道富銀行 (STT) 2014 Q4 法說會逐字稿

Good morning and welcome to State Street Corporation's fourth-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 for 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 on 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 Anthony Ostler, Senior Vice President of Investor Relations at State Street.

Thank you, Stephanie.

Good morning everyone and welcome to our fourth-quarter 2014 earnings conference call.

With me on this call is Jay Hooley, Chairman and CEO, and Mike Bell, our Chief Financial Officer.

Now to our agenda.

Jay will discuss the fourth-quarter highlights and Mike will discuss our fourth-quarter financial results and our 2015 outlook.

Our fourth-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 material such as the slide presentation referenced on this call, can be found in the Investor Relations section of our website.

Mike Bell will refer to the financial highlights presentation when he provides an overview of our financial results for the fourth quarter of 2014, which he will refer to as 4Q 2014 and for the 12 months ended December 31, 2014, which he will also refer to as full-year 2014.

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

When reviewing our results comparison to prior periods, Mike will primarily focus on comparing our 4Q 2014 and full-year 2014 performance relative to our 4Q 2013 and full-year 2013 performance unless he otherwise notes that the comparison is sequential from our 3Q 2014 results.

Before Jay and Mike begin their discussion of our financial performance and 2015 outlook 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 will speak only as of today January 23, 2015.

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 and CEO, Jay Hooley.

Thanks, Anthony, and good morning, everyone.

Welcome to our fourth-quarter conference call.

Our fourth-quarter and full-year 2014 results reflect strength across our asset servicing and asset management businesses.

Despite the low interest rate environment in 2014, our revenue experienced solid growth compared to 2013 from both asset servicing and asset management.

As a result, operating basis total fee revenue for 2014 exceeded 2013 by 7.4%.

Our focus on developing and delivering solutions to serve clients' evolving needs continues to position us well against strong global growth trends.

As a result of this, we achieved new asset servicing commitments in 2014 of $1.1 trillion, including approximately $400 billion in the fourth quarter of 2014, and net new assets to be managed of $28 billion, including $7 billion in the fourth quarter of 2014.

We are pleased that we have successfully completed our business operations and information technology transformation program on schedule and at the high end of our guided range.

I want to acknowledge the efforts of the entire State Street team for helping us complete this important initiative.

Going forward, managing our expenses and continuing to drive efficiencies across the organization will remain a priority despite continued pressure on regulatory costs.

Now I would like to provide a brief overview of economic and market developments and how our business is affected.

US equity markets ended the fourth quarter on a robust footing, but that thinly disguised the fact the quarter was characterized by greater uncertainty.

US economic news continued to surprise to the upside, but the collapse in commodity prices fueled fears about growth outside of the US.

This prompted significant moves in commodity-linked assets from the currencies of commodity exporters such as the Russian ruble to assets such as high-yield corporate bonds of energy producers here in the United States.

We are only just beginning to observe the economic implications of those commodity swings.

We believe they will exacerbate the downward pressure on already falling global inflation rates and impact expectations of movements in monetary policy.

Long-term bond yields fell considerably to reflect this.

The decrease in long-term bond yields was most notable in the Eurozone.

In September the ECB cut its administered rates to ward off the risk of deflation.

In light of that decision, we began charging clients for euro deposits on December 1. However, now that lower oil prices have increased the risk of deflation, the ECB has finally responded with a full-scale quantitative easing of a scale similar to that seen in the US and the UK.

The Bank of Canada reduced its administered rate by 25 basis points on Wednesday, citing the impact of lower oil prices on its economy and the outlook for inflation.

The loonie dropped in reaction to this surprise move.

The bigger surprise was the Swiss National Bank's last week with their removal of the cap on the Swiss franc and increased the negative rates being charged for deposits.

Our FX business was not impacted adversely by the dramatic move in the Swiss franc post the announcement, and all of our businesses have been working with clients as they manage the impact of this market disruption.

While our deposit base in Swiss francs is much lower than it is for other major currencies, we do plan to communicate with clients that deposit pricing may have to be adjusted for Swiss franc deposits.

The Fed, by the forecast of the FOMC members themselves at the December meeting, is still projecting a tightening of monetary policy in 2015.

Nevertheless, rapidly falling US inflation is creating a good deal of market uncertainty as to whether such hikes will actually materialize and has contributed to much lower US long-term yields.

These lower yields have resulted in a significant increase in mortgage applications in the US, which could result in a spike in mortgage prepayments as homeowners refinance to take advantage of low long-term yields.

Monetary policy is still projected to diverge in 2015 across the G7, but that is now predicated more on continued easing in the Eurozone and Japan.

Together these economic divergences and uncertainties have resulted in a greater fragility in financial market trends in the fourth quarter of 2014 and into the beginning of 2015.

Together these trends impact our business lines in several ways including: first, global growth downgrades and disinflation risk means the low interest rate environment could be protracted.

This continues to negatively impact our net interest revenue and net interest margin as higher-yielding investments mature, pay down, or experience prepayments and then those funds are reinvested at lower-yielding investments currently available in the market.

We also continue to experience high levels of deposits, and for liquidity reasons, maintain those as we view as excess with central banks.

However, in Europe, after we began to charge negative rates on certain euro deposits, we saw euro deposits run off by an average of $5 billion from September 30, 2014.

Second, the uncertainties around certain global economies have caused some flows out of emerging markets towards the end of the fourth quarter.

Emerging market flows would adversely impact our servicing fees.

This was offset by continued volatility and elevated volumes in foreign exchange markets in the fourth quarter, which positively impacts our trading services revenue.

And, finally, reduced values in securities markets, especially equities, and the strengthening US dollar have a direct impact on our investment servicing and asset management businesses.

Later in this call we will be walking you through our 2015 outlook and our assumptions around equity markets and foreign exchange rates.

Our 2015 revenue outlook assumes stronger global equity market valuations and for the US dollar to not strengthen any further than it already has in 2015.

Now I would like to talk about the growth in our asset servicing and asset management business.

Our 2014 new asset servicing wins totaled over $1.1 trillion, including approximately $400 billion in the fourth quarter, representing broad participation globally as well as across multiple sectors.

37% of the assets for 2015 were from outside the US.

New assets to be serviced that remain to be installed in future periods totaled $406 billion at year-end and we continue to see deep and diverse pipelines.

In our asset management business we experienced net inflows of $7 billion for the fourth quarter of 2014, the flows were driven by net inflows of $36 billion into ETFs, offset by net outflows of $9 billion from cash funds and $20 billion from institutional funds, which was driven primarily by rebalancing by a client based in Asia-Pacific out of fixed income.

Our success in new business commitments across our franchise reflects our efforts to develop client-focused solutions through continuous innovation.

Given our client focus and ability to differentiate our offerings, we expect to build on our new business momentum for 2015 and beyond.

Now I would like to turn the call over to Mike, who will review our financial performance for the quarter as well as our outlook for 2015.

Mike?

Thank you, Jay, and good morning, everyone.

Before I begin my review of our operating basis results I would like to comment on two non-operating charges included in our fourth-quarter GAAP basis results.

First, we recorded an after-tax charge of $40 million, or $0.10 a share, to increase our legal accrual associated with indirect foreign exchange matters.

This charge pertains to indirect FX matters that we have disclosed over the past few years and it reflects our intention to seek to resolve some, but not all, of the outstanding and potential claims arising out of our indirect FX activities.

Our current efforts, even if successful, will not address all of our potential material legal exposure arising out of these activities.

As I am sure you can appreciate, settlement discussions are confidential and we are not able to make more specific comments on these matters at this point.

Second, we recorded an after-tax charge of $27 million, or $0.06 a share, in restructuring costs related to the completion of the business ops and IT transformation program which we completed this quarter as planned.

Overall, we are pleased with the success of this program.

Now please turn to page 9 in the slide presentation where I will provide a brief overview of full-year and fourth-quarter 2014 operating basis results.

Full-year 2014 EPS increased over 12% from the prior year, driven by strong fee revenue growth and the continued execution of our common stock repurchase program.

Full-year 2014 total fee growth of 7.4% offset a persistent low interest rate environment, which negatively impacted net interest revenue.

For full-year 2014, in the face of increasing and significant regulatory compliance costs, we achieved slightly positive operating leverage.

2014 ROE of 10.9% increased from 10.3% in 2013.

Turning to 4Q 2014 results, EPS increased 19% from 4Q 2013 driven by strong fee revenue growth, an improved tax rate, and a reduction in the number of outstanding shares, partially offset by lower net interest revenue and higher expenses.

4Q 2014 operating basis effective tax rate of 28.5% decreased from a year ago and from third-quarter 2014.

Our 4Q 2014 ROE of 11.6% increased from both fourth quarter of 2013 and third quarter of 2014.

Now turning to slide 12, I will provide additional details on our operating basis revenue for Q4 2014 and the notable variances to 4Q 2013 and 3Q 2014.

There were a number of notable items in 4Q 2014.

The impact of the stronger US dollar negatively affected our fee revenue by $37 million when compared to third quarter of 2014.

In addition, processing fees and other revenue benefited from incremental equity earnings from joint ventures of $11 million, and net interest revenue included the benefit of a one-time accelerated loan prepayment of $9 million.

Importantly, fee revenue increased 10.6% from 4Q 2013 driven by growth in all fee lines.

Servicing fees were up from 4Q 2013, primarily due to net new business and stronger US equity markets partially offset by the impact of a stronger US dollar.

Servicing fees in 4Q 2014 were down slightly from 3Q 2014, due to the appreciation of the US dollar which negatively impacted servicing fees by $15 million.

The currency impact was mostly offset by net new business and higher transaction driven revenue.

Asset management fees in 4Q 2014 increased from 4Q 2013, primarily due to net new business and stronger US equity markets partially offset by the impact of the stronger US dollar.

Compared to 3Q 2014, management fees decreased, primarily due to a $5 million impact from the stronger US dollar, lower performance fees, and weaker global equity markets.

Total trading service revenue in 4Q 2014 increased 24% compared to the year-ago quarter, primarily reflecting increased foreign exchange revenue driven by higher volatility and volumes.

Securities finance revenue increased approximately 40% compared to 4Q 2013 due to higher spreads and volumes and new business in enhanced custody.

Processing fees and other revenue also increased approximately 40% from 4Q 2013, primarily due to higher equity earnings from joint ventures and increased revenue associated with tax-advantaged investments.

Net interest revenue decreased from 4Q 2013 and, excluding the one-time repayments noted on slide 12, the net interest revenue was approximately flat with 4Q 2013, primarily due to lower yields offset by higher interest-earning assets.

Now many of you have had questions regarding the impact of charging negative rates or fees on euro deposit balances.

In December, we began to charge negative rates on certain euro balances.

The primary impact of our action has been a decrease of approximately $5 billion in US dollar equivalent of average euro deposits in fourth quarter relative to 3Q 2014.

Moving to slide 13, let's review 4Q 2014 operating basis expenses.

As you can see on the top of the slide, there were some notable expense items affecting 4Q 2014 results.

The stronger US dollar benefited 4Q 2014 expenses by $33 million when compared to 3Q 2014.

This was more than offset by a combination of elevated securities processing costs of $29 million and a $17 million charge related to our withdrawal from the over-the-counter derivatives clearing and execution activities.

In addition, we recorded a $9 million impairment primarily associated with an intangible asset.

4Q 2014 compensation and employee benefits expenses of $962 million increased from 4Q 2013, primarily due to increased costs to support new business and regulatory compliance initiatives, as well as higher incentive comp expense partially offset by the impact of a stronger US dollar.

Information systems and communication expenses increased from a year ago.

4Q 2014 information systems and communication expenses included $6 million related to our withdrawal from the over-the-counter derivatives clearing and execution activities.

Transaction processing expenses were higher than 4Q 2013, primarily due to higher servicing volumes.

Occupancy expenses decreased from 4Q 2013 primarily due to the effect of an $8 million charge in the fourth quarter of 2013 associated with a sub lease renegotiation.

Compared to 4Q of 2013 other expenses increased primarily due to higher professional services primarily related to regulatory compliance initiatives, costs associated with our withdrawal from the over-the-counter derivatives clearing and execution activities in the fourth quarter of 2014, a $9 million impairment primarily associated with an intangible asset, and $28 million of Lehman Brothers related gains and recoveries recorded in the fourth quarter of 2013.

Compared to 3Q 2014 other expenses increased primarily due to higher securities processing costs, higher professional service fees primarily related to regulatory compliance initiatives, costs associated with our withdrawal from over-the-counter derivatives clearing and execution activities in the fourth quarter of 2014, and an impairment primarily associated with an intangible asset.

Now I will provide a brief overview of our December 31, 2014, balance sheet on slide 14.

Our balance sheet continues to evolve as we respond to regulatory changes, including the liquidity rules.

Our estimated liquidity coverage ratio is above 100% as of year-end 2014.

The investment portfolio maintained a high credit quality profile and our duration was in line with the prior quarter.

Lastly, the after-tax unrealized mark-to-market gain as of December 31, 2014, was $487 million, which improved from September 30, primarily due to a decline in interest rates partially offset by wider credit spreads.

Now I will turn to slide 15 to review our capital position.

As you can see our capital position is strong.

This strength has enabled us to accomplish a top priority of returning value to shareholders through dividends and common stock repurchases.

As of year-end 2014 our holding company common equity Tier 1 ratio under the current Basel III advanced approach was 12.5%.

Under the Basel III standardized approach, which will go into effect in reporting periods beginning in 2015, our holding company estimated pro forma common equity Tier 1 ratio was approximately 10.8%.

Under the fully phased-in advanced and standardized approaches our estimated pro forma common equity Tier 1 ratios were approximately 11.6% and 10%, respectively.

We estimate that our supplementary leverage ratio under our interpretation of the final US rules are approximately 5.7% at the holding company and approximately 5.1% at the bank as of year-end 2014.

Based on our estimate of the pro forma fully phased in supplementary leverage ratios as of year-end 2014, they were approximately 5.2% for the holding company and approximately 4.8% for the bank.

We are comfortable we have the levers that will enable us to be in compliance with the requirements in advance of the 2018 effective date.

On December 9, the Federal Reserve released a notice of proposed rulemaking to establish capital surcharges for US globally systemically important banks.

Our prior proposed surcharge of 1% may increase under the Federal Reserve proposal to 1.5%.

This will depend upon the final rules, particularly the treatment of non-operational deposits.

Returning capital to shareholders continues to be a top priority.

During 4Q 2014 we repurchased approximately 5.6 million shares of our common stock at a total cost of approximately $410 million, resulting in average fully diluted common shares outstanding of approximately 424 million for the quarter.

As of December 31, 2014, we had approximately $470 million remaining on our current common stock repurchase program authorizing the repurchase of up to $1.7 billion of our common stock through March 31, 2015.

So to summarize our 2014 operating basis financial performance, we are pleased with the fee revenue growth of 7.4% and proud of our EPS growth of 12%.

Now let's turn to our outlook for 2015 on slides 17 through 20.

We plan to continue to focus on key priorities of delivering value-added solutions to our clients, investing in growth initiatives, diligently managing expenses, and returning capital to shareholders.

Beginning with the revenue outlook, we currently expect total operating basis fee revenue to increase 4% to 7% compared to full-year 2014 as shown on slide 17.

Our fee growth expectations are dependent upon a number of assumptions, including those for equity markets and foreign exchange rates which are summarized on slide 17.

I would note that we project that the stronger US dollar would reduce operating basis 2015 fee revenue by approximately $200 million, assuming constant currency rates relative to 2014.

This $200 million headwind is built in to our 4% to 7% operating basis fee growth forecast.

We further expect that the stronger US dollar would provide an operating basis expense benefit that is only modestly less than the detriment to fee revenue using the same constant currency rate assumptions relative to 2014.

As a result, we believe we largely have a natural currency hedge relative to fee revenue.

We expect our operating basis tax rate to increase to 30% to 32% in 2015 as compared to 29% in 2014, due both to the non-recurrence of certain tax savings realized in 2014 and to an increase in state and local taxes.

Slide 18 summarizes two scenarios for our 2015 net interest revenue which we expect to be pressured in 2015 from the persistent low interest rate environment and reinvestment of the investment portfolio in the high-quality liquid assets to meet the new liquidity requirements.

The first scenario assumes interest rates remain static with 2014 year-end levels.

Under this scenario we expect operating basis net interest revenue for 2015 to be in the range of $2.07 billion to $2.17 billion.

The second scenario assumes administered interest rates will increase in 25 basis point increments per quarter beginning in August of 2015 for the UK and a single increase in December for the US.

Under this scenario we expect short-term market interest rates to increase in advance of the increase in administered rates.

We estimate that operating basis 2015 net interest revenue in this scenario to be in the range of $2.15 billion to $2.25 billion.

Since there is significant uncertainty to the amount and timing of interest rate increases, we believe both of these scenarios are relevant to consider.

Now moving to slide 19, expense management remains a priority.

While there continues to be upward pressure on regulatory compliance costs, our focus in 2015 will be on prudently managing expenses and driving further efficiencies, expanding our capabilities to meet increasing regulatory expectations, supporting new business growth including higher information technology costs, and continuing to fund growth initiatives.

In this context, and based on our current assumptions noted on the slides, we are targeting for our operating basis total fee revenue growth to outpace our operating basis expense growth by at least 200 basis points for the full-year 2015 relative to 2014.

I would note that this assumes that we achieve our operating basis total fee growth objective of 4% to 7% in 2015.

Although positive operating leverage remains a long-term goal, our near-term ability to achieve is likely predicated on higher market interest rates for a significant portion of 2015.

An additional point that is important to note as in prior years the first quarter of 2015 compensation and employee benefits expense will be higher due to the effect of the accounting treatment of equity compensation for retirement-eligible employees as well as for payroll taxes.

We expect the incremental amount attributed to equity compensation for retirement-eligible employees and payroll taxes in the first quarter of 2015 to be in a range of approximately $140 million to $150 million.

This compares to $146 million in first quarter of 2014.

Now turning to slide 20, I would note that returning capital to shareholders remains a high priority.

We issued $750 million of preferred shares in 4Q 2014, bringing our total preferred outstanding to approximately $2 billion.

Based upon preferred shares currently outstanding, we expect total preferred dividend costs to be approximately $31 million in first quarter of 2015 and $118 million for the full year of 2015.

Finally, the evolution of our balance sheet and of regulatory capital and liquidity expectations may lead to an additional issuance of preferred shares of approximately $750 million in 2015.

We may also issue additional long-term debt.

And with that I will turn the call back to Jay.

Thanks, Mike.

Stephanie, we are now open to responding to calls.

(Operator Instructions) Ken Usdin, Jefferies.

Thanks, good morning.

Mike, in your fee revenue growth outlook I just wanted to ask you to kind of flesh out more; are you expecting -- which business do you expect to drive the incremental growth?

And what is the real delta between the bottom and the top end as far as what goes poorly or what goes better at the low and high end?

In terms of the 4% to 7% fee revenue growth that we expect in 2015 versus 2014, first I would just repeat what I said in the prepared remarks, Ken, that that does include a $200 million headwind from the stronger US dollar so that is built into the 4% to 7%.

Otherwise we would be roughly 2.5 points higher than that 4% to 7% range.

So on a constant currency basis think of it as call it 6.5% to 9.5%.

But we think again the US dollar strengthening is a real headwind.

In terms of what we expect to drive that I would really characterize it as continued strength in each of our main fee revenue categories for 2015.

Specifically, we are pleased with the net new business that we have gotten particularly in our global services business.

We would expect that to continue and to actually increase in 2015 relative to what we saw in 2014.

We expect continued growth in our management fees, and we are pleased with the uptick in the finance revenue in Q4 and also the FX revenue in Q4.

And while I wouldn't characterize Q4 as the new run rate going forward, I do think on a full-year basis 2015 to 2014 we will continue to see good growth in both of those businesses.

Lastly, to your question on the magnitude of the range and how to think about it.

I think, Ken, the major wildcards to me, number one, would be again the market-driven revenues.

FX volatility -- pardon the pun, but FX volatility was quite volatile throughout 2014 and I think it is anybody's guess.

So I would characterize the low end of the range as being a return to weaker volatility than what we saw in the second half of the year.

Sec finance we are pleased with the strengthening of those revenues in the second half of the year.

The M&A environment helped with that.

The enhanced custody revenue continued to be strong; that was helpful.

But again, we saw in the first half of the year sec lending on the agency side seeing very narrow spreads and certainly that could revert.

Lastly, there is an overall question of client flows.

We benefited in 2014, as Jay has talked about several times.

We benefited from strong flows in 2014.

I would characterize the upper end of that range as being continued strength there and the lower end possibly some softening there.

Let me see if Jay wants to add or edit to those comments.

The only thing I would probably pile on there, Ken, would be I noted that we have $406 billion in committed yet-to-be-installed pipeline in the asset servicing business.

And I would say broadly the pipelines are as good as they have looked in several quarters, so I would add that to the input.

Okay.

My second question: on capital, you mentioned the extra $750 million potential.

Basel III Tier 1 common has also kind of dripped back down to 10%, so can you talk to us about what drives the decision tree on the potential to issue that extra $750 million?

And also if any of that also informs any differing view on how you think about your capital return ask?

Sure, Ken; it is Mike.

First, on the prefs.

The main couple things driving the likelihood of the additional pref issuance in 2015 would be: number one, additional clarity that, at least for the foreseeable future, the SLR, particularly the 6% SLR at the bank, is likely to be our binding constraint.

Now, again, I would characterize that as likely to be our binding constraint for a while.

And, therefore, it is more economical to meet that binding constraint with prefs as opposed to common, just given the relative cost of capital of common versus call it 6% on an after-tax basis for pref.

So that is number one.

Number two, we have seen an increase in deposit levels, particularly non-operational deposits, throughout 2014.

Again, with that accruing in 2014 we view it as more economical to meet the required capital associated with that deposit growth with prefs as opposed to common.

As it relates to the risk-based ratios, since we turn around and place excess deposits with the central banks, that does not increase our risk-weighted assets and, therefore, that has not had an impact on the risk-based ratios.

And, therefore, I would again just reinforce that we think the SLR is likely going to be the binding constraint for a while.

Thanks, Mike.

Alexander Blostein, Goldman Sachs.

Great.

Good morning, guys.

So my question on the operating leverage; I guess in the outlook slide you guys have kind of outlined core fee growth versus core expenses, which I think your competitors are kind of migrating towards that sort of metric as well.

But when we think about the operating leverage for the entire enterprise, from your comments it sounds like unless rates go up in the middle of the year it is unlikely that you guys will achieve material operating leverage in 2015.

So I just want to make sure I understand that.

And then I have a follow-up.

I would say that what we have shared with you at your encouragement is our best thinking as we sit here today around the 2015 outlook.

And when you look at some of my comments about what shifted in the last 90 days with regard to the general economic outlook and the likelihood that maybe the Fed delays tightening, we wanted to put out there the two different scenarios.

And Mike can comment if you would like.

We set every year as a goal operating leverage.

We will continue to do that and we will strive to achieve that.

What we are signaling is that if in fact rates stay stagnant, it's going to put a lot of pressure on our ability to achieve operating leverage.

Go ahead, Mike.

Do you want to --?

Alex, the only thing I would add; I think there is arguably more uncertainty around the NIR outlook for full-year 2015 than there has been for quite a while.

It is not lost on any of us just how soft the situation is in Europe.

And while we are encouraged by a number of the public comments coming out of the Fed on the possibility of increases in administered rates in the US, just given that relative divergence, we thought it made more sense to put out the two different scenarios.

That way, again, depending upon your own view of the world, you can model it the way you see fit.

Second, I would just emphasize, Alex, that obviously the piece that we can control the most is our expense growth relative to our fee revenue growth.

And we feel like that is going to be a good story for 2015.

As we talked about, we expect to get at least a 200 basis point delta between our fee revenue growth and our overall expense growth for 2015.

And that is the piece that we feel like we have the most control over.

So in terms of the fundamentals on what we have the most control over, we feel very good about the outlook.

Obviously, we recognize the uncertainty on the NIR.

Got it.

That is helpful way to [doing it].

Second question just on FX, and thank you guys for the comments around just this activity on the revenues front, but as you pointed out, there is obviously an offset around expenses.

So, yes, it is a big $200 million or so drag on fees, but you guys should get some help from expenses.

Can you help us understand, when we think again about the enterprise as a whole from a pretax earnings or a net income perspective, what is the sensitivity of State Street's model today relative to -- in an environment where the US dollar continues to strengthen?

If euro/dollar goes to parity, what is the pre-tax hit that we should think, or is it not a very meaningful number because of that natural hedge in the model?

Alex, it is Mike.

The short answer is it is not a material, in the grand scheme of State Street, impact on our overall EPS.

There is a modest impact, of course, because the fee revenue is slightly impacted more than the overall expense level.

There is also some collateral impact on our net interest revenue, but again, in the grand scheme of things that is not the risk that I would point as being in the top five or top 10 list.

Got you.

Okay, makes sense.

I will jump back in the queue.

Thank you.

Glenn Schorr, Evercore.

Thanks.

I appreciate the rising rate scenario and obviously when you compare it to the static it doesn't have a huge impact because of the timing of your rate hikes.

If you follow on the forward curve, even if it is just ballpark, can you talk about maybe a full-year type impact?

Like 2016 what kind of delta could we be looking at on an operating basis NIR?

Sure, Glenn; it is Mike.

First, as you can imagine, there would be a lot of different factors that would impact 2016, so I would characterize my comments as directional as opposed to precise.

But I think your comment is a fair one, which is since the rising interest rate scenario mainly gives us the benefit in the second half of the year, you could think of the delta between the static and the rising interest rate scenario as being roughly twice that delta in 2016 versus 2015.

Now, again, importantly there are so many different factors that would go into 2016: where are deposit levels, how is the evolution of the liquidity expectations taken place, the possible divergence between Europe and the US.

So there are 100 different caveats I could give you there.

But I think you are thinking about it in the right ballpark as kind of half a year impact in 2015 and that would then widen, obviously, with an even greater impact in 2016.

I appreciate that.

I'm trying to balance that all with the increased debt issuance, too.

Okay.

The question specifically on regulatory cost, because you noted there continues to be upward pressures there.

I am curious on what is driving that, and I am reading into that line that it says the dollars would be up in 2015 from 2014 which was up from 2013.

I want to make sure I'm reading that right.

And just, literally, what drives it, what is left to do?

Sure, Glenn.

First of all, you are reading it right.

We do expect 2015 regulatory costs to be higher than 2014 and 2014 was certainly higher than 2013.

I would not point, Glenn, to a single area and say it is this area that is driving the higher regulatory cost.

It really is the culmination of the ratcheting expectations by regulators really across the globe on a higher expectation, particularly for GSIBs in terms of regulatory compliance.

And in many cases it is not just literal compliance with the literal rules; it is all the qualitative aspects of our management processes that end up getting evaluated by the various exams and various standards that we are subject to.

Let me see if Jay wants to add anything.

The only thing I would add -- I agree with that, Glenn.

The only thing I would add is that if you look at any one of these processes, so take CCAR for instance, the 2013 versus 2014 submission significant increase in expectations.

And the point I was going to add is that knowing or believing that this is a long-term gain, part of the investment that is going into this is to structurally change the way we are aggregating data so that not unlike our IT and ops transformation program, we are looking at long-term regulation and compliance.

The need to be best-in-class; not only from a standpoint of the results that we deliver, but the way we collect data in order to deliver that information.

So there is a pretty high effort going into creating internal data models so that we can quickly aggregate and bring together information; not only for today's expectations, but for tomorrow's as well.

I appreciate that.

Thanks, Jay.

Ashley Serrao, Credit Suisse.

Morning, guys.

When you look at the NIR delta between the static and rising rate scenario that you painted, can you help us just bifurcate the upside there between the rise in the UK versus the US rates just given that they are happening at different times?

Sure, Ashley; it is Mike.

We would anticipate that the rise in the Bank of England rates and the associated market interest rate increase in interest rates from that would be, round numbers, worth about $20 million to $25 million in full-year 2015 versus full-year 2014.

The way you might want to think about that is think about it as we have approximately $12 billion of US dollar equivalent deposits in the UK and we would be getting a little more than half a year in terms of the impact on market interest rates.

And the basis point increase would be a little more than 25, because we would get a little bit of an additional benefit from the second 25 increase.

So that is the background of the arithmetic behind that number.

And then the Fed fund increase would be approximately the remainder.

So think of it as, again, round numbers, Ashley, approximately $60 million of benefit from market interest rates rising modestly in advance of that Fed fund increase.

Okay.

Appreciate you guys having just a lot of challenges out there from the regulatory environment and environmental as well.

Should this environment persist or deteriorate further is there anything else that you could do on the expense side to help mitigate the situation?

I would say -- this is Jay, Ashley.

I would say two things because we think the regulatory requirements will continue to grow.

So the two things that we're consciously doing: one I already mentioned which is to replace the labor with technology, like we would in any of our operating businesses and do a better job at gathering information.

The second, which we did in 2014 and will continue to do in 2015, is to replace external consultant dollars which come at a premium with internal staff.

We are also doing some of this work in lower cost environments.

So all of the techniques you would expect to do the work at a high level, but do it most efficiently, we are putting into place with regard to all of the regulatory initiatives.

Okay.

Thank you for taking my questions.

Luke Montgomery, Bernstein Research.

So in your guidance you are forecasting the EUR1.16 to US dollar by the year end of 2015.

I think we are already at EUR1.12 and possibly headed lower.

So perhaps you could discuss how important that exchange rate assumption is to your NIR guidance, and then whether today's exchange rate would represent a material change in that expectation.

I think I heard you downplay the risk factor in a prior response, but maybe you could be a little bit more explicit.

Sure, Luke.

It's Mike.

First of all, the rule of thumb that I use around the euro specifically is that a 1% swing in the euro relative to the US dollar is worth approximately $10 million of annual fee revenue, and a shade less than that -- so call it $9.5 million -- of impact on full-year expenses.

And that is for the entire State Street enterprise.

The NIR impact would be a fraction of that.

So as I said, there is some very, very modest headwind associated with the euro continuing to weaken on NIR, but that is built into the range that I provided in the prepared remarks.

Okay, helpful, thanks.

And then I wonder if you guys could talk us through the decision to shut down the swaps clearing business.

I think the plan is to focus on futures clearing, although I think some would argue that you really don't have scale there either and you lost Pimco, which was your biggest client.

So how are you gauging your prospects in the futures business?

And then if you could speak to how these developments affect your ability or your appetite to offer collateral management and collateral transformation.

Sure, Luke, let me pick that one up.

This is Jay.

You are right in that I think we began this journey thinking that both OTC and futures clearing were both attractive future opportunities, given the clearing requirements that were imposed by regulators.

As it turns out, what we are hearing from our customers is there is more of a calling for futures clearing versus over-the-counter clearing.

We had taken the first steps in that journey and concluded that we were better served to follow the futures clearing path.

We think we have a very competitive offering.

We have got good volumes through our futures clearing merchant and we are optimistic that that is a good additional product for us going forward.

With regard to collateral management, we have spoken before; we think that is a nice additional service.

I don't view it as having huge upside revenue potential, but the need to optimize and manage collateral is ever-present in the activities that we conduct for our customers.

So we have a series of collateral management services that we offer to our customers and get good take up.

Okay, thanks very much.

Brian Bedell, Deutsche Bank.

Just in looking at the 2015 outlook, if I am getting this right, if we look at the middle of that fee range, so call it 5.5% growth and assume about 3.5% growth in operating expenses.

If we take the static NIR range and then considering the tax rate and obviously share buyback, to me that comes to around a flattish EPS result for 2015 using those assumptions.

I just wanted to check if I'm doing that right by your math.

Brian, roundly obviously there are a number of different assumptions built in there.

I think roundly your arithmetic is in the ballpark.

I think importantly, number one, we do believe we are going to achieve at least 200 basis points of daylight between the fee growth and the expense growth.

Again, you took obviously the 200 basis points.

And we think there is a reasonable chance to get some help from market interest rates.

Obviously you took the static interest rate scenario.

So I'm not disagreeing with your arithmetic, but just recognize the implicit judgments that you are making there.

Yes, so some upside if those are a little bit better, okay.

Then just clarification.

I think I missed the revenue impact on the fee line that you cited, Mike.

And then were there any fees from euro deposit charges or any bank charges that you passed along baked into the servicing fees and/or do you expect those charges to come to the servicing fees in 2015 or through NIR?

Sure.

Brian, in terms of the impact of the stronger US dollar, what I said in my prepared remarks is that the currency assumptions noted on the slide would negatively impact fee revenue in 2015 full-year by approximately $200 million.

That would be almost entirely offset by a same kind of reduction on the expenses so that it would have a relatively immaterial impact on overall earnings for the full year.

But think of it as again a 10% strengthening in the US dollar costing us $200 billion of reported fee revenue growth for the full year.

In terms of the negative interest rates in Europe, we did collect some small -- it was approximately $3 million US in Q4 from the negative interest rates that we were charging on euro deposits in Q4.

We have assumed that that will continue, at least at that level, into full-year 2015 reflecting the fact that the ECB rate obviously is negative, the Swiss bank rate is now even more negative.

So, again, we are making the assumption that we will continue to charge for euro deposits as long as that situation is evident.

Great.

Thanks very much.

Brennan Hawken, UBS.

Good morning, guys.

So I understand that the rules are preliminary and somewhat fluid, but at this point do you have an estimate for what proportion of your deposit base would be considered non-operating?

At this point you are absolutely right; it is a fluid situation, Brennan.

We do estimate that our excess deposits on average for Q4 2014 were $52 billion, but as you correctly noted, the ultimate calculation, the ultimate standards that are used to determine exactly what is an operational deposit versus a non-operational deposit, that work is still in front of us.

But for right now you feel confident that the way you view excess is in line with your understanding of the non-operating definition?

That is correct.

Cool.

Okay, thanks.

And just want to follow up on what Alex and Ashley both hit on.

It is certainly helpful to hear that you might moderate regulatory expenses with tech and such, but the environment -- it is certainly nothing new that the environment has been difficult and it has been brutal for like five years for pretty much all financial services firms.

So it is not like it is episodic to State Street, but it seems like the message is that you all are waiting for it to get better rather than proactively dealing with it.

And I guess I hear that frustration from investors.

I am curious how you would counter that and what will it take for you guys to start to get maybe a bit more proactive on managing the expense front; not just for the regulatory pressures, but also for the environmental ones.

I would say on the regulatory ones I think we are being proactive, and proactive means not just responding to the need but looking over the horizon to see what is coming next and making sure we can harden an infrastructure to do this more efficiently than anyone else going forward.

I don't have perfect visibility to what others are doing, but we are taking a longer view of this and building sustainable infrastructure, but very proactive.

Okay.

Maybe on the environmental front, what do you guys think there?

I get it that it is really difficult and it is hard to try to figure out how long this is going to last, but is there a point at which we start seeing you maybe take some hacks at the expense base or start to tactically start to think about how you want to reposition the business?

On the environmental front, just to make sure we get the -- we are talking about the same environment.

I think we have been -- we've talked a lot about the rate environment and its effect on net interest revenue.

We've tried to give you a little bit of the bookend thinking on possible outcomes for 2015.

We commented on 2016 as well.

Environmentally, given this divergence of macroeconomic trends, actually that is a little bit more positive for the market-driven revenues, and you saw some of that in the fourth quarter.

Our expectation for 2015 is that continues to get better.

With regard to expenses, as we mentioned, the IT and ops transformation program wound down as we concluded 2014, but we have several efforts underway which pick up on the core themes of IT and ops transformation.

And that is to increasingly drive efficiencies through operational processes, through doing work in lower-cost environments.

And Mike referenced some investment in technology.

We continue to employ technology to replace human labor.

So even though the program officially ended in 2014, our zest to continue to get more efficient has not subsided.

Great.

Thanks for the color, Jay.

Mike Mayo, CLSA.

Two follow-ups from prior questions.

One, Mike, I guess you just kind of gave it to us straight, so if EPS is flat in a static scenario would that imply something closer to $5.10?

First of all, I would just emphasize that there are a number of different factors that are going to impact EPS, not just the net interest revenue and not just the market interest rates.

I was simply making the comment that the arithmetic that we were talking about earlier did take the conservative end of a handful of different assumptions.

So flat EPS year-over-year would certainly not be my best estimate.

Although I would respect you, Mike, if you pick your own views on both interest rates as well as how much we are going to exceed expense growth with fee revenue growth in 2015.

So I guess slide 18 the main point is that lower rates for a lot longer really hurt your NIR and there is not a whole lot you can do about that, so --?

Certainly that is the case, Mike, and we did talk about that in detail at our investor day a year ago, and I'm sure we will be talking about it at the upcoming investor day.

We talked about if interest rates stayed static that we would expect the net interest margin to continue to grind down a fair amount lower versus where it is today.

All of those numbers, if you recall, excluded excess deposits which have grown; that is a little different issue.

But in terms of what would we do in that kind of environment: number one, as we have talked about this morning, we will continue to look for even more efficiency opportunities including, as Jay talked about earlier, looking for opportunities to use IT to replace labor on a number of different fronts.

We think that is good for our clients and then good for our shareholders.

And then, ultimately, if we really believe that interest rates would stay at this level forever, particularly given the capital and liquidity rules, we will have to over time look more holistically at pricing and ensure that client relationships in totality in that kind of an environment are enabling adequate returns for our shareholders.

So the idea of the capital for labor swap, Jay, you've spoken about the movement to the digital enterprise.

Can you talk about this next phase of State Street and the investments that you are making and when you can potentially see some of those payoffs, since that would seem to help out expenses over the medium to long term?

Happy to, Mike.

And we do -- have coined internally the Digital Enterprise as a broad-based organizational effort to digitize our environment, which is I think going to be critical.

Not only to drive efficiency, but if I think about some of our most attractive prospective future products, they will most likely revolve around our ability to aggregate real-time information for our customers for risk management and other services.

So I would put us in a little bit of a transitional period between IT and ops transformation in the digital enterprise.

In 2014 and a little bit of 2015 one of the critical elements to getting there, being more reliant on technology is to make sure we completely harden our technology environment.

Internally we use the word building resilience so that it is practically impossible for our technology to go down.

Once we are more reliant on technology, less on labor you can't have technology that fails, whereas if you have a higher labor content there is ability to recover.

So we are investing in that infrastructure, but as we get there every process within the organization is getting examined for how we can improve the process itself and then how we can apply technology to replace labor.

And I would say, Mike, that is not just for the operational areas.

If you look at the finance area, as just an example in a support group, that organization is going through that same thing.

We don't know what the future holds.

We don't know when rates will start to rise, but we are not waiting for that.

We are anticipating it is going to be a slow environment for some years to come and, therefore, we are driving efficiencies in every corner of the place.

All right.

Thank you.

Adam Beatty, Bank of America Merrill Lynch.

Good morning.

I have two questions about asset management, so I guess I will ask them both at once.

The first concerns the fixed income rebalancing that you saw in Asia and just I guess in one sense it's a positive data point for rate rises, but just what you are seeing across the complex.

Do you anticipate or see in smaller fashion similar types of activity?

Also, and maybe more importantly, globally do you see different investor behavior across regions, maybe based on some of the currency volatility?

The other question I had was more specifically about ETFs -- I see impressive asset growth there -- and where you see opportunities there, particularly maybe in the retirement space and 401(k) platforms.

Thank you.

Sure, bunch of questions there, Adam.

Let me take a swing at it.

I gave you our breakdown of our $7 billion in net new assets under management and I highlighted a $20 billion fixed income client that left.

I would say that was certainly one-off.

We would hope as the client rebalances to pick up something on the equity side in time, but there is a little transition going on there.

If you look at our asset management business, it is anchored in the passive/beta/smart beta space, not exclusively but primarily, and delivered through various vehicles.

You mentioned ETFs.

When we look at where flows are coming from these days I think beyond [SFJ] you see broadly a broad move into scientific or actively managed funds.

Not just passive, but active with a -- passive with an active bent on it.

Some call it smart beta; that is the term that we use.

We see that as a worldwide phenomenon.

It is happening everywhere.

It is delivered through various vehicles.

We think ETF is a preferred vehicle, given the natural efficiency, both tax and otherwise, of delivering diversified investments.

So we have made a considerable effort into expanding our ETF business, not just from the standpoint of product, which we do by ourselves.

And I think we are the only large ETF provider that engages other managers -- Blackstone, DoubleLine, MFS -- in an active equity sub advisory relationship, but we have also built out --.

Since as you probably know ETFs are largely bought through intermediaries, we've built out our wholesaling force in the US and increasingly Europe on the continent.

I would say both passive and alternatives are two big themes that we see globally.

On the alternative side, while as an asset manager we don't play that, we are very active, as you would expect, on the asset servicing side for servicing passive, both hedge, private equity, and real estate.

Last point I would make, which is more of a servicing comment, but it brings in an interesting sidelight, is that in the US but trending across the globe these mutual funds that take on an alternative element to them, we not only service those but that has been a big source of our enhanced custody growth.

So I would say, broadly, passive and alternative and ETFs as the preferred vehicle for distribution.

So it sounds like some real synergy between the asset management and the custody?

Absolutely.

Great.

Thanks for all the detail.

Much appreciated.

Steven Wharton, JPMorgan.

I just had a question on the rate outlook.

You are actually, in some ways to me, somewhat conservative.

I recognize that the forward curve expectations have shifted outwards, so you have this first Fed rate rise starting in December.

But I was just kind of wondering if the Fed has indicated, which I know could change, that they may move as soon as this summer.

The dot plot keeps moving around of course.

But if, for example, the Fed moved say sometime in June or July or even in August or September and you ended the year closer to maybe 50 or 75 basis points on the Fed funds rate, can you give me a sense of the benefit that might accrue to the NII forecast and the rising rate scenario?

Sure, Steven; it is Mike.

I appreciate your comments and I think, importantly, the answer to your question would be predicated on how quickly do we see the benefit of the market expecting that sooner Fed fund administered rate hike.

How quickly do we see that show up, for example, in one-month and three-month LIBOR.

So it is caveated on that.

Historically, we have seen one-month and three-month LIBOR increase in advance of the administered rate as the market starts to price that in, but that is really the heavy dependency.

I would characterize it as round numbers.

Think of it as approximately $60 million of potential benefit in 2015, if in fact we got a mid-year increase rather than the December that we had expected.

Again, as long as -- I mean that would really suggest that we would be seeing probably as early as March or certainly by April the increase in the LIBOR rate, so that is the dependency.

So the $60 million would be -- is that per 25 basis points or is that in aggregate?

I was trying to answer your question in aggregate, which I heard it as if we get the first Fed fund increase at mid-year and then we get a second increase in Q4, what do I think the overall impact would that be on NIR for full-year 2015 relative to the expectations that we shared with you in the slide.

Okay.

So that basically implies roughly two rate rises with a little bit of market rate impact ahead of it?

Correct.

Okay, thanks.

Brian Kleinhanzl, KBW.

I had a quick question on the potential long-term debt issuance in 2015.

Looking right now you have about $10 billion of long-term debt on the balance sheet and I am assuming that is being done in preparation for TLAC or NSFR.

Can you give us a sense of how much that could grow?

Are you looking at it as a percentage of RWA, or how much are you going to add potentially in 2015?

Sure, Brian; it is Mike.

Yes, there is uncertainty around where TLAC is going; specifically what kind of proposed rule will the Fed issue around TLAC.

And that was really the main driver of the comment that I was making.

So at this point I would not try to size it.

Obviously, as we know more we will communicate more.

At this point I wouldn't try to size the potential issuance on the long-term debt side.

I just think there are too many uncertainties in terms of where those rules are ultimately going to go.

You mean that you won't issue until you see the rules; is that the way to interpret that?

I just think there are a number of different considerations on whether we would issue or not in 2015, not the least of which would be market conditions.

So I would rather not try to give you a specific forecast on long-term debt.

But I was acknowledging the point that you made, which is accurate, that if TLAC came out from the Fed, and particularly if it was more conservative than the Basel rule, that might encourage us to do more rather than less in 2015.

Okay.

Then just my second question was on the preferred issuance.

It sounded like there was some optionality in that as well, meaning it is not included within your CCAR plans so you are not required to issue it.

So is there a scenario where you could see yourself not having to issue preferred?

I would obviously prefer not to talk about our CCAR submission at this point.

Is there a scenario that I could imagine where we didn't issue the $750 million of additional preferreds?

Sure, but I think that it is unlikely.

I think it is more likely than not that we will issue the additional $750 million.

Again, timing to be determined, but I think it is more likely than not.

Okay.

Great, thanks.

Jim Mitchell, Buckingham Research.

Good morning.

Mike, can you just help us understand, given that you are assuming a flat rate environment, flat balance sheet, what are the drivers of the $100 million variance in the NII?

And then secondarily, if we are assuming a flat rate environment as we have seen over the past couple years, you have had pretty steady strong deposit growth.

Is there a reason why we wouldn't or shouldn't assume more deposit growth in 2015 if we have a flat rate environment?

Sure, Jim.

First, in terms of the NIR forecast for 2015, when you talk about the $100 million you're talking about the difference between 2014 actual and the midpoint?

Oh, no, I'm sorry.

The range between the low end and the high end, sorry.

I understand, thank you.

First of all, it actually links to your deposit growth point.

It is not lost on us that we have seen substantial deposit growth over the course of 2014.

Unfortunately, mainly that has been in the category of excess deposits, which means that we have turned around and put that deposit growth with the central banks and earned a very, very small interest margin on that.

So deposit growth would be an example of uncertainty in our forecast for 2015, hence the wide range.

I would also add to the point that we may see this divergence in 2015 by geography, so that was the thinking that was part of that range as well.

There will be mixes in the change in our portfolio.

Again, there are just so many different moving parts here, Jim, that I thought, particularly given that we are so early in the year, that that kind of width of range made sense.

Then in your question on the deposit growth, given the pressure that the growth, particularly in excess deposits, puts on our capital ratios and, therefore, would potentially put on the need to issue additional press longer term, I would hope that we would not have and would expect that we would not have the kind of growth in excess deposits over the course of 2015 that we had over 2014.

I think net-net that would be a negative, because again, even if all of those excess deposits came in the US, they get placed with the Central Bank here currently earning 25 basis points.

That is not helpful economically with today's interest rate environment and with today's capital and liquidity rules.

No, fair.

So just to follow-up on your discussion there, the range is sort of dependent on deposit level.

So is the upper end of the range assuming some deposit growth, or you mean it is flat and the low end of the range is assuming some deposit runoff?

Honestly, Jim, there are a lot of different factors.

The deposits would be a piece of it, but I just think again where our spread is going to go in 2015, what kind of portfolio opportunities do we have in 2015, how do the rules get -- in answer to one of the earlier questions, I think it was Brennan's, where is the final interpretation of the operational deposit rules for LCR come out.

There is just a lot of different uncertainties that could push that either up or down.

Fair enough.

And just one last question just on the prior discussion you have had a couple of times around at the low end that implies flat earnings.

Was that discussion, and maybe I missed it, reflecting or contemplating lower share count from the buyback or not, when you think about flat earnings at the low end?

I would rather not get into share count forecast, just given that that would imply certain things about CCAR.

But I was just simply trying to point out that our view is that we are going to have EPS growth in 2015.

We obviously recognize the risk factors and we have tried to be very transparent about the pluses and minuses.

I think -- most importantly, I think the things that we can most control; we feel good about what we are going to execute on for 2015.

Okay, thanks.

Geoffrey Elliott, Autonomous Research.

Good morning.

If I think about capital ratios declining a little bit, the G-SIB surcharge potentially stepping up from 100 basis points to 150 basis points, then just conceptually how do you think about the right proportion of earnings that you should be returning to shareholders?

Not so much thinking about this year, but just going forward, given that there is some growth in the business, how long can you keep giving everything back before you have to start retaining something?

Sure, Geoff; it is Mike.

First, I think there are really two different questions embedded in your question there.

One is the G-SIB buffer.

I would emphasize that my comment on it potentially increasing is based on our interpretation of the Fed's proposed rule and in particular that our non-operational deposits get picked up.

Under our interpretation, our non-operational deposits get picked up in what they are characterizing as short-term wholesale funding, despite the fact that those dollars are literally placed with the Central Bank, which we view as the epitome of a risk-free transaction and we view it as the antithesis of a hot money kind of risk.

So the G-SIB buffer we will certainly put in a comment letter and we would hope that reason would ultimately prevail there.

So I think it is way too early to attribute a change in philosophy or anything, a change in game plan related to that.

I think your question more importantly, which we will talk about some more at our investor day in February, is our longer-term plans around capital management.

In a nutshell, Geoff, our game plan has not changed there, which is that we would expect to return -- if you think about our overall ROE, we would expect to pay out a portion of that in common stock dividends, a portion of it would need to be retained to fund a growing balance sheet over time.

But again, assuming that we limit the growth in required capital from a growing balance sheet to a small single-digit number, that that provides ample opportunity over the long haul for share repurchase and using that as a vehicle to return capital to shareholders.

All right.

Thank you.

Gerard Cassidy, RBC.

Thank you.

Good morning, guys.

You mentioned that with the negative deposit rates at the European Central Bank and other central banks customers are starting to pull out some deposits.

Others are paying those fees.

Can you guys give us some color on the sensitivity analyses you might be doing; if those numbers become more negative at the central banks, how many more customers may decide to leave rather than paying the fees?

And then would you shrink the balance sheet accordingly?

And as part of that, I heard in response to some answers about the amount of fees you received in the fourth quarter was $3 million.

And I didn't know if that was just for the month of December which, Jay, you mentioned that is when you started to charge and then, Mike, you said that was for the full fourth quarter.

So is it a $9 million run rate or is it just $3 million?

Gerard, let me start that one and Mike can jump in maybe on the $3 million question.

It is probably too early to tell as to what the sensitivity at what price balances find different homes.

But as you rightly point out, it is to me one of the most important elements of what we are doing by charging for euro deposits is trying to determine or establish at what price deposits stay versus go.

And if you carry that forward that would be a pretty powerful weapon for us with regard to having some, control is probably too strong a word, but some ability to influence excess deposits which obviously have big consequences for the capital that we hold.

So early days.

We have only been at it for a couple of months, but we are spending a lot of time at the individual client level trying to understand deposit behavior, trying to understand what alternatives there are and at what point a price causes somebody to move, because we think it has pretty important implications far beyond charging for euro deposits.

Gerard, it is Mike.

Just to add on your question on the timing.

So we did start charging for deposits in December, so the $3 million all came in in December.

It was reported in net interest revenue at this point.

And so again think of it as, on approximately $30 billion, 15 basis points on an annual basis.

One month is the $3 million.

Great.

Then as a follow-up question can you give us some color on the loan portfolio?

Obviously on an average basis it is almost $18 billion; that is up nicely from the beginning of the year.

The color I am interested in, are there any big energy credits in there?

Are you part of any syndicates that you have energy exposure in that portfolio?

The short answer is no, Gerard.

Great.

Thank you.

I would now like to turn it back over to management for closing remarks.

Thanks, Stephanie.

I will be brief.

Thanks for your attention and questions this morning.

Hopefully, we look forward to seeing all of you on February 25 in New York City.

We will be in a position to talk a little bit more about our long-term strategy and I am sure we will revisit the 2015 outlook as well.

Thanks, everybody.

Thank you.

This does conclude today's conference call.

You may now disconnect.