道富銀行 (STT) 2015 Q1 法說會逐字稿

Good morning and welcome to State Street Corporation's first-quarter 2015 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 reported for replay. State Street's conference call is copyrighted and all rights are reserved.

This call may not be recorded or rebroadcast or distributed in whole or in part without the express written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street website.

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

Thank you Brandy. Good morning and thank you all for joining us.

On our call today are CEO Jay Hooley will speak first. Then Mike Bell, our CFO, will take you through our first-quarter 2015 earnings slide presentation which is available to download in the Investor Relations section of our website at www.statestreet.com. Afterwards we will be happy to take questions.

Before we get started I would like to remind you that today's presentation will include operating basis and other measures presented on a non-GAAP basis. Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our first-quarter slide presentation.

Today's presentation will contain forward-looking statements. Actual results may differ materially from those statements due to a variety of important factors such as those factors referenced in our discussion today and our first-quarter slide presentation under the heading forward-looking statements and in our SEC filings including the risk factors section of our 2014 Form 10-K. Our forward-looking statements speak only as of today and we disclaim any obligation to update them even if our views change.

Now let me turn it over to Jay.

Good morning everyone and thanks for joining us. I'm pleased with our first-quarter 2015 results which reflect strong fee revenue growth over the first-quarter 2014, continued momentum of our core business and our focus on managing expenses.

We continue to prioritize returning capital to our shareholders. During the first quarter of 2015 we completed the final phase of our $1.7 billion common stock purchase program announced in March of 2014 with the purchase of 6.3 million shares of our common stock.

In addition to our Board of Directors approved a $1.8 billion common stock purchase program following the Federal Reserve Board's 2015 CCAR process. Our 2015 capital plan also includes a proposed increase in our quarterly common stock dividend to $0.34 per share starting in the second quarter of 2015 which our Board will consider in May.

Now I'd like to provide a brief overview of economic and market developments and how our business was affected. The first quarter was characterized by further monetary policy easing in several jurisdictions outside the US. Some of the moves were anticipated but a few were not.

Not only have these policy changes tended to support global equity markets, they have also contributed to higher volatility particularly in the fixed income and foreign exchange markets. Recent weaker US economic data and Federal Reserve Board members' public commentary have brought into question expectations for the timing and pace of interest rate increases in the US later this year. However, the wave of global monetary easing by major central banks outside of the US has reinforced the trend of diverging monetary policies and continues to fuel the broad appreciation of the US dollar.

Combined with ongoing political uncertainties across Europe managed as well as floating exchange rates are being significantly pressured. Both the Russian and Brazilian Central Banks abandoned their intervention programs while the Swiss National Bank abandoned its cap on the Swiss franc euro rate and moved interest rates deeper into negative territory.

In addition the central banks in Australia and Canada also reduced interest rates to help their economies absorb lower commodity prices. These actions spurred an increase in FX volatility.

Monetary policy easing also impacted the fixed income markets in the first quarter. The ECB's announced and expanded asset purchase program was larger and longer lasting than anticipated. Combined with the Swiss National Bank's moves a significant and growing share of European sovereign bonds now have negative yields which in turn is helping suppress yields around the globe.

Together these trends impact our business in several meaningful ways. First and most significantly the low interest rate environment continues to negatively impact our net interest revenue and net interest margin as our higher-yielding portfolio investments mature or experience prepayments and then those funds are reinvested in lower yielding investments.

Also amidst the various central bank actions, and changes to various market structures, we continue to experience high levels of deposits. As you know we recently imposed charges for holding euro deposits which compensates us for the use of our balance sheet in a negative rate environment. We have also begun a comprehensive program to further reduce our excess deposits given the negative effect of these deposits on our capital ratios to better align our and our customers' interest in the management of our level of deposits given the new regulatory requirements.

Second, our foreign exchange trading revenue was quite strong in the first quarter and we benefited from the higher volatility in the foreign exchange markets relative to Q1 2014 and Q4 2014. Our broad range of foreign exchange trading platforms continue to serve us well.

Finally, our first-quarter 2015 fee revenue was negatively impacted by the strengthening US dollar which was mostly offset by the favorable impact on first-quarter 2015 expenses. Excluding these impacts our core business performed well benefiting from both the client relationships and continued expense discipline.

Now I'd like to discuss our asset servicing and asset management business. Our focus on developing and delivering solutions to serve clients' evolving needs continues to position us well against global growth trends.

Our first-quarter 2015 net asset servicing lines totaled $215 billion and importantly these wins were across sectors and geographies. New assets to be serviced that remain to be installed in future periods totaled $336 billion at March 31 and we continue to see deep and diverse pipelines.

In our asset management business we experienced net outflows of $38 billion during the first quarter of 2015 driven by net outflows of $27 billion from ETFs reflecting the first-quarter seasonal outflows from our S&P 500 ETF, $8 billion from institutional mandates and $3 billion from cash products. Outflows were driven primarily from lower yielding products, lower revenue yielding products as evidenced by asset management revenues for the first quarter of 2015 being up from the first and fourth quarters of 2014 excluding the impact of the stronger US dollar.

Now I'll turn the call over to Mike who will review our financial performance for the first quarter and after that we will take your questions. Mike?

Thank you, Jay, and good morning everyone. Before I begin my review of our operating basis results I'll comment on a non-operating charge included in our 1Q 2015 GAAP basis results.

We recorded an after-tax charge of $150 million or $0.36 a share for 1Q 2015 to increase our legal accrual associated with indirect foreign exchange matters. This accrual pertains to indirect FX matters which we have disclosed over the past few years and it reflects our intention to seek to resolve the outstanding claims asserted in the United States by federal governmental entities and civil litigants.

It is possible that we will not be able to reach any settlement of these matters and the cost of any resolution could materially exceed our accrual. Our current efforts even if successful may not address all of our potential legal exposure arising out of these activities and other claims which may be material could be asserted against us. As I'm sure you can appreciate settlement discussions are confidential and we are not able to make more specific comments on these matters at this time.

Now please turn to page 7 in the slide presentation where I will begin a discussion of our 1Q 2015 operating basis results. Operating basis EPS for 1Q 2015 increased to $1.17 per share from $0.99 in 1Q 2014 and decreased from $1.37 in 4Q 2014. Our first-quarter results in 2014 and 2015 included the seasonal effect of deferred incentive compensation for retirement eligible employees and payroll taxes.

Compared to 1Q 2014 EPS growth of 18% was driven by strong fee revenue growth, well-controlled expenses, a favorable effective tax rate and the impact of our common stock repurchase program. Operating basis total revenue increased 5% with associated total fee revenue increasing approximately 7% from 1Q 2014 while operating basis total expenses increased 1% from 1Q 2014. Our operating basis effective tax rate for 1Q 2015 was 28.4% which is lower than our expectation for the full-year.

On the capital front in 1Q 2015 we purchased approximately $470 million of our common stock completing our March 2014 common stock repurchase program. In addition we announced a new common stock repurchase program of up to $1.8 billion and subject to approval by our Board of Directors a planned increase of our quarterly common stock dividend for 2Q 2015 to $0.34 a share.

As slide 8 shows we delivered strong 1Q 2015 operating basis EPS growth over 1Q 2014. Primary drivers included strong fee revenue growth and the impact of our common stock share repurchases.

Turning to slide 9 I'll now discuss additional details of our operating basis revenue for 1Q 2015 and notable variances to 1Q 2014 and 4Q 2014. First, I would note that the stronger US dollar adversely impacted total fee revenue by approximately $83 million compared to 1Q 2014 and $46 million compared to 4Q 2014. Net interest revenue was also negatively impacted by the stronger US dollar by approximately $14 million compared to 1Q 2014 and by $7 million compared to 4Q 2014.

compared to the year-ago quarter all fee revenue lines increased with the strength in FX trading in particular supporting the 7% total fee revenue growth from 1Q 2014. Servicing fees were up from 1Q 2014 primarily due to net new business and stronger US equity markets partially offset by the impact of the stronger US dollar. Management fees increased 3% from 1Q 2014 primarily due to net new business and stronger US equity markets partially offset by the impact of the stronger US dollar.

In addition 1Q 2015 included money market fee waivers of approximately $11 million. Total trading services revenue in 1Q 2015 increased significantly from 1Q 2014 and 4Q 2014 due to higher foreign exchange trading revenue reflecting higher volatility and volumes.

Securities finance revenue increased approximately 20% compared to 1Q 2014 primarily due to increased new business and enhanced custody and higher volumes. Processing fees and other revenue were flat with 1Q 2014 and decreased from 4Q 2014 primarily due to lower earnings from joint ventures and lower revenue associated with tax-advantaged investments.

Moving to slide 10 as you can see our operating basis net interest revenue and net interest margin continue to be challenged in the prolonged low interest rate environment. NIR decreased from 4Q 2014 primarily due to a one-time loan repayment in 4Q 2014 and the impact of lower market interest rates partially offset by higher deposit levels.

We continue to expect 2015 NIR to perform within the scenarios we communicated at our Investor Day. For your reference we have provided those slides in the appendix of the slide presentation along with the primary drivers and assumptions underlying those scenarios.

To remind you the first scenario assumes interest rates remain static and deposits remain level 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 we presented to you assumes that administered interest rates will begin to increase later this year. 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.

Before discussing 1Q 2015 expenses please note that we continue to target 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. This assumes that we achieve our operating basis total fee growth objective of 4% to 7% in 2015.

Moving to slide 11 you can see on the top of the slide there were some notable expenses affecting 1Q 2015 results. The stronger US dollar benefited total expenses by approximately $77 million compared to 1Q 2014 and $39 million compared to 4Q 2014. In addition 1Q 2015 compensation and employee benefits, those expenses increased from 4Q 2014 primarily due to an incremental $137 million associated with seasonal deferred incentive compensation for retirement eligible employees and payroll taxes.

Lastly other expenses included $20 million in securities processing costs and an additional $8 million for a new bank levy in Europe. Other expenses increased from the year-ago quarter primarily due to additional required regulatory costs and higher securities processing cost. Compared to 4Q 2014 other expenses decreased primarily due to the non-recurrence of a number of 4Q 2014 other expenses and lower professional services costs.

Turning to slide 12 I'll provide a brief overview of our March 31, 2015 balance sheet. Our balance sheet continues to evolve as we respond to regulatory changes including the liquidity rules.

Our liquidity coverage ratio is currently above 100%. In addition the investment portfolio maintained a higher credit quality profile and our duration was in line with the prior quarter. Lastly the after-tax unrealized mark-to-market gain as of March 31, 2015 was $699 million which improved from year-end primarily due to a decline in interest rates and tighter credit spreads.

Now turn to slide 13 to review our capital position. As you can see we remain well-capitalized which has enabled us to accomplish a top priority of returning capital to shareholders through dividends and common stock repurchases. As of March 31, 2015 our fully phased-in capital ratios have declined modestly relative to year-end.

The decrease in the common equity Tier 1 ratio under the Basel III fully phased-in advanced and standardized approaches was principally due to the 1Q 2015 charge associated with foreign exchange matters. The fully phased-in holding company supplemental leverage ratio decreased from 4Q 2014 principally due to a higher average balance sheet as of March 31, 2015 and the 1Q 2015 charge associated with foreign exchange matters. We are comfortable we have the levers that will enable us to be in compliance with the supplementary leverage ratio requirements in advance of the January 1, 2018 effective date.

Returning capital to shareholders continues to be a top priority as evidenced by the capital actions included in our CCAR 2015 capital plan. As we communicated at our Investor Day leverage ratios continue to be our near-term binding constraint and this was further highlighted by our DFAST 2015 and CCAR 2015 results. This constraint has been driven by the growth in our balance sheet primarily as a result of higher client deposits.

While operational deposits are integral to the overall service that we provide our custody clients growth in excess deposits has pressured capital ratios and we have begun a program designed to reduce the level of excess deposits on our balance sheet. For example, starting in April we increased the rate we are charging for euro deposits. Based upon our discussions with clients we are also developing other initiatives that appropriately balance our clients' needs with our economic and regulatory objectives.

Overall we are targeting a net reduction in excess deposits over the remainder of the year. In addition we continue to plan our capital actions carefully and as previously disclosed we plan to issue approximately $750 million of preferred equity in 2015.

So in summary our 1Q 2015 results were driven by strong fee revenue, well-controlled expenses and a favorable effective tax rate. We continue to focus on our key priorities of delivering value-added solutions to our clients, investing in growth initiatives, diligently managing expenses and returning capital to shoulders. We continue to expect 2015 total operating basis fee revenue to increase 4% to 7% compared to full-year 2014 and we continue to target 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.

We expect NIR headwinds are likely to continue as illustrated within the scenarios we communicated at our Investor Day. Lastly we continue to expect our operating basis effective tax rate to be approximately 30% to 32% for the full-year 2015.

With that I will now turn the call back to Jay.

Thanks, Mike. And Brandy we are now Mike and I are now available to handle questions.

(Operator Instructions) Glenn Schorr, Evercore ISI.

Thanks very much. So I guess the balance sheet is up 9% thereabouts year on year so it's good for supporting net interest income while the NIM has its issues. But as you mentioned it impacts the capital and asset line.

So curious on how you're balancing that? And then related question is I noticed that mortgages and asset-backs have declined the most somewhere between 10% and 25%. Is that just straight runoff or is that a purposeful decline to impact the capital ratios as well? Thanks.

Let me start and then Mike will comment on the balance sheet construction. This issue of growing deposits and the pressure on our capital ratios, let me just tease out for a minute how we're approaching that because I think it's important. We're working with our customers.

We've had a series of discussions so we've brought out into the open the concern we have somewhat ironically that clients particularly in the asset management segment have the same issues. SEC and other regulatory agencies are forcing them to do more liquidity stress testing on their portfolios which is one of the causes for excess deposits ending up on our balance sheet. We have developed some tools just recently through our global exchange business, portfolio stress testing tools that we've been sharing with our customers so that as they look at their liquidity needs it can be done more scientifically.

So we're working with them to one, understand their liquidity needs and we think from that will come a reduction in their liquidity needs which will reduce deposits that end up on our balance sheet. So I point that out because I think it's a more durable and sustainable approach than just forcing them excess deposits.

I also think the other thing that is in play here obviously is at some interest rate level we want these deposits. So what we're really trying to unearth is what deposits are truly excess, not needed for the liquidity needs of the fund and deposits that would likely runoff anyway in a different interest rate environment.

So that's a little bit of where we are on our deposit strategy. Based on that as Mike pointed out we would expect our excess deposits to go down between now and end of the year. But you might comment, Mike, on the portfolio construction.

Sure, absolutely. Good morning, Glenn. First regarding the overall balance sheet and then moving to the portfolio regarding the overall balance sheet we published at the end of first quarter an SLR on a fully phased-in basis at the bank of 4.8%.

And as we've talked about previously we do expect to be able to manage the levers between now and the 1/1/18 effective date to get that 4.8% up to at least 6%. And as Jay talked about some of that will come from the excess deposits leaving us, some of it will come from some financial engineering that we can do between the bank and the holding company and some of it we would expect to meet through pref issuance including the $750 million that we have slated for 2015. So your arithmetic is accurate, I would just point out that we continue to feel good about the levers that we have in front of us.

On the specific question on the balance sheet the short answer is that the runoff in the mortgage-backs and asset-backs are in fact by design. I'm sure it's not lost on you that the regulatory environment now specifically the combination of the LCR and the SLR converge to basically encourage us to move towards more of a barbell kind of approach so that as an example we're holding more US treasuries, more central bank deposits than we've done historically.

At the other end it's not huge but we have a for example a modestly larger loan book including leverage loans in the $2.5 billion to $3 billion range. And as a result in the new environment the piece of the portfolio that becomes then less valuable from a net return on capital standpoint tends to be the mortgage-backs and asset-backs that you describe. So we would expect that as we over time move to more of this barbell kind of approach that those would be the assets that are most likely to runoff.

Ken Usdin, Jefferies.

Hey, good morning guys. This is actually Josh in place for Ken. What was the impact from activity levels on the servicing business this quarter?

Josh, it's Mike. Regarding the GS fees they were down a little bit relative to Q4. It was not huge but they were down modestly Q4 to Q1.

Ashley Serrao, Credit Suisse.

So on the excess deposit reduction, can you just help us think about the size of these deposits and what yields these are carried at and invested in right now?

Ashley, good morning it's Mike. Regarding the deposits first of all we estimate that on average in Q1 that our excess deposits were approximately $54 billion.

And on average those are earning in the -- again on average something in the high teens, so call it 15 to 20 basis points of spread on those deposits. So if you back that out of our overall interest earning assets you would see that the 101 basis point NIM would be a combination of high teens on the excess deposits and then something in the high 120s in terms of the core net interest margin on the remainder.

Luke Montgomery, Bernstein Research.

I was wondering if you could give a sense of what the year over year expense growth would've been excluding FX translation. I think obviously the reported numbers look pretty good but maybe you could speak more to the core execution on expense containment. And then what was the impact of FX translation on revenues and net income?

Sure, Lou, it's Mike. Regarding your first question on expenses so the reported expense number on an operating basis was up 1.3% on a year-over-year basis. Again that's Q1 2015 to Q1 2014.

If we take out the $77 million that I noted in my prepared remarks on the impact of the currency translation it would say that the expenses would have been up 5.4% on a constant currency basis. And as you can imagine, that's roughly offset, not completely offset but roughly offset by a similar kind of impact on fees.

So the impact of the revenue year over year was approximately $83 million of headwind Q1 2015 to Q1 2014. Then the income impact incremental to that from net interest revenue of the stronger US dollar was approximately $14 million. So $14 million Q1 2015 to Q1 2014.

So if you take the $14 million of negative impact on NIR and take then the $6 million delta between the impact on fees and impact on expenses that would say about $20 million was the headwind to earnings from the currency translation. So relative to a constant currency calculation, so call that a little less than $0.04 per share.

Alex Blostein, Goldman Sachs.

Great, good morning everybody. So on the taking a step back just a bigger picture I guess on the operating leverage, you guys had delivered pretty nice operating margin expansion year over year despite the currency headwinds, it looks like up in about 200 plus basis points year over year.

But in your outlook for the full-year again for the whole Company your outlook remains kind of no operating leverage assuming rates stay at current levels which increasingly feels like it will be the case. So I guess my question is the reason for not coming out with a little bit more optimistic guidance for the full year on the operating leverage a function of look, we don't know where FX trading is going to go and that's really been the main driver or is there something else we need to account for in the back half of the year that could take some of that upside out of the run rate?

Sure, Alex, it's Mike. First you're absolutely right. No change in the full-year outlook relative to what we had just talked about 60 days or so ago at the Investor Day.

Basically that's because at this point we really wouldn't overweight a single quarter. For example we think it's unlikely that the FX trading revenue will continue at the pace that it did in Q1. Generally the conditions for FX have been good but I wouldn't characterize the first-quarter rates which were exceptionally strong as being the new run rate going forward.

So that's really the main punchline is no change in the underlying outlook which again we view Alex as being favorable. With 4% to 7% fee revenue despite currency headwinds of somewhere between 200 and 300 basis points that would say 7% to 10% fee revenue growth on a constant currency basis. We view that as a positive result.

And as we talked about at the Investor Day with at least 200 basis points of daylight between fee revenue and expense growth we view that as a real positive step forward in terms of our productivity. And again even a bigger step forward than we took for full-year 2014 relative to 2013.

So again in terms of the items we can control we feel good about the outlook. Obviously we cannot have control over market interest rates. As you noted correctly that remains a headwind.

We also acknowledge that the tax rate is likely to be higher for 2015, in fact higher than it was in a first quarter. So that would be another headwind that is not truly within our control. So again we feel good about the outlook and do not feel like it made sense at this point to change it.

Brian Bedell, Deutsche Bank.

On the investment servicing like Mike can you tell us with the dollar amount of the FX impact is 4Q to 1Q? And then Jay maybe the amount to be installed from the new custody wins at the end of the first quarter? And then maybe just an update on your enhanced custody efforts within securities lending as well.

Good morning, Brian. In terms of the Q4 to Q1 roll forward GS fees were negatively impacted by currency translation by approximately $27 million.

So it would have been essentially flattish Q4 to Q1 without the currency translation. And then Jay?

Let me pick up and I just remind you Brian that 2014 to 2013 service fees were up some 9%. So we don't look at a single quarter as being terribly informative. The $336 billion of committed not yet installed, hard to characterize it anyone way.

It's a real mix from traditional to offshore alternatives. No single big deals, it's not an 80/20 so that's good. It should feather in nicely over the next couple of quarters would be our expectation.

On the enhanced custody which drove a good deal of our period-over-period securities lending growth we continue to see a great interest in that product. And it's coming from I would say from smaller part is coming from new relationships. More of it is coming from expanding existing relationships.

And we find with the continued changing landscape in the investment bank world with prime brokers that enhanced custody continues to be a very attractive product. So we would anticipate that product to continue to grow and probably dominate the incremental growth in the securities lending line for some time to come.

Vivek Juneja, JPMorgan.

Jay, I have a question for you just stepping away from earnings a little bit. Looking at your proxy when I look at the ROE targets for long-term incentive comp plans for management you're using a 9% ROE target for this year and you earned 9.8% last year. So I'm trying to understand the rationale for the target that's being used being lower than last year and what to imply from that.

Sure. As you know I can comment on it but that would be the Board and the executive comp committee that sets those targets. And I think what's notable about that target is that it continues to move up.

It doesn't have upside beyond the 9%. It does have downside at the 9%.

I think it's fair to say that the Board and executive comp committee continue to calibrate that number up but are also mindful of the continued variation with regard to capital and some of the things that we're working through. So the expectation that that would move closer to the 12% to 15% target over time but for now the Board is most comfortable with targeting that at 9%.

Jim Mitchell, Buckingham Research.

Good morning. I just want to Jay I think in the past you've talked about how emerging market equities can have maybe a little bit of an outsized impact on fee rates. Obviously emerging markets over the last month or so has had a very strong run. Think up 9% so far in April.

Is it fair to assume that can still have a positive impact on fee rates in the second quarter if it's sustained? Or is it not just market appreciation, we also have to see flows? If you can just give us any kind of red box to think about this impact going forward if it's sustained?

Happy to, Jim. And your observation is on target which is emerging market asset growth is a good thing proportionally as it relates to our asset growth and service fee revenue. You're also right that the last month has been very constructive for emerging markets growth and we would expect that if that continues that would be a positive helper to the service fee line.

Less influential but important as well is the transaction volume that is associated with that. Transaction volume was a little soft in the first quarter which is part of the drag on the securities on the service fee growth period over period.

Again I'd expect that if we see sustained upward movement in emerging markets the transaction growth will flow from that. So both positive towards the service fee growth.

Betsy Graseck, Morgan Stanley.

Hi, good morning. Jay, you announced a new head of the SSGA business, I wondered if you could give us a few words on expectations and maybe speak within that to the commentary in the press about focus on fixed income ETFs?

Sure. We did announce, Betsy, that Ron O'Hanley will be replacing the retiring Scott Powers. Scott will retire some time mid-this year and Ron is on board as of now.

Ron many of you would know previously was at Bank of New York Mellon running the asset management wealth management practice and then was president of Fidelity most recently. I have known Ron as a customer, as an industry associate through the years and when Scott informed me that he wanted to retire I began a conversation with Ron.

That conversation was largely around SSGA's position, its strategy, what I thought the opportunities were with that. And I found Ron to have a similar minded with regard to how we viewed the SSGA opportunity.

Scott and Ron worked together for some years in a past life so that makes the transition even smoother as they work together. So with Ron on board my expectation is that obviously with a new person you look at strategy but I would expect more tweaks to the adjustment as opposed to overhauls.

I think what Ron and I find attractive about the SSGA franchise is its global nature, its institutional relationships and its in-product areas most notably ETFs and passive that continue to generate proportionally higher flows than the traditional active asset categories. I would say Ron's loves the ETF franchise. He is a big believer in asset allocation overlays across ETFs for use in intermediary channels, institutional channels.

The fixed income ETF which you referenced is also an area that we have been building out but there's more to do. So I think Ron coming on board I expect that the transition will be smooth. He will bring some new ideas to the mix but fundamentally we have a similar view of how we can best leverage the SSGA franchise going forward.

Mike Mayo, CLSA.

Hi, you guys are batting cleanup this quarter among the trust banks. Year-over-year operating leverage is a little bit more negative than your peers and so I'm just wondering from your perspective why do you think that's the case?

Is it, one, maybe the mix, maybe it's just the impact of Europe for more equities. Would it be two, maybe this stage of your strategy? I know you are investing a lot in the digital enterprise, maybe you could get some ins and outs from that.

Or third do you think you are not executing as well as you'd like? Thanks.

Well we don't think it's the third, Mike. I would say as you would expect as do you we compare ourselves to our peers and we try not to focus on a single quarter and we think over longer periods that our performance has been good if not better in most categories. I do think we look at this as a long-term game where as you know we are continuing to drive product development which is creating innovation and top-line growth.

And we think that we're best positioned in some of the faster growing asset classes, alternatives, ETFs, offshore funds and so we don't sit back and ignore investments in those categories. So we're continuing to drive investment.

On the other hand you referenced the digital enterprise. We also while we like to see improved environmental factors that could cause us to return to days of old we're not expecting that, so we're continuing to drive efficiency in the core operations. The digital enterprise does have some investment associated with it.

It's designed to make us the low cost producer and some of those commodity activities that we generate. If you were to say what's the investment that's going into that it's continuing to drive straight through processing, continuing to enhance the private cloud, moving more applications to the private cloud.

Some of the new products that we've introduced recently I referenced the portfolio liquidity stress test tool which was built in the cloud fairly rapidly given the need. TruCross which is a buy side to buy side foreign exchange platform which we introduced in the last quarter and a half also has those same characteristics.

So we're trying to build for the long term, which means driving those unit costs down, being the low cost producer in the core baseline activities while continuing to invest in those products that continue to differentiate us and what we think are some of the more attractive segments of the investment services business. So as opposed to outperforming in a quarter we would rather outperform over time and we think we're positioned to do that.

Brennan Hawken, UBS.

Good morning. So it appears as though the seasonality in the SPDR ETFs is becoming more pronounced over the last few years.

Does this concern you at any way and does it create any kind of constraints on your capabilities whether they be operational or capital markets oriented? And is there anything going on there that might be problematic or that you might want to adjust through your sales processes?

Yes, Brennan let me pick that up. I think the broad answer is no. Your observation is accurate which is the SPDR S&P 500 is actively used for portfolio positioning so it spikes, ebbs and flows at quarter-end and beginning of the following period.

As you would expect S&P highly liquid, so we don't worry about any operational issues related to the increased volumes going through the SPDR S&P 500 ETF. So really no, we don't worry about it. I think if you look at -- I mentioned the negative flows to SSGA which were dominated by the S&P 500 which while an attractive product has relatively low revenues associated with it.

If you look at our currency adjusted performance for SSGA it was up 2% revenues quarter over quarter and 7% year over year. So I think while the big ETFs have high velocity to them the revenue impact is relatively small and as I've said for several quarters our focus is more on generating more differentiated higher revenue producing ETFs.

So just in the quarter we introduced seven new ETFs in SSGA, maybe the most notable was the one with DoubleLine which was a total return ETF which has very attractive revenues associated with it and got off to a good start. So no real concern on the high velocity of the S&P 500 ETF focused on leveraging that ETF business to produce more differentiated products with higher revenue per asset mix.

Geoffrey Elliott, Autonomous.

Hello, thank you for taking the question. On the comments you made around not seeing the first quarter for first quarter revenues in terms of FX trading as a run rate, is that because you think that volatility moves down a bit of first-quarter level if you look at the indices or is it more because some of the dislocation around the Swiss franc and QE kicking in in Europe just created wider spreads on FX trades that aren't going to be sustainable?

Let me pick that up, Geoff. Mike can comment if he has anything to add. More on that latter. I think if you look at volatility there was a real spike in the first quarter.

You mentioned the Swiss National Bank de-peg. It was just the highly volatile quarter that was very conducive to foreign exchange volatility. We don't see that event obviously repeating itself but we're very constructive overall on general volatility going forward and the positive effect it would have on our foreign exchange business.

Volatility has been up for three quarters if you look at the underlying drivers. I keep referencing the divergence of monetary policy.

We began the year thinking that the UK, US, Australian and Canadians might begin to tighten. The Australians and Canadians have gone the other way but I'd say the US and UK are still in the mode of heading towards a policy tightening, that monetary divergence is very constructive for foreign exchange volatility. So we think that there was some exceptions in the first quarter which won't repeat but overall very constructive on foreign exchange volatility going forward.

I'd also add that I think if you look at foreign exchange in the first quarter roughly 6%, 7% volume growth both across platform and not-platform business. We've seen higher volume growth leading into this quarter which have driven the outperformance.

So we would continue to expect we'd see good volume growth and the volatility to persist, just not at the level we saw in that first quarter. Mike, do you have anything?

No, that's perfect Jay.

And just in terms of the overall impact on profitability of the FX revenues is it fair to assume there is very little expense that goes against them maybe a little bit of comp but not very much and most of it is just dropping to the bottom line?

Yes, Geoff it's Mike. That's a fair assessment of the profitability of a high-margin FX trading business.

Adam Beatty, Bank of America Merrill Lynch.

Good morning. A follow-up on asset management.

Specifically multi-asset class solutions which I think is relatively small but promising category, it looks like you've had some outflows there lately. Have there been certain products or maybe client mandates driving the outflows and maybe more importantly what's your plan for the category and the latest outlook?

Let me take that. The outflows which are categorized in the institutional bucket were almost all from a single target date fund rebalance so it was just helping a client rebalanced their target date. Very constructive on solutions and solutions has many meanings in the asset management industry.

I would say for us we've made a big push on the 401(k) target date fund category where we've had several new mandates and we have several promising prospects. But solutions also exist at a broader level where occasionally we'll compete, we will complete frequently for institutional mandates were somebody we'll put out a mandate and ask you to come up with your best ideas to deliver against that set of assets.

So it comes back a little bit to my comment that Betsy brought up in my discussion with Ron O'Hanley around using asset allocation as one of the key levers in driving our asset management business both at the target date fund, at the intermediary level where increasingly intermediaries are looking for solutions, oftentimes derived out of ETFs as well as at the big institutional buckets. So we think we have a lot of the right asset classes in the right chassises as in ETFs, and we also believe we bring a lot of expertise with regard to asset allocation knowledge. So bringing those things together is one of the most important for us for SSGA going forward.

(Operator Instructions) Gerard Cassidy, RBC.

Thank you. Good morning Mike, good morning Jay. You pointed out, Mike, that you're mixing your assets a little differently because of the SLR and different capital ratios and you've added to your loan book and I recognized the loan book as a percentage of assets is not very significant for you folks.

It's less than your two competitors of course. But can you share with us on the leverage loans where do you think that may go on a go-forward basis? And your total loan growth was about 14% on a year-over-year basis, should we expect that kind of growth to continue for the rest of the year?

Regarding leverage loans specifically I would expect that that will remain a relatively small part of the overall balance sheet. So at this point we have a total asset there of $2.7 billion. I would expect that we will probably have some growth over time relative to that $2.7 billion but I think it's unlikely that it would grow -- that it would get to the point where it was double that number.

I think that's highly unlikely for the foreseeable future. So again it is a nice complement to the derisking that we've had to do. As Glenn had asked about derisking moving out of mortgage-back and asset-backs into treasuries, it gives us a little bit of an offset relative to that but not a huge part of our overall balance sheet.

The rest of the loan book primarily relates to loans that we've made in support of our client relationships. Specifically, for example, loans to 40 Act funds would be an example.

Again under the new regulatory expectations I don't think we'll have a significant amount of growth in that business, simply because those tend to be relatively tight spread loans. And again in an environment where the SLRs are binding constraint that's a challenge. So I would not say that we would expect a huge growth in the loan book for the foreseeable, really for the remainder of 2015.

Brian Kleinhanzl, KBW.

I just had a quick question on regulatory and compliance costs. You mentioned previously that they were going to be up year on year and first quarter you said that they were up. But if I think about it from the first quarter to the fourth quarter are they going to go up from the first quarter or is that $300 million run rate in the other expenses a good run rate for that line item?

First I think what's most important really of course is the full-year outlook. And I have made the comments around the full-year outlook on expense growth relative to fee growth a couple of times. I think that's the most important thing is to look at the overall expense levels as opposed to just a single line item like other operating expenses.

Nevertheless in answer to your direct question I do expect that we'll see an increase in other operating expenses over the course of 2015. Again that category tends to be somewhat lumpy, but it's typically driven by a combination of regulatory compliance spending as well as legal expenses. And I do expect that those will be higher than the levels that we saw in Q1 which were seasonally low.

There are no further questions at this time.

Okay, Brandy, thank you and thanks to everyone for participating on the call today. We look forward to speaking to you during the second-quarter call which will happen in July. Have a good day.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect your lines.