道富銀行 (STT) 2016 Q1 法說會逐字稿

Good morning, and welcome to the State Street Corporation's first-quarter of 2016 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 a rebroadcast or a distribution, in whole or in part, without the express written authorization from the State Street Corporation. The only authorized broadcast on 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.

Thanks, Therese. Good morning, and thank you all for joining us. On our call today, our Chairman and CEO, Jay Hooley, will speak first. Then Mike Bell, our CFO, will take you through our first-quarter 2016 earnings by presentation, which is available for download in the Investor Relations section of our website, www.StateStreet.com. Afterwards, we will be happy to take questions. During the Q&A, please limit your questions to two questions, and then re-queue.

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 measures are available in the appendix to our 1Q 2016 slide presentation.

In addition, 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, in our 1Q 2016 slide presentation under the heading, Forward-looking Statements, and in our SEC filings, including the Risk Factors section of our 2015 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.

As with the past couple of quarters, we have instituted a new pattern of releasing our financial results on the fourth Wednesday of the month following each quarter end. As such, we expect to hold our second-quarter earnings on Wednesday, July 27, 2016.

Now let me turn it over to Jay.

Thanks, Anthony, and good morning, everyone. Despite the challenging environment, I'm pleased with the progress we made during the quarter on the five strategic priorities I outlined for you at our Investor Day in February. These priorities will help us to transform State Street, compete in the new environment, and deliver value in the short term.

As a reminder, these priorities are, one; to become a digital leader in financial services, to drive growth from our core franchise; to invest in new products that will enhance revenue and drive differentiation; increase our focus on expense management; and leverage our strong capital position to continue to return capital to shareholders. As you can see on slide 4 of the slide deck, we've outlined for you highlights of our progress so far this year against those five priorities.

First, on becoming a digital leader in financial services, we are investing in becoming a digital leader in financial services through State Street Beacon. Our journey to digitize core processes will deliver an enhanced client experience and generate $550 million in annual pretax net run rate expense savings by the end of 2020. Our clients are already beginning to see the results of our investments through faster and more consistent delivery of services, impacting our clients' operations and driving improved ranking within distribution channels.

We are also actively engaged in evaluating new technologies, such as Blockchain. We remain on track to achieve State Street Beacon-related annualized run rate savings of $100 million by the end of this year. That amount will be reflected in our 2017 results. As we indicated could be the case at our Investor Day, we did take a pretax restructuring charge of $97 million in the first quarter related to Beacon.

Second, we expect our core franchise to continue to deliver growth, given our leading positions and attractive markets. Although our first-quarter fee revenue reflects a challenging market environment experienced at the beginning of the year, I am encouraged by the signs of stability in March and the strength of our pipeline across the Firm. The first quarter included new asset servicing wins of approximately $264 billion, with approximately $400 billion of service commitments remaining at quarter end to be installed from current and prior periods.

I want to highlight a win that our global services group in Asia-Pacific recently finalized. In early March, we were selected to be the master custodian for Australia's third-largest superannuation fund, First State Super. This new relationship will also extend into global markets and our global exchange businesses. Of note, State Street now services four of the seven largest superfunds in what is a high-growth sector for us in Australia.

I'm also pleased to say that our asset management business had net inflows of $13 billion, with expected annualized net new revenue of $11 million during the quarter, providing the strongest quarterly net flow in annualized revenue results since the fourth quarter of 2014. Net activity was driven primarily by $7 billion of inflows into ETFs and $11 billion of inflows into cash products.

Third, we believe continuous investment in new products and solutions will enhance revenue and drive differentiation. Our recent agreement to acquire GE Asset Management supports our strategy to invest in higher-growth and -return businesses.

GE Asset Management significantly enhances our position in the outsourced CIO market, which is one of the faster-growing segments of the asset management business. Additionally, GE Asset Management expands SSGA's alternative capabilities, while enhancing our active equity and fixed income teams, which broaden the solution sets we can provide to our combined client base.

Most importantly, GE Asset Management is a high-quality organization with strong cultural alignment with SSGA. And this transaction is an endorsement of our ongoing and strong long-term relationship with GE. We expect this acquisition to be accretive in the first 12 months of operation.

On an ongoing basis, we evaluate products that are not meeting our strategic or financial expectations. We made the decision during the quarter to exit our futures clearing business. And at the beginning of the second quarter, we completed the sale of the WM/Reuters-branded foreign exchange benchmark business to Thomson Reuters. These and other ongoing return-on-capital actions are aimed at improving our efficiency, strategic focus and ROE over the medium to long term.

Innovation is a critical differentiator in the competitive ETF segment, and a key focus for SSGA. Our SSGA, our SPDR ETF business, introduced 13 new funds during the quarter, including the SSGA Gender Diversity ETF. SHE is the first self-indexed ETF, and its development was inspired by CalSTRS efforts to move the needle on gender diversity in corporate America and seeks to track performance of the SSGA Gender Diversity Index, which comprises large US large-cap companies with the highest levels within their sectors of gender diversity on their boards of directors and in their senior leadership.

Fourth, we are increasing our focus on expense management. Our results this quarter reflect our commitment to manage expenses, with first-quarter operating expenses flat compared to the same period a year ago and also flat, excluding the seasonal impact of equity compensation for retirement-eligible employees and payroll taxes, compared to the fourth quarter of 2015.

We continue to make expense discipline core to our culture, encouraging employees to embrace an owner's mindset and identify ways we can reduce costs across the enterprise, looking at everything from travel to consultant spend. As I noted earlier, State Street Beacon is contributing to our expense management efforts, and we are on track to generate at least $100 million in annualized pretax net run rate expense savings this year from the program.

And fifth, we're leveraging our strong capital position to continue to return capital to shareholders. Our first-quarter 2016 common stock dividend was $0.34 per share, and we purchased approximately $325 million of our common stock. We expect to repurchase up to $390 million of our common stock in 2Q 2016.

As I've just reviewed for you, we will continue to focus our attention and effort in 2016 on our strategic priorities. We expect this will allow us to generate positive fee revenue growth, and to achieve our objective of generating positive fee-basis operating leverage this year relative to 2015.

Two weeks ago, the Federal Reserve and FDIC released their review of our July 2015 RRP submission. Both the Federal Reserve and the FDIC noted that we have made improvements over our prior plans, but determined that our 2015 resolution plan is not credible.

While disappointed with the findings, we are committed to addressing the issue and enhancing our resolution plan as our business and regulatory requirements evolve. We've had ongoing communications with the regulator and are focused on addressing all the deficiencies jointly identified by the Federal Reserve and the FDIC by October 1, 2016.

Now I'll turn the call over to Mike, who will review our financial performance for the first quarter. And then we'll both be available to take your questions.

Thank you, Jay. Good morning, everyone. This morning, before I start my review of our operating-basis results, I'd like to note that our GAAP basis results for the first quarter included pretax restructuring costs of $97 million related to State Street Beacon, including the exit of our futures clearing business.

Now turn to slide 8 in the slide presentation for a summary of our operating-basis results for 1Q 2016. 1Q 2016 results reflect softness in our fee revenue, primarily driven by lower global equity markets, partially offset by strong expense control. Operating-basis EPS for 1Q 2016 decreased to $0.98 a share from $1.16 in 1Q 2015, and decreased from $1.21 in 4Q 2015.

Our first-quarter results in 2015 and 2016 included the seasonal effect of deferred incentive comp for retirement-eligible employees and payroll taxes. Importantly, total expenses were approximately flat compared to the year-ago quarter. And excluding the noted seasonal retirement-eligible expenses and payroll taxes, total expenses were approximately flat compared to 4Q 2015. Regarding capital, in 1Q 2016, we declared a common stock dividend of $0.34 a share, and purchased approximately $325 million of our common stock.

Moving now to slide 9, 1Q 2016 fee revenue decreased 3.6%, while expenses were approximately flat versus a year ago. Weakness in global equity markets and elevated 1Q 2015 FX revenue resulting from the Swiss National Bank actions at the time contributed to the decrease in fee revenue relative to the year-ago quarter.

I'll now turn to slide 11 for a review of our 1Q 2016 operating-basis revenues. Servicing fees decreased from the year-ago quarter, primarily due to the lower global equity markets and the impact of the stronger US dollar, partially offset by net new business. The decrease in the international equity markets, particularly in emerging markets, negatively impacted first-quarter servicing fees. Compared to the year-ago quarter, average daily values for the Morgan Stanley Emerging Markets Index decreased 22%, while the EAFE Equity Index was down approximately 12%.

Management fees decreased relative to a year ago, reflecting global equity markets and net outflows, partially offset by lower money market fee waivers. Foreign exchange revenue decreased from the strong market activity in 1Q 2015, due to lower volatility in volumes. Nevertheless, it increased relative to 4Q 2015.

Securities finance revenue increased from 1Q 2015 and 4Q 2015. The increase over both periods reflects increased revenue from both enhanced custody and agency lending. Compared to 4Q 2015, processing and other revenue decreased, reflecting lower equity earnings from joint ventures, and lower revenues associated with tax-advantaged investments.

Moving to slide 12, I would note that our operating-basis 1Q 2016 net interest revenue benefited from higher Fed funds rate and disciplined liability pricing. Net interest revenue decreased from a year ago, primarily driven by the successful reduction in the size of our balance sheet.

Now let's turn to slide 13 to review 1Q 2016 operating-basis expenses. Importantly, total operating-basis expenses were well-controlled in 1Q 2016, and were approximately flat relative to 1Q 2015, a notable accomplishment. Compensation employee benefits were impacted by the seasonal deferred incentive compensation for retirement-eligible employees and payroll taxes.

Demonstrating solid expense control, the other expense category decreased as compared to both 1Q 2015 and 4Q 2015. Compared to 4Q 2015, lower other expenses were driven by lower professional services fees and travel expenses, as well as the settlement that the Securities and Exchange Commission recorded in the fourth quarter of 2015.

Now turn to slide 15 to review our capital position. As you can see, our capital ratios remained strong, which has enabled us to accomplish a key priority of returning capital to shareholders through dividends and common stock purchases. Compared to December 31, our Common Equity Tier 1 ratio increased under the Basel III fully phased-in, advanced approach, and remained approximately flat under the standardized approach. Importantly, the March 31 fully phased-in supplementary leverage ratio at the bank increased to 6.2%, primarily due to an increase in Tier 1 capital.

We repurchased $325 million of common stock in 1Q 2016, and expect to repurchase up to $390 million in 2Q 2016. This will put us approximately $65 billion below our gross share repurchase program of $1.83 billion. The $65 million difference represents the reduction in our 1Q 2016 equity compensation for our employees, relative to what we expected at the time our capital plan was approved. The net repurchased amount is therefore consistent with the capital plan.

Moving on to the next slide, let me briefly discuss our agreement to acquire GE Asset Management. While it remains a top priority to return capital to shareholders through common stock repurchases and dividends, we also are focused on allocating capital to higher-growth and -return businesses. The agreement to acquire GE Asset Management reflects this plan.

The purchase price is $435 million, subject to adjustments, with up to an additional $50 million tied to incremental opportunities with GE. Excluding merger and integration charges, the transaction is expected to be accretive to operating-basis EPS for the first 12-month period following the close of the transaction. And we're targeting a client asset retention rate of at least 90%. Importantly, the acquisition will significantly enhance State Street's position in the fast-growing outsourced chief investment officer market.

Moving to slide 17, I'll now provide an update to our 2016 financial outlook. Despite the pressure on global equity markets in the first quarter, we are encouraged that the environment improved in March. Importantly, compared to January and February, servicing and management fees improved in March.

On the expense front, we continue to expect operating-basis expense growth of up to 2% for full-year 2016 compared to full-year 2015, with variability across quarters. We also continue to expect to generate positive fee operating leverage relative to 2015.

Please note my comments related to our 2016 outlook exclude any potential impact from the acquisition of GE Asset Management. Also, we're on track to generate at least $100 million in estimated annual pretax net run rate expense savings from State Street Beacon by the end of 2016.

Now as a reminder, upward pressure on regulatory and compliance cost is expected to continue throughout 2016. However, we expect the growth rate to be lower than full-year 2015 relative to 2014. We also expect expense growth to be affected by the volume of new business, as well as continued investments.

In addition, we continue to have two scenarios for 2016 net interest revenue, largely consistent with prior communications. The first scenario assumes market interest rates remain static at March 2016 levels. Under this scenario, we expect full-year 2016 NIR to be in a range of approximately $2.025 billion to $2.125 billion.

The second scenario assumes administered rates in the US increase 25 basis points in both June and December, and corresponding market rates to trend higher from March 2016 levels. Under this scenario, we expect full-year 2016 NIR to be in a range of approximately $2.1 billion to $2.2 billion. We continue to be expect the 2016 operating-basis tax rate to be 30% to 32%.

And lastly, I would emphasize that returning capital to shareholders through share repurchase and dividends remains a priority. Our 2016 capital plan remains subject to the results of the 2016 CCAR process, including a review by the Federal Reserve Board.

In summary, although the revenue environment remains challenging, as reflected in 1Q 2016 results, we are encouraged that fee revenue gained momentum in March. And we remain focused on prudently managing expenses and providing solutions to our clients. Now let me turn the call back over to Jay.

Thanks, Mike. Therese, we are now available to open the call for questions.

(Operator Instructions)

Ashley Serrao.

Good morning.

Good morning.

First question just on expenses and Beacon. Curious what the run rate benefit to 1Q results was?

Ashley, good morning, it's Mike. In Q1 as compared to Q4 -- so on a sequential basis -- we had net savings of approximately $7 million. We had noted at the Investor Day that we did expect a fair amount of spending for Beacon, and we had that. But as I said, the net savings in Q1 was approximately $7 million sequentially.

Okay, so still fairly early innings there. Okay. And just, too, if I look at the net interest revenue this quarter and the sequential jump in NIM, what drove the increasing yields on the other asset bucket?

Let's see. I would point to a couple things. And I wouldn't characterize it, Ashley, as just the impact on the other asset bucket. But there were a couple of things that broadly helped us.

First of all, as we've discussed before, we have a significant amount of our balance sheet that is in floating rate assets. So that's a combination of the central bank deposits that we have here in the US, that includes the floating rate securities in the securities portfolio -- about half of the floating rate securities are in US dollars. So that's approximately $18 billion. And then we also -- our loans tend to be also a floating rate asset. So basically, the floating rate assets in our balance sheet increased, as you would expect, based upon the increase in short-term market interest rates.

In addition, we also were able to capture a wider spread on client repo, and we also saw increased netting for repo's. So those two things, combined, increased what you see on the Average Rates Earned and Paid page. That increased significantly the average rate for the assets that are in the repo securities category. And then in the other interest-earning asset line that you specifically ask about, that's our enhanced custody asset. And basically, that just reflects the market rate increase as a result of short-term rates being higher.

Ken Usdin.

Thanks. Just one more follow-up on the NII front then, Mike. So do you normalize for some of those helpers? Because if I take what you're saying about that and just think about the fact that you've left the without-rate band unchanged, it would seem that, even to get them to that high end of that X-rate spending, you're talking about more of a 510-type of net interest income run rate. So can you just help us walk through how much of that first quarter goes away? And then the other typical pushes and pulls, in terms of any lingering yield compression versus balance sheet strength that we should be thinking about?

Sure, absolutely, Ken. Good morning. The couple things that we expect in the static-rate scenario, Ken, the couple things that we expect to put downward on our NIR under the static scenario would be, number one, the grind in the fixed rate portion of the portfolio. So I mentioned that approximately $36 billion of our portfolio is floating rate. About half of that is in the US, that benefited from the short-term rate hike. About half of that is outside of the US, which obviously did not benefit from the short-term rate hike.

But in the fixed-rate category, which is approximately $66 billion of the portfolio, we're seeing this grind, where the rate on the investments that are maturing is approximately 100 to 150 basis points higher than the new fixed-rate investments that we're making with the proceeds from those maturities. So that grind over the course of the year is a negative.

As we've talked about before, in Europe, the situation is still relatively negative, in that not only are the short-term interest rates negative with the ECB, but in addition to that, because of the quantitative easing program over there, spreads are really teeny as well. So the grind in the portfolio in Europe, as well, is putting downward pressure.

So in the static-rate scenario, we would expect those to be the big drivers of the lower NIR in the next several quarters. If instead though, we get a couple more Fed fund hikes, we wouldn't expect them to be quite as accretive as what we saw in first quarter. But obviously, we would expect it to be net-net helpful, as we get a higher rate on the floating rate assets that a mentioned in response to Ashley's question.

Great, thanks, Mike. And just a second question on expenses. Great start on the flat year-over-year, but you're also keeping to a up-to, or a 2% full year. And to your point about the compliance builds and also the volatility quarter to quarter, are we also implying that expenses -- you have do have a distinct upward trail from here? Because it would seem like you are on a better trajectory. Why couldn't you do better than that 2% guidance you had given us at Investor Day?

Yes, first, Ken, I appreciate the compliment on the first-quarter results. We are really please with that. And as we talked about at the Investor Day, we continue to look at really every single area of expenses. And I think we did a particularly good job in Q1 at reducing the outside consulting expenses -- some of it regulatory, some of it not regulatory. We reduced travel expenses significantly in Q1. But I do expect that there will be a march up in regulatory expenses in Q2, Q3, Q4, as a result of dealing with the higher expectations.

Now, having said that, we'll continue to look at every area of expense. As Jay talked about, Project Beacon continues to be on track for the expected $100 billion of savings for the full year. But again, between the regulatory costs and the net new business that we expect to be coming onboard, that we'll need expense to service, we thought it made sense to stick with the up to -- or, to say up to 2% on expense growth. And obviously, a lot of where we'll end up will also relate to where the fee revenue ends up as well.

Glenn Schorr.

Hi, thanks very much. Two business questions. First one is on enhanced custody and agency lending. You mentioned the wider spreads, or I should say, the growth in the higher short-term rates. But curious on overall balances and progress of the business. It seems to be growing fast. You've talked about it in the past, but what are the goals in terms of how much you want to grow it? And what risk -- or, let me rephrase that. What capital charges go along with growing that business?

Glenn, let me start that one. You know, you've seen, not just this quarter, but progressive quarters, good performance, out-performance in securities lending. And you're right -- this quarter it was a combination of agency and enhanced custody. But I would say over a longer cycle, it's really been enhanced custody that has driven the disproportionate growth. And we expect that will continue.

There continues to be high demand in our, not only hedge, but in our traditional client base, to use enhanced custody, as opposed to some of the traditional means of credit. And we don't see much limitation. I'd say most of the business growth that we're seeing quarter to quarter is existing clients doing more credit extension with us. So we've built out the product. I think I mentioned last quarter, we're building it out in Europe and Asia, as we would do normally for all of our products.

The ability to net the securities lending back against the broader portfolio makes it an attractive proposition from a capital standpoint. So net-net, we see continued demand. We don't see much in the way of capacity constraints. And we think we've figured out how to make this attractive from a return-on-capital standpoint.

ROE better than the overall Company's ROE? I'm just curious if it's driving your ever-increasing capital ratios, or that's just all regulatory and --?

Glenn, it's a little bit less, but I would say steadily improving over the last couple of years.

Okay. I appreciate it. Thanks, Jay.

Alex Blostein.

Hey, good morning, guys. Question on the living will issue from a couple weeks ago. You know, what do you guys -- as far as the next steps go, what do you expect to do to address the issue, especially when it comes to the capital concern that came out of their statement? And do anticipate this to have any impact on CCAR for you guys, whether -- probably not so much in the quantitative piece, but more on the qualitative?

Sure. Good morning, Alex, it's Mike. First of all, I don't view the capital piece, the capital item that was noted as a deficiency, as being a significant problem for us to deal with. And I do not expect at this point in time that, that would have an impact on CCAR. Now obviously the Fed will make the judgments that they'll make. But I have no indication at this point that, that would have a negative impact.

So really, what we're focused on now is better-understanding the regulatory expectations, both for the October 1 deliverable, as well as the submission next July 1. And so that, more broadly, is what we're focused on. And as Jay indicated in his prepared remarks, we are certainly committed to doing everything in our power to meeting their expectations.

Got you. And then, Jay, follow-up for you on the GE acquisition. You guys talked about pretty robust growth, I guess, in that business. But my understanding is that something like 90% or so AUM is just GE pension assets that are obviously sticky there, but I'm not sure how growthy those are. So give us a sense of what the organic growth has been in that business prior to your acquisition? And then maybe what you guys anticipate to see from, again, the organic growth part of the business?

Sure, happy to take that one up, Alex. As you point out, a good deal of the assets are GE assets -- both their pension, which is how the whole thing got started, outsourcing the CIO function of GE's pension assets. But they've also been successful in attracting some other big names in the outsourced CIO marketplace.

So I think that if you just look at that segment of the market, particularly against an environment where rates are likely to be low for a protracted period of time, we think that's a growth market. And we think by kind of unshackling GE from GE, and making it part of State Street, that we'll be a more attractive provider of services in the outsourced CIO market. So they've had some growth on their own. We've also had some growth. By combining it, we think we can grow at a faster rate.

So that's core to the growth opportunity. But also core to the growth opportunity is, you've heard us talk before about -- a natural place where we play very effectively in the asset management world is in solutions. And whether it's a target date fund or outsourced CIO, or many other versions of solutions. And we had a little bit of a deficit in several asset classes, particularly alternatives.

And so again, by taking our natural solutions capabilities and enhancing it with some of GE's very credible asset-management components in the alternatives, real estate, private equity and hedge -- all three -- we think we can accelerate our solutions growth. So it's really taking, I'd say, a very high-quality and stable asset management organization, embedding it at State Street, and true synergies on the revenue side in the OCIO and solutions segments of the market.

Okay, thanks.

Jim Mitchell.

Hey, good morning. Maybe you could talk a little bit about euro deposits. It sounds like you raised the fee charged on those. Have you seen any runoff that's material? Or is it a little too early to tell, we'll see that in second quarter? How do we think but your client reaction to raising rates?

Sure, Jim. Good morning, it's Mike. We did -- as you suggested, we did increase the rate that we are charging for euro deposits. We did see approximately $2 billion of runoff on average, Q1 versus Q4. The discussions with clients are ongoing. I would say, at this point it feels like a relatively well-managed situation. But it's something that we're obviously paying close attention to, given the challenging conditions in Europe.

Hey, Jim, let me just chip in something. I would say on this call charging for negative rates, we were market leaders in that. And as I look across the landscape, we're not alone anymore. So whether it's the US banks, the European banks, the environment has shifted to be supportive of this activity. So I think that helps from a standpoint of being able to raise rates and retain the deposits that we want.

Right. And so it seems like deposits have held in a little bit better than maybe you've expected? Is that part of the upside we see in NII this quarter relative to your full-year forecast?

Jim, I would characterize it as, they're pretty much tracking with what we expected.

Okay. And if I could just ask one on the Tier 1 capital at the bank, it seems like you downstreamed some capital there. Is that true? How has that accomplished the boost, the Tier 1 on the SLR bank?

Well, sure. In terms of just administratively how we did it, we basically just retained some earnings at the bank, as opposed to dividending that from the bank to the holdco. But as we've talked about in the past, Jim, we do recognize that we've got some flexibility in terms of what assets we hold at the holdco versus what we have at the bank. So this was really normal management, in line with our plan to be sure that we were above 6% in time for 11-18. Obviously the fact that the balance sheet got smaller as well, was also helpful in that regard.

Right. Okay, great, thanks.

Brian Bedell.

Hi, good morning, folks.

Good morning.

Mike, just to circle back on the securities repo line yield going from 236 to 586, that's about a -- looks like around a $30 million sequential increase. Can you just explain that dynamic again, and what you would expect the normalized rate to be in the second quarter on that?

Sure, Brian. First of all, I wouldn't focused as much on the 586 as I would on just the overall contribution from that line item. But again, first talk about the change in the numerator. As we talked about in one of the earlier questions, we did earn a higher spread, a wider spread on client repo in the first quarter. Basically, as short-term market interest rates increased, we were able to capture that in our margin.

The thing that makes the average rate jump as much as it did though, is that we also expanded netting in the quarter. So as a result, we actually had expanded activity for our clients in the quarter, but we were able to net more of it. So the average balance you see there dropped by about $0.5 billion, or about 16% sequentially. But that was really from the netting. So the overall activity expanded. The spreads expended. But as a result, the average balance then dropped.

I would say that I think it was a combination of good management and good market conditions. And I would expect that market conditions will remain relatively good in the near-term. But it's something certainly we can't guarantee, and it's something that we manage and monitor every day.

So in other words, that $30 million you would view as somewhat -- or, that $30 million increase you would view as somewhat sustainable? Or would you see that revert back somewhat?

I think that, again, time will tell, Brian. I don't have a perfect crystal ball. But I would expect that perhaps the majority of the sequential increase in those spreads should be sustained over the next couple of quarters. But again, it will be dependent upon market conditions.

Okay, great. And then maybe, Jay, do you want to comment a little bit about the typical dividend arbitrage season in Europe? I know there's been some discussion of curtailing that. Are you seeing the same type of activity that you typically see in securities lending and FX trading coming into the second quarter? Or do you expect that to be a little bit restrained?

You know, Brian, as you point out, second quarter is a seasonal peak for us with regard to the dividend activity. There's been a lot of attention on that over the last couple of years. So we probably see some slight diminishment from what we've seen in past. Don't think it's material, but probably not quite at the peak it's been in past years, because of all the attention that trade has received.

Great, thank you. I'll get back in the queue for some follow-ups. Thanks.

Betsy Graseck.

I just want to dig in on two things. One was on the Beacon project. You indicated the restructuring charge of $97 million this quarter -- obviously a net savings this quarter of $7 million. I know you're investing $500 million -- you're investing $400 million to get a $500 million benefit over five years. But could you give us a sense as to how we should think about the investment in the space as we go through the at rest of this year? Because I thought it was front-end-loaded. So I just want to make sure I have the numbers right there.

Sure, Betsy. It's Mike. I do expect that both the benefits as well as the investments that we're making in Project Beacon will both steadily increase over the course of 2016. I do expect that the net benefit will increase each of those three quarters. On the other hand, as I mentioned earlier, I also do expect to see some upward pressure on regulatory costs. So again, that's several moving parts, but I would think in Beacon, in particular, as both investments continuing to increase and savings continuing to increase.

And all of the $97 million in investment was largely in severance, and I'm assuming that's the below-the-line number. You're not anticipating any investments in the Beacon project to be in operating expenses, are you?

Yes, we are, Betsy. In fact, we did see investments in that area in operating expenses. That was both in compensation, but it's also in the information systems line. And again, I would expect to see additional spending in the information systems line over the course of 2016.

And then on your slide, you indicated, you know obviously the strategic priority to be a digital leader in financial services. Could you just break apart a little bit the one-liner you have there -- actively testing new technologies such as Blockchain? Could you give us a sense as to what you're doing there?

Happy to do that, Betsy. This is Jay. Blockchain has received, appropriately, a lot of attention. And I think to me, it's synonymous with digitization, generally. I think if I would have put some perspective on -- put into perspective Beacon and Blockchain, I would say that Beacon is our effort internally to digitize within the four walls of State Street. I think that, importantly, the whole developed markets' financial services infrastructure needs to be digitized, and that's going to require standardization between firms and between activities. So that's really where I see Blockchain being most relevant.

We have, internally -- within our Beacon effort, we've got, I think it's four, maybe five, pilots going on to use Blockchain as a means to digitize within State Street, linked to other firms. So let me give you the best example, maybe the most easily explained example. Bank loan processing has been an activity that State Street has developed a significant share of the market in. Processing a bank loan requires many intermediaries to come together, and a common ledger to exchange information.

So we have a pilot going on in our bank loan processing group, where we're using Blockchain. And we've got agreement from all of the counterparties to participate in a Blockchain pilot around bank loan processing. So what that would do is, take an activity where there's process improvements and technology that we need to do internally within State Street, but it would extend it to other counterparties. So we've got several of those going on, which we think could be helpful to us.

I think that probably the bigger comment I would make is that we'll digitize our own environment, but it will require standards across the industry. And again, Blockchain may be one of those. We're participating in a group called R3 -- I think there's up to 16 banking institutions that are trying to figure out what the best applications are to use Blockchain in order to create standards inter-company, inter-industry. And so I think we're going to absolutely do what we need to do to digitize our environment.

I think the home run here is if we can get some standards developed around how we will inter-operate from a digital standpoint. And I think Blockchain could be. If it's not Blockchain, it will be something else, one of those standards that emerge that allow the interoperability at a digital level in the whole industry. I don't know if that confuses or helps, but that's how I view it. We can control it -- that's what we're doing with Beacon. But in order for this really to work, the industry needs to digitize. Blockchain is just (multiple speakers)

You know, that's helpful. It's just a question of -- is it product by product? And what kind of timeframe do you see to potentially take something like the pilot that you're working on, to either have a go or no-go decision, with some benefits to you?

My guess is, it's product by product at this point. And so bank loans is one of those products, one of those services. I'd be surprised if, within the year, we don't know whether it would be the right answer to that issue. And I think, as with many things, if you get a bunch of financial institutions to converge around a problem and use a new tool, if successful, it will grow from there. And I think it's got a decent chance of succeeding. But it will be one of many solutions versus the silver bullet.

Yes, got it. Thank you.

Adam Beatty.

Good morning. I have a question about product strategy and ETFs. I appreciate the details earlier. It seems like State Street and others have come out with some fairly niche offerings recently. And the question is, with a lot of the big indexes and exposures already being covered, including by some State Street products, is that the future of ETF innovation, kind of like with television, where there's 300 channels so everybody can see exactly what they want? Or if that's not the whole story, how does that fit into your overall product strategy? Thanks.

Yes, I appreciate the question, Adam. I would just remind you that our ETF strategy is really two tracks. One is to continue to build out the distribution, which we're doing in the US and also Europe. And then, to your point, it's enhancing the product. And I'd say, a lot of the basic beta strategies have been consumed in an ETF product. But then you get to the next level of customized indexes.

So the SHE index that I described in my prepared comments is developing a strategy, and developed -- in this case, this is the first time we have self-indexed. So we built the index, back-tested it, and then packaged it in an ETF. You'll see more and more of that happening. In fact, we're not the only ones doing that. I think in the broad beta and ETF space, that's a theme.

The other thing I would say is that, I would point to maybe the partnership we have with DoubleLine, where they're taking active fixed-income strategies, they are the manager, we're packaging it in the ETF and distributing it. And I think you're going to see more and more encroachment into traditional products spaces. And I come a little short, because I'm not quite sold yet that you'll take active equity products, for instance, and wrap it in an ETF. But others would take the other side of that argument. So I don't really see much limitation for investment strategies being able to be wrapped and packaged in an ETF structure, and distributed to both institutions and the retail market space.

So we have -- I would say that SSGA has deployed kind of an open platform strategy, where if we can create the index, in the case of SHE, manufacture and distribute -- and we will. But if there's an interesting investment idea outside of SSGA, we're willing to discuss packaging and distributing, which we've done not just with DoubleLine, but with UV and MFS and several other firms. Hope that helps.

Yes, it does. Thank you very much, Jay. Another question, on the OCIO business, in the context of asset servicing. How much revenue synergy would you expect in terms of asset servicing? And if so, in what areas? Is it possible that the GE acquisition benefits from being housed, from that standpoint, in an organization like State Street?

Yes, I think it's an astute question, in that one of the reasons we have a 25-year-old relationship with GE, is we've been the back end of the front-end OCIO business that GE has run over these years. So I think that, as I mentioned before, the outsourcing of the chief investment officer function for these defined benefit plans is likely to be a growing opportunity, growth opportunity.

You're already seeing it today. The fact that we can go and not only offer the front-office expertise of how to run these plans, how to speak the language of DB to trustees and other customer-facing, pension organizations. But also be able to fully integrate the back office, complete with asset-servicing, middle office, securities lending -- everything that goes with it is all relevant here. So I see, the more OCIO business we get, it should naturally bring all the middle- and back-office business with it.

Excellent. Thanks again.

Brennan Hawken, UBS.

Hey, good morning. Just one quick follow-up at this point. The decline in other expenses -- I think the implication was that you had some benefit here. I think you laid out the consultant expenses coming down, but he reason why the guide didn't go up is because you got some upward pressure pending from potential living will spend and such. Am I paraphrasing that correctly? Am I reading through your comments right, or can you clarify it, please?

Brennan, it's Mike. I think those are fair comments, but I wouldn't limit upward regulatory cost pressure to just the living wills. I think it's broader than that. But other than that, your comment is very fair.

Okay. And then is there a way to unpack the other expense result that was better than expected? And how much independently you think might sustainable beyond then the pending upward pressure from here? Is there a way to think about that separately?

Well, I would just remind you that we're still guiding to up to 2% overall expense growth year over year, excluding the acquisition of GE Asset Management. So the fact that, that's the case says to me that we are going to manage expenses, really, in aggregate. And obviously our preferred route would be to continue to build in-house capabilities, hire full-time people to manage and run these regulatory and compliance activities, and rely less and less on outside consultants.

And so if we continue to be successful in that area, then I think that line item will likely run below last year's. But again, it really is a question of managing those priorities in aggregate, as opposed to just focusing on one line item.

Okay, thanks so much.

Vivek Juneja, JPMorgan.

Vivek?

Hey, it looks like Vivek withdrew his question. Brian Kleinhanzl, KBW.

Thanks, good morning. Quick question on the GE Asset Management deal. I know you gave guidance as to what the expected accretion to be for one year, and also you want to retain 90% with regards to AUM. So are we to assume that the one year is just because that's when the lockup period is for those assets? Or is there a longer lockup on the assets being acquired?

Brian, I wouldn't relate the two. Basically, we were focused on the first 12 months, because we wanted to give you a time period at which we expect this to be accretive to EPS. And so that really is irrespective of any kind of a lockup period with the GE plan.

And I'd add, Brian, that our expectation is that the 90%-plus business that we retain will have a long life to it.

So I guess, asked differently, when does the lockup period end?

There is not a contractual lockup period. Basically, we're confident that we can continue to meet the GE pension plans needs, and that's what we will be focused on.

Okay, thanks. And then just a second question. What's the impact on the revenues from the exit of the futures clearing businesses? And I guess, what's the impact on the pretax margin as well?

Sure. So Brian, the FCM business earned $9 million in fees in full-year 2015. And the expenses were greater than that, but were part of the overall savings that I talked about earlier in terms of Beacon. So I wouldn't be more specific at this point.

Okay, great. Thanks for taking my questions.

Geoffrey Elliott, Autonomous Research.

Morning, thank you for taking the question. On the resolution plan, could you talk about what you need to do there? And how much of that is simply around changing the plan versus how much is around making changes in the way business is structured, the amount of liquidity that you hold, how capital is allocated between different entities, and so on?

So Jeff, it's Mike. I would say it is early days to be real specific on the actions that we will take to ultimately meet the regulatory expectations. You saw the same information that we did in terms of the paper that lays out expectations for the July 1, 2017 submission. And I think we'll be in ongoing dialogue with both the Federal Reserve as well as the FDIC over the next, at least 12 months, to make sure that we specifically understand them.

So I think it's going to be a combination of all the things that you just described. There's likely to be some additional infrastructure to be built. Some of it will be additional modeling capabilities. Some of it will be additional monitoring capabilities. And also as you correctly indicated, I would expect to see additional legal entity simplification over time as well. But I really think it's a little bit too early to try to be specific until we have more ongoing dialogue with both groups.

Thank you. And then just to follow up on the previous question on there not being a contractual lockup on the GE Asset Management assets. Why not? I would thought that when you're acquiring a manager, and the vast majority of the assets are in-house, that would be absolutely critical to making sure you don't just get the one-year accretion, but the accretion three, four, five, 10 years out.

I would say, Geoff, its a pension plan, so it has a list of restrictions. If you look at SSGA, probably the biggest segment that they manage for are pension plans. And they do that, and as they are fulfilling their return expectations, it's unlikely that, that changes. And so GE has been managing this plan for a long time. We see in our business -- the OCIO market, very sticky assets.

So I don't, frankly, view it as -- I view it as not a concern at all. As long as we do what we are being asked to do -- which we do every day for many customers around the world -- then we think these assets will be with us for a time. And the fact that we're going to combine it with our business gives us more scale and expertise, and will make us a more attractive counterparty for other pension plans that want to outsource that. I view it as a stable, sticky series of assets, with some capabilities we don't have today that will allow us to grow the base.

Thank you.

Great.

Gerard Cassidy, RBC.

Thank you. Can you guys share with us on the new business wins on the net asset servicing side of about $264 billion, what percentage of that was the First State Super Australia win? And then second, what's the pipeline look for the second quarter?

Yes, let me take that one, Gerard. I can't give you First State Super, but what I would tell you is that of the $264 billion, a little bit unusually, 50% of that came from Asia-Pacific. So we've been running more probably 60%/40%, US, non-US. For this quarter, it was more 70%/30%, 30% being US, 70% non-US. So good progress in Asia-Pacific, really anchored in not only Australia, which I highlighted, but that we've also seen some movement in Japan. Where we've seen the first outsourcing of investment trust funds, something we've been pursuing for a long time. So that's the first question.

The second -- pipelines are quite full. I think that -- I've said that before -- but if you look at the asset owner, and maybe even more specifically, the asset management segment. Between difficulty in achieving above-benchmark returns to increasing regulatory pressure, we've never seen the demand for things like middle office outsourcing that we have on our plate right now. And importantly, in that particular product, there's a willingness to accept standardized services. So I feel very good about the pipeline, not only from a geographic standpoint, but across, in particular, asset managers, but asset service owners as well.

Thank you. And then maybe Mike, when we look at your average balance sheet that you've give us on the supplement, on page 11, I noticed that the interest-bearing deposits in the United States, the yield on that or the cost, I should say to you guys, jumped from 23 basis points to 40 basis points. And then this is quite a bit different than some of your peers. What caused it to jump up that much?

Sure, Gerard. First of all, the main driver in that category is actually the cost of our wholesale CDs. So we have approximately $15 billion, on average, of wholesale CD balances in Q1, and those moved with LIBOR rates. So that's the driver of the sequential increase there. If we stripped those out and just looked at the interest-bearing DDA, that was pretty close to flat, sequentially. So it's really the wholesale CDs.

And the CDs as a percentage of total that you just gave us, is that consistent with those prior periods? Or is it a greater percentage today than it was in those prior periods?

It's probably a slightly smaller percentage today at $15 billion. We used the wholesale CDs as a management tool around liquidity. And those balances were actually a little bit higher in 2015. Now remember, the rates were lower, because LIBOR was lower in 2015 than what it is in Q1 2016.

Great. Thank you.

Vivek Juneja, JPMorgan.

Hi, thank you for taking my questions. A couple of things. Firstly, Mike, just following up on the question you were talking about on the repo market, you said majority of the increase in spreads can be sustained over the next couple of quarters. Can you give us a little more color on what's going on in that market structurally that's causing this widening in spreads, and that will sustain it?

Sure, Vivek. Really it's a combination of the fact that short-term interest rates have obviously gone up with the Fed fund hike. And it's also just a function of supply and demand. And so we will monitor those conditions carefully. But I see nothing that would suggest that, that's going to evaporate here in Q2. So again, it's something that we will pay close attention to.

Okay, thanks. Just shifting gears, Jay, if I look at of your asset management business, if I look at the operating margin in the fourth quarter, it was 13%. And if I look at full year, asset management margin was 19% and change. 13% for the fourth quarter and 19% and change, so really low margin compared to peers. Can you talk little bit about specifically that business? What you can do to -- especially when moving things like ETFs, what you can do to accelerate the operating margin improvement? And why it's so far behind peers?

Sure, Vivek. I'm happy to take that. We're not pleased with the margin in the SSGA business -- I think I said that before. And we do think by re-orienting around the strategic priorities that we laid out back in February -- which are anchored in ETF solutions, OCIO as an additional category -- that we're getting the right level of focus and investing at the right amount in order to drive, really, top line. And also create more efficiency through the focus.

And I think that if you look over an extended period of time, you would have seen we've hit a trough with regard to returns. And I feel like the investments that we've been making are starting to create some traction. And I look at ETFs and, really, solutions as being the cornerstone of that. In addition to some of the positioning we have in markets outside the US, again, I would point to those same two cornerstone elements.

So we're working on it. We think we're making the right investments. I think focus is important. SSGA, in some respects, does not have a lot of pure comps, given what it does, and we're trying to be very good at a couple of things, and do them well globally. And I think we're on the right track.

And do you think it will be sooner, SSGA, in terms of -- you know, you've given out targets for overall Company operating margin improvement. Do you see SSGA as doing same timeframe or sooner, Jay, compared to the servicing business?

I've got two views on that, Vivek. One is, yes, sooner, because we're making proportionally more investments in the SSGA business. And I think you also need to come back to one of the comments we made around the GE acquisition. As we look at our different businesses within State Street and look at returns, SSGA has a disproportionately higher return, as does a business like global exchange.

So as we look at investing in areas that we've had natural growth upside, and in addition, would be accretive to our return on equity, we are going to proportionally lean in that direction. So I think for those reasons, I would expect that you would see SSGA improve sooner than the rest of the franchise.

Thank you.

Brian Bedell, Deutsche Bank.

The assets under administration looked like there was a significant decline in the pension product area, from $5.5 trillion to $5.2 trillion. Just was wondering what drove that?

Nothing specific, Brian. It's really be negative impact of markets that's the big driver there.

On the pension side, okay. Was the 6% linked-quarter -- was all market-related?

I wouldn't say all market-related. I don't have that desegregation rate at my figure tips. But the main drop in the AUA was, in fact, from markets.

Nothing going on from a lost business standpoint that's (multiple speakers)

Oh, okay. That's what I was getting it. Okay, great. Thanks for that. And then just tax rate guidance, I guess, would imply that we'd be between the higher end for the next three quarters, given it was 29% for 1Q? Is that fair?

Yes, I think that's fair, Brian. First of all, the operating tax rate that we provide is heavily impacted by tax advantaged investments. And so just based on the seasonal pattern of tax-advantaged investments, we tend to see the pattern that you're describing. So nothing particularly surprising there, and we experienced a similar pattern in 2015.

Got it. And then just lastly, I think, Mike, you talked about the futures clearing business. But the impact of the Reuters business [first sold] to Thomson Reuters? And does that flow through the FX trading line, or is that on a different line?

That's in -- let's see, it's in the other -- it's in the fees line item. In the brokerage and other fees line item.

Brokerage, okay. And is that -- can you size that, just from [owing]?

I don't have that right at my fingertips. It's relatively small. We can follow up with you offline on that one, Brian.

Yes, perfect. Thank you. Thanks a lot, guys.

Okay, thank you. And that was our final question.

Thanks, Therese, and thanks, everybody, for joining us this morning. We look forward to talking with everybody at the end of the second quarter.

Ladies and gentlemen, thank you for joining today's conference. Thank you for your participation. That does conclude the conference. You may now disconnect.