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Operator
Good morning and welcome to State Street Corporation's second-quarter of 2016 earnings conference call and webcast. Today's discussion is being broadcast live on State Street's website at investors.statestreet.com. This conference call is also being recorded for replay. State Street's conference call is copyrighted and all rights are reserved.
This call may not be recorded for rebroadcast or distribution in whole or in part without expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street website. I would now like to introduce Anthony Ostler, Senior Vice President of Investor Relations at State Street.
- SVP of IR
Thanks, Jennifer. 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 second-quarter 2016 earnings slide presentation which is available for download in the investor relations section of our website, www.statestreet.com. Afterwards, we'll be happy to take questions. During the Q&A, please limit to your questions to two questions and then requeue.
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. Reconciliation of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our 2Q 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 2Q 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 for the past couple of quarters, we've 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 third-quarter earnings call on Wednesday, October 26, 2016. Now let me turn it over to Jay.
- Chairman & CEO
Thanks, Anthony. Good morning, everyone. We're pleased with our strong second-quarter results which reflect strong fee growth compared to the first quarter, driven by growth in our core asset servicing and asset management fees and the seasonal uptick in securities financing. Demand remains strong across our global client basis as demonstrated by new servicing commitments of $750 billion in the quarter.
Importantly, these results also reflect our success in implementing our multi-year digital transformation program, State Street Beacon, which is delivering savings and efficiencies as well as new product innovations for our clients. As you may have seen in the news today, we announced that we have negotiated the series of agreements subject to final approval that we expect to resolve all pending litigation and regulatory matters in the US related to our indirect foreign exchange business.
We're pleased to put this litigation behind us. Matters of this nature can drain both time and resources, so where possible and appropriate, we feel it is in our and our clients' interest to pursue settlements. Our previously-established reserve will be sufficient to cover all the costs associated with these agreements.
I'd now like to turn your attention to slide 5 of our slide deck, as I want to highlight for you a number of developments this quarter that helped us make substantial progress against our 2016 strategic priorities. In support of our objective to become a digital leader in financial services, we advanced a number of State Street Beacon initiatives. In the first half of 2016, we successfully digitized a significant portion of platforms that enable straight through processing of client transactions end to end.
Some of the early successes here include faster cycle times with end-of-day net asset values being delivered 20 to 30 minutes earlier and reduction of manual transactions. Our fund administration digitization prototype is underway and expected to be rolled out to clients in the early fall. Our focus on driving growth from the core franchise resulted in asset servicing winds of approximately $750 billion in the quarter.
This included the appointment of by Deka Bank and Allianz Global Investors to provide a range of investment services for $538 billion in assets and the appointment as custodian and outsourcing partner for Sumitomo Mitsui Asset Management Company's Japanese investment trust business. Our new business yet to be installed now stands at over $1 trillion.
We experienced outflows of $35 billion during the quarter on our asset management business, driven mostly by passive equities and reflective of official institution clients redirecting assets in response to economic conditions. Importantly, these outflows are primarily in our low-fee-based institutional products.
We continue to generate new business in our higher yielding product lines such as GLD, which is our gold ETF, active equity, multi-asset and institutional. For example, in the second quarter, we launched 15 new ETFs at an average total expense ratio of 37 basis points. This is reflected in our favorable management fee revenues for the second quarter of 2016 and our outlook for management fee revenue growth remains positive for the second half of the year.
We continue to invest in support of our overall strategy and earlier this month on July 1, we successfully completed our acquisition of GE Asset Management. This transaction is a key step in our plan to invest in higher growth and return businesses. It's also an important part of SSGA's continued evolution as a premier provider of solutions to clients. GE Asset Management has significant asset management capabilities, including active management, alternative and outsource chief investment officer capabilities.
With our focus on expense management, we have reduced expenses both on a year-over-year and year-to-date basis compared to the same period in 2015. State Street Beacon has been a key factor in this progress and is ahead of our original schedule. In fact, we're now expected to generate at least $140 million in annualized pretax expense savings in 2016.
We continue to prioritize returning capital to our shareholders. During the second quarter of 2016, we executed the final phase of our common stock purchase program announced in March 2015. Earlier this month, our Board of Directors approved a new $1.4 billion common stock purchase program following the Federal Reserve's 2016 CCAR process.
Our 2016 capital plan also includes an increase of approximately 12% in our quarterly common stock dividend to $0.38 per share starting in the third quarter of 2016 subject to Board of Directors approval. We'll 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 to generate positive fee basis operating leverage this year relative to 2015.
Moving to slide number 6. I'd like to discuss the opportunities presented in Europe and our strong franchise there. Despite the Brexit vote and the remaining uncertainty, Europe and the UK represent a significant opportunity for us. For instance, Europe is 35% of the world's assets under management and is expected to grow by approximately 30% by 2020.
Slow GDP growth and a weak economic outlook reinforce high savings rates, while lower interest rates are driving a search for yield that pushes funds out of deposits into other investments such as mutual funds and cross-border investments. In addition to Brexit, other trends that we're seeing are that regulatory changes and cost pressures are creating client demand for complex outsourcing services. We have a deep and diversified presence in Europe, as we have nearly 11,000 employees in 12 European countries.
20% of those employees are in the UK, with the majority being situated in nine European countries under our recently consolidated international bank which is based in Germany. Given this presence, we have an organizational structure that gives us the potential to offer both passportable EU products and services tailored to European markets. We're well positioned to support our clients and gain new clients regardless of their jurisdiction.
We are the leader in offshore servicing and grew our offshore assets under administration by 70% over the last three years while growing market share. We provide support of the global fund distribution of regulated products, called UCITS, in more than 70 countries worldwide. Similarly, we're the industry leader in ETF servicing with over 60% European ETF assets under administration market share.
Not including the impact of lower market interest rates, our short- and long-term outlook for our European business has not materially changed post the EU referendum vote. We believe the post-EU referendum vote winners will be the firms with strength in offshore, in the UK, and in Pan-European fund structures in an on-the-ground presence in key domestic markets and demonstrated ability to partner with clients to navigate complexity.
We believe State Street is well positioned in these areas to take advantage of the short- and long-term growth opportunities in Europe and the UK. Now let me turn the call over to Mike who will review our financial performance for the second quarter and then we'll turn to your questions. Mike?
- CFO
Thank you, Jay, and good morning, everyone. This morning, before I start my review of our operating basis results, I would like to note that our GAAP basis results for the second quarter include two notable items. First, on April 1, 2016, we sold the WM/Reuters branded foreign exchange benchmark business to Thomson Reuters, resulting in a pretax gain of approximately $53 million. Second, we recorded a pretax charge of approximately $58 million that reflects an increase in our reserve related to our previously-disclosed review of amounts we invoiced clients for certain expenses.
Now refer to slide 7 in the slide presentation for a discussion of our operating basis results for 2Q 2016 and for the six months ended June 30, 2016 which I'll refer to as year-to-date. By way of summary, 2Q 2016 results were driven by both strong sequential fee revenue growth and expense management. Operating basis EPS for 2Q 2016 increased to $1.46 per share from $1.36 in 2Q 3015, an increase from 1Q 2016, which included the impact from seasonality associated with retirement-eligible employees and payroll taxes.
Year-to-date EPS decreased 3% compared to the same period a year ago, driven by a decrease in year-to-date fee revenue primarily due to lower equity markets, as well as lower net interest revenue, partially offset by share repurchases and lower expenses. Importantly, 2Q 2016 total expenses decreased compared to the year-ago quarter, resulting in an expansion in pretax margin to 31.5% in 2Q 2016.
The first half of 2016 operating basis effective tax rate of 27.9% is lower than our current expectation for the full year 2016 of 30% to 32%, primarily due to the timing of our tax advantage and investments. Regarding capital, in 2Q 2016, we declared a common stock dividend of $0.34 a share and purchased $390 million of our common stock.
Moving to slide 9, I want to highlight the strong positive fee operating leverage in 2Q 2016 compared to the year-ago quarter. Strong progress in 2Q 2016, particularly on the expense front, positions us to continue to expect operating basis fee revenue growth to outpace operating basis expense growth for full-year 2016 relative to 2015 under current conditions and excluding the GE Asset Management acquisition.
I'll now turn to slide 11 for a review of our 2Q 2016 operating basis revenues. Servicing fees decreased from the year-ago quarter, primarily due to lower equity markets and increased relative to 1Q 2016 due to net new business and higher global equity markets. Compared to the year-ago quarter, the decrease in international equity markets, particularly in emerging markets, negatively impacted servicing fees.
Average daily values for the MSCI emerging market index decreased 19% while the EFA equity index was down approximately 14% relative to a year ago. Management fees decreased relative to a year ago, also reflecting lower equity markets. Foreign exchange revenue decreased from 2Q 2015 due to lower volumes. Securities finance revenue was up slightly from 2Q 2015, primarily reflecting continued growth in enhanced custody, mostly offset by lower seasonal benefit compared to the year-ago quarter.
Moving now to slide 12, I would note that our operating basis net interest revenue has benefited from a higher fed funds rate at the end of 4Q 2015 as well as disciplined liability pricing. Net interest revenue decreased from 2Q 2015 primarily driven by the reduction in size of our balance sheet, partially offset by liability pricing discipline.
Now let's turn to slide 13 to review 2Q 2016 operating basis expenses. Importantly, total operating basis expenses were well controlled in 2Q 2016, decreasing approximately 3% from 2Q 2015. 2Q 2016 expenses were nearly flat with 1Q 2016 when excluding the 1Q 2016 seasonal deferred compensation expense of $122 million for retiring eligible employees and payroll taxes.
Compared to 2Q 2015, compensation and employee benefit expenses increased modestly, primarily due to increased costs to support regulatory initiatives and net new business, mostly offset by State Street Beacon savings. Importantly, other expenses decreased from 2Q 2015 driven by a significant reduction in professional services costs.
Let me now move to slide 15 to review our capital highlights. Our capital ratios remained strong, which has enabled us to deliver on a key priority of returning capital to shareholders through dividends and common stock repurchases. Compared to March 31, our common equity tier 1 ratio decreased under the fully phased-in standardized approach, primarily driven by an increase in risk-weighted assets generated by the FX volatility late in the quarter following the Brexit vote.
The June 30 fully phased-in supplementary leverage ratio at the corp increased to 6.1% and the bank increased to 6.3%, primarily due to the preferred stock issuance in the second quarter. Please note that the capital impact from the acquisition of GE Asset Management will be reflected in our third-quarter 2016 capital ratios and our estimate of this impact is noted on slide 16.
We repurchased $390 million of common stock in 2Q 2016 under our prior common stock purchase program announced in March of 2015. And importantly, our capital actions included in our 2016 CCAR capital plan demonstrated our focus to return value to shareholders through share repurchases and dividends.
Moving on now to the next slide, let me briefly discuss our acquisition of GE Asset Management. The acquisition of GE Asset Management supports our plan to allocate capital to higher growth and return businesses. The purchase price was $435 million, subject to adjustments, with up to $50 million tied to incremental opportunities with GE. Excluding merger and integration costs, the transaction is expected to be accretive to operating basis EPS for the first full 12-month period as of July 1, 2016.
Moving to slide 17, I'll now provide an update to our 2016 financial outlook. Please note that all of my comments relating to our 2016 outlook exclude any potential impact from the acquisition of GE Asset Management. Relative to the first quarter, second quarter results reflected strong fee revenue growth and well-controlled expenses. Importantly, we continue to target positive fee operating leverage for full-year 2016 compared to full-year 2015 assuming current market conditions.
Included in our expectation to generate positive fee operating leverage is modest operating basis fee revenue growth for full-year 2016 compared to full-year 2015. Importantly on the expense front, we now expect operating basis expenses to be approximately flat for full-year 2016 relative to full-year 2015. Included in our expectation of flat operating basis expenses for full-year 2016 is upward pressure on regulatory and compliance costs and expenses related to the installation of new business for the second half of 2016.
Contributing to the success in managing expenses has been the execution of State Street Beacon, our multi-year program to create cost efficiencies and to digitize our business. We now expect State Street Beacon to deliver at least $140 million in estimated annual pretax fiscal savings in 2016.
Moving on to net interest revenue for full-year 2016, we currently expect operating basis in IR to modestly exceed the high end of our static scenario of $2.025 billion to $2.125 billion. This assumes US interest rates remain static and some additional central bank easing occurs outside the US.
So in summary, we're very pleased with the 2Q 2016 results as sequential quarterly growth in fee revenue and strong expense control positions us well to achieve our 2016 financial objectives. Now let me turn the call over to Jay.
- Chairman & CEO
Thanks, Mike. And, Jennifer, we're now available to open the call to questions.
Operator
(Operator Instructions)
Your first question will come from Ashley Serrao with Credit Suisse.
- Analyst
Good morning, Jay and Mike.
- Chairman & CEO
Good morning.
- Analyst
Jay, I was just hoping you could share what the client reception has been so far to the digitalization program, and then, as you maybe look out a year or two, what do you think you'll be able to do with this program in terms of servicing clients versus where you are today?
- Chairman & CEO
Sure. I appreciate the question, Ashley. The Beacon effort, as you know, is designed to improve straight through processing, so clean up a lot of the hand-offs and the inefficiencies, but importantly, when you do that, the impact it has on clients can be pretty dramatic.
So one of the examples that I referenced in my prepared remarks I just push out a little bit. One of the things that we do in huge volume is, at the end of the day, produce a net asset value based on the workings of the day in the daily fund business where we have a pretty significant position globally. And the production of that net asset value is critical from a timing standpoint, and then once you get that, that feeds downstream distribution systems, it feeds newspapers and other communication vehicles.
We have seen, through the most recent improvements in Beacon, that we've been able to pull back that time of producing a net asset value 20 to 30 minutes, which in an hour and a half window, is significant. So our clients, who are ultimately concerned about satisfying their distribution systems, when we can deliver that 30 minutes early, it gives everybody in the chain more time to react. It might seem mundane, but to our clients, it's a huge win. I'd say secondly, we experienced in the first quarter a 20% reduction in the number of reconciliations that we do within the Company, and, again, that just improves not only cost, but accuracy and how data flows back to our clients.
I think to your question ultimately, our vision or end game in this is not only to achieve the savings that are prescribed by Beacon, but to the extent that we can digitize our internal environment and make it real time to our clients, the ability to get information intraday, whether it's cash positions, whether it's risk management data, that's really where we're going with this.
And when we established global exchange a few years ago, that was done in order to take the benefit of digitizing our internal production environment and start to provide information and analytic services to our clients, not just back office, but middle and front office as well. And in parallel, global exchange is introducing some exciting new products that give clients intraday access and insights to what's going on in their portfolio, all enabled by our ability through Beacon to digitize our internal environment. So you've heard me say before, to me it is the next big thing in this business and we're making good progress.
- Analyst
Great. Thank you for all the color there. And maybe a question for Mike as well. I appreciate the NII guidance, but can you just walk through your thoughts on what your liability pricing initiatives are likely due to the balance sheet, and just anything we should be mindful of in terms of accelerated refis and impact on NIM?
- CFO
Sure, Ashley. So first of all, I'd say from a liability pricing standpoint, we're really pleased with the success that we've had for the first six months of 2016, and at this point, I anticipate that that would continue into the second half of 2016. Specifically, we did increase the amount that we're charging for deposits, for example, in Europe, when the ECB cut rates further in March.
Obviously, it's anybody's guess where the ECB will go from here, so it's a situation that we're watching carefully, but I would anticipate that we would look to move, at least in the near-term, I expect that we would move in lock step with further changes with the ECB. So it's a situation that we're monitoring, but I don't expect any change at this point from the pattern that we had good success with in the first half of the year.
So as a result, I would expect that, overall, the deposit levels that we saw in Q2 are likely to remain probably pretty close to that level over the remainder of the year, but again, it's a situation that's pretty fluid, and one that we're watching pretty carefully.
- Analyst
All right. Great. Thank you for the color and congrats on the quarter.
Operator
Your next question is from Ken Usdin with Jefferies.
- Analyst
Thanks. Good morning. Mike, I was wondering if you could follow up on your comments about the expenses? So the other line, again, [$255 million] or so, really great control and a meaningful decline year-over-year.
You mentioned professional services fees, but I guess I'd just ask you to walk us through, like is this a new run rate? Are a lot of your professional services fees that you've kind of had to spend on in the past done? And kind of the moving parts within your expense outlook? You mentioned some of the investments, but I think that's the real delta into people's expectations. Thanks.
- CFO
Okay. Thanks, Ken. First of all, I appreciate the positive commentary on Q2 and I think those comments are well-deserved. I think maybe start out broadly and then go to your specific question. We feel really good, Ken, about the job that we've done managing expenses in the first half of 2016, and primarily, I would focus on two areas that we've talked about previously.
The first, as you accurately pointed out, we have done a good job at replacing a significant amount of the outside consulting expend with full-time employees, and that's a real good trade economically, and we also expect that that will build a more sustainable infrastructure going forward. So we're real pleased around that.
Second, we're obviously real pleased with our success to date here around project Beacon and, as I alluded to in my comments, we were able to accelerate some of the savings for 2016 around project Beacon, specifically, we moved faster on management spans and layers than we had previously planned. We also captured more of the savings through the increase in straight-through processing that Jay described. So I think we've done a good job on all those fronts for the first half of the year.
There are some specific areas that we expect upward pressure on expenses in the second half of the year and there are three specifically, Ken, that I would highlight here. The first is we have known new business in the global servicing business, and we will obviously staff to service that new business, and that includes, for example, our the Allianz business that we've talked about publicly. So that would be an example.
Now, specifically tying that to your other operating expense question, we will actually have some expenses in the other operating expense category because part of that arrangement includes a transition services agreement. It's basically a lift-out deal. And so, we have some transition service expenses that will show up in the second half of the year in other operating expenses related to that particular piece of new business. So that's one.
Second, while I really feel good about what we've done in terms of managing regulatory spending, we are going to see some upward pressure in the second half of the year around regulatory spending, particularly as it relates to the recovery and resolution planning that's gotten so much press here. There's a October 1 deliverable that we're very focused on. There's also a July 1, 2017 deliverable that we're very focused on. And that will, inevitably, push up the level of regulatory spend in the second half of the year.
And then just for completeness, I would add that, while we accelerated some Beacon savings into the second quarter, I do expect that we'll accelerate some Beacon investments in the second half of the year. So from a net-net standpoint, I would expect Beacon to entail addtional spending in the second half of the year as compared to the second-quarter run rate.
Now, all of that needs to be thought about, Ken, in the context of positive fee operating leverage for the full year. We are absolutely, as a management team, riveted on achieving that for the full year. So, for example, if the revenue, if the fee revenue environment looked softer than it is right now, we'd have to look even harder at expenses in the second half of the year.
- Analyst
Okay, great color, Mike. And then just a follow-up. Two of the legacy issues that you spoke to in the press release, the FX, seems like that's now behind. And also, does this client billing true-up on a GAAP basis, does that put that issue behind now as well?
- CFO
So first of all, on the FX piece, it does resolve the US litigation that we have and we continue to expect that the overall accrual that we have set up, which is $585 million, will be sufficient for all known issues. But again, it was the US piece in particular that we feel real pleased putting behind us with this announcement.
On the billing piece, Ken, the main point that I would make there is that, at this point, we've completed our calculations at the client level. And I cannot emphasize enough that that was just an extraordinary amount of detail, going back invoices over 18 years, literally millions of invoices at the client level and our previous calculation had been in aggregate. So this refinement caused the update to the accrual.
And, I mean, at this point, we're confident in the calculations we've done at the client level, but we're now, the next step is really now underway as we speak, which is we're now reviewing this detail with the impacted clients. And that's really the next step ahead of us in, again, in putting this prior-year issue behind us.
- Analyst
Okay. Thanks for the color, Mike.
Operator
Jim Mitchell, Buckingham Research
- Analyst
Good morning. Just a quick question on the living will. One of your peers discussed that changing to a single point of entry could increase expenses and higher long-term debt costs. Is that a similar issue for you, or how should we think about that for you?
- Chairman & CEO
Jim, this is Jay. That's not a similar issue for us. We have pursued a single point of entry strategy from the beginning and continue to pursue that. For is it's more about absorbing the input from the Fed and the FDIC and marching to it, as Mike mentioned, the October date. And importantly, there's even more work to be done for the July 2017 date. But we have a pretty clear mandate for what we need to do, and it's a matter of executing against that. So no big shifts in strategy with regard to resolution
- Analyst
That's really helpful. And when we think about the second question on the Deka Bank onboarding, it sounds like that's happening reasonably quickly. Is that the right conclusion? And when we look at the impact on expenses, is that half of the growth? How do we think about the impact on your guidance of flat when you're tracking down in the first half?
- Chairman & CEO
Let me start that one Jim, and just give you a little bit more color on the Deka and Allianz Global Investors business. It's a large transaction, as you can probably figure out from the size of the assets that we'll be servicing. One major component of it which will be enabled beginning in the third quarter is a large fund accounting operation which spans Germany and Luxembourg. Which adds to our Luxembourg leadership position and creates a leadership position for us in Germany, which we think is a key marketplace.
So we will take it over beginning of the third quarter revenues and expenses will go with that. As Mike mentioned, not unusual for a deal like this. Initially we'll take it over intact as a transition agreement and then we'll evolve it to our systems and that will happen towards the end of the year. So that's a little bit of color on Deka and Allianz Global Investors, and Mike, functionality to the expenses?
- CFO
Sure, Jim, it's Mike. I'd really prefer not to get into specific numbers around client-specific arrangements, but I think it's fair to say, Jim, that it's part of the overall upward pressure that I mentioned in my prepared remarks around operating expenses for the second half of the year relative to Q2. Some of it is to support net new business, including the Deka Allianz win. Second would include the upward pressure given what we need to do around RRP, and then third is the additional Beacon investments. I'd rather not get into more detail, but I think it's fair to say on the net new business, that we expect that to help fee revenue for the second half of the year, as well as be an area that we spend some money to service. So that's all thought of as we gave you the updated outlook for full-year 2016.
- Analyst
Okay. Right. So it sounds like the revenue is coming in coincidental with the expenses. That's great. Thanks.
- CFO
Correct.
Operator
Your next question is from Alex Blostein with Goldman Sachs.
- Analyst
Hello, guys. Good morning. Couple of cleanup questions, again, around expenses. So the $140 million of Beacon savings this year, relative I guess, to $100 million that you guys talked about in the past. Is that just simply the faction of timing or the size? In other words, did this take away from some of the savings we should think about for next year or the size of the ultimate savings got -- was increased in your view?
- CFO
So, Alex, it's Mike. At this point, we're still maintaining the $550 million net savings target for the full program. So I would suggest that you think about this as accelerating it into 2016. Now, I would note that we've not changed our outlook for 2017, so we still expect that increment to remain intact.
So therefore, you could deduce it's the savings in the out years that are being brought up, some brought into 2017, and then some of the 2017 and beyond into 2016, particularly around the areas that I mentioned: the improvement in the straight through processing and the reduction in management spans and layers. Again, this will be a program, Alex, that I suspect we'll continue to give you updates over the next several years. So stay tuned. The main point I'd reinforce is we really are doing a nice job in terms of executing on this program and I would expect that to continue.
- Analyst
Got you. And then a quick follow-up around the GE deal and how we should think about it in nearer-term as well as the longer-term? So I think you gave us the dollars in terms of revenue. So I was wondering if you could give us the expenses for the back half of the year that's going to come in with this deal?
And then I guess more importantly, as we think about this business phasing into State Street, what are the cost savings that you expect to realize from integrating it?
- CFO
Sure, Alex. Let me first reinforce the numbers that we talked about in the slide presentation. So overall for the first 12 months of the arrangement, so July 1, 2016 through June 30 of 2017, we expect the overall revenue contribution to be in the range of $270 million to $300 million, and while we haven't given you the specific expenses associated with it, given that we indicated that we expect this to be accretive in terms of overall EPS, and you can also look at the cost to the [prefs] that we issued in second quarter to essentially fund it, you can get a pretty good estimate of the first 12-month financial expectations for the overall arrangement.
In terms of the Q3 contribution, we expect that the revenue for Q3 will be approximately $60 million, and we expect the contribution to pre-tax earnings, if we exclude the merger and integration costs, to be a modest positive. So think of it as something in the less than $5 million contribution here for Q3.
So in terms of where we go from Q3 to the following three quarters, I would note that we expect the expense synergies to really begin to materialize in Q4, and then ramp up further in Q1 and Q2 of 2017. And then from a revenue perspective, we do expect to grow that $60 million in third quarter to something higher than that number in the first and second quarters of 2017, which is what gets you from a, call it, a $240 million annualized number in Q3 to something in the $270 million to $300 million range for the first full 12 months.
- Analyst
Got it. And this $5 million number, that's net of the pref cost?
- CFO
Oh, no. That's truly just the contribution of the business organization itself. And it's actually a little less than $5 [million]. So think of it is as a modest contribution. But, again, importantly, we're highly confident in our ability to get synergies through the combination of this organization which is really terrific. I mean, 270 terrific employees, a little over 100 institutional clients, a fair number of them are actually overlapped with State Street's client base in the past. So, again, we're really jazzed up about the synergies here.
- Chairman & CEO
And, Alex, just a footnote, we had set a 90% client retention rate. We achieved 95%, which was not shocking, but a positive given what our expectations were.
- Analyst
Yes, yes. Understood. Great. Thanks, guys.
Operator
Your next question is from Brian Bedell with Deutsche Bank.
- Analyst
Hello. Good morning, folks.
- Chairman & CEO
Good morning.
- Analyst
Mike, thanks for all the expense details. That's real helpful. Maybe is it possible to talk a little bit about the trajectory of the Beacon saves, so the $140 million? Maybe if you can talk about the exit run rate in fourth quarter, or actually the actual fourth-quarter run rate of savings.
And then as we go into 2017 for the $125 million, how you see that running through 2017, and I know it's early, but essentially, it sounds like you're pulling some of the expense saves in from the outer years. So should we expect this project to be completed potentially by 2020?
- CFO
So, let's see. A number of questions there, Brian. First of all, let me give you an important data point here. On a year-to-date basis, our Beacon saves for year-to-date 2016 relative to the same year-to-date period in 2015 was approximately $75 million. So essentially, I mean, if you doubled that, you'd get to $150 million, and basically, that syncs up with the point that I was making that we expect now the full-year savings to be approximately $140 million for full-year 2016 versus full-year 2015 starting point. So you can conclude from that arithmetic that we expect some additional net spending on Beacon as we invest in some, particularly, some IT areas in the second half of the year as compared to the quarter two expense base.
So from a run rate standpoint, I think you can think of it as we'll be leaving full-year 2016 at something pretty close to our current expenses, and again, a little bit higher net Beacon spending pushing that, so the savings number for the full year being a little bit less than what you'd get if you doubled the year-to-date savings number.
Again, in terms of 2017, I'm sure we'll provide additional updates between now and the beginning of 2017. I think the main point is that we still expect the 2017 savings to be on top of the $140 million of savings that we expect to achieve in full-year 2016. So it should give you confidence that the pace here is actually accelerated. And I wouldn't, at this point, try to either change the $550 million full program target or to change the end date. But again, it's something that I'm sure we'll continue to give you updates on in the future.
- Analyst
Okay. That's helpful. And then maybe to follow up on the net interest revenue outlook. Can you just talk about what you're assuming there for the long, let's say, for the 10-year treasury yields and whether you think there's any potential for raising any long-term debt in conjunction with the resolution planning?
- Chairman & CEO
Okay. So Brian, in terms of the net interest revenue, I believe, if my recollection is right this morning, I think the 10-year is at about 1.55%, and so what we've assumed in the updated NIR forecast that we gave you is static rates in the US, and then likely some easing by the Bank of England probably in August. And so it's really the combination of the grind in the portfolio, as the existing portfolio rolls over and gets reinvested at lower rates, coupled with this likely easing in the UK are obviously factors that are putting some negative pressure on the second half of the year net interest revenue.
As it relates -- actually, one other data point before I forget it. In the Q2, we did note on slide 12 of the slide deck that we did have, it was actually four discrete securities prepay, so it was unscheduled redemptions in Q2. That contributed $5 million of positive NIR in Q2. We don't expect that to repeat in Q3 and in Q4. So if you're really, if you're doing the modeling, I would suggest you sort of start with a [$541 million] rather than a [$546 million]. Again, just it'll help the modeling make more sense.
Your last question around the debt. I don't expect at this point to have to issue additional long-term debt just because of the RRP. Again, we're working on a longer-term capital plan that does ultimately include compliance with the proposed TLAC requirements. Now, again, TLAC at this point is a proposal, not a final rule, but as it relates specifically to your point around RRP, I don't anticipate having to issue long-term debt just because of RRP. But, again, it's -- the whole RRP situation is a pretty fluid one, as you can imagine.
- Analyst
All right. Thank you. That's helpful. I'll get back in the queue for a couple follow-ups. Thanks.
Operator
Your next question is from Adam Beatty with Bank of America Merrill Lynch.
- Analyst
Thank you and good morning. I wanted to ask about the positive mix shift in asset management fees, and obviously there have been some outflows and some other factors that State Street doesn't necessarily control, but wanted to get your thoughts on the strategy there?
You noted that you're introducing a suite of products that have pretty good fees associated with them. How much can you kind of target a positive mix shift and how do you go about doing that with your products and your clients? And should we expect a run rate on that or perhaps even more leverage? Thank you.
- Chairman & CEO
Yes. Thanks. Let me pick that one up. So first point is that, in the quarter, we had $35 billion of outflows, mostly passive equities in separate accounts so not ETFs, and I would say, the other theme, which I referenced, is sovereign wealth funds, mostly oil-based sovereign wealth funds, looking to reallocate.
We have been focused for some time on introducing new products that have higher yields to them from a standpoint of the fees, and more particularly the management fees and we've had good success with that. I referenced some of the new ETFs we brought out. That's a continuation on a theme.
I'd also add that GLD, the gold fund, is probably more of a product for the times, but we've had great traction in our active quant equity products, which are doing nice from a performance standpoint, and therefore, the flows are coming in nicely, a high fee products from our standpoint, the multi-asset class. And so I would say it's been a conscious effort for the last, I would say, 18 to 24 months to focus on those higher fee products and I think we're making headway.
If you look at the first quarter and the management fee growth of almost 5%, some of that's market, but some it is a reflection of the mix shift. And as we sit mid-year looking towards rest-of-year, we expect to continue to see growth in the asset management business, mostly based on introducing higher-yielding products and getting positive flows into those products.
I think that the commoditized end of our world tends to move with markets and other events. As you know, we have the largest ETF in SPY, the S&P 500, which trades pretty actively. But our strategy, consciously, is to move to the higher end of the product spectrum.
Last point I would make, Adam, is that the GE Asset Management business was a really big add in that, supporting that strategy, in that not only do we think we have a great opportunity to compete in the outsource CIO marketplace given what GE brings, but GE brings a mix of more active products, high fee products, that can be sold as stand-alone, but even more importantly, as part of a bundled mix to provide solutions, whether it's in a 401(k) setting, outsource CIO or other elements of the risk spectrum.
- Analyst
Thanks, Jay. I really appreciate that. That's great color. Also wanted to ask about the slide on Europe and the opportunities there, which was interesting so soon post-Brexit. And thinking about the competition there, both sort of US domiciled and European domiciled, what would you say are the one or two biggest advantages that State Street has versus the competition, and maybe one or two of the bigger challenges? Thanks.
- Chairman & CEO
Sure. Let me pick that up, Adam. I think it's -- my Brexit-related comments, the only caveat I would make is that to the extent that Brexit and the EU bring down global growth or broad-based interest rates, that's outside of this commentary.
But if you look at Brexit and our European strategy, we have a different business. So our business is driven by asset pools, both pension, insurance and investment asset pools. So if you think about managing and servicing assets, that's the starting point.
We've seen, in the last couple years, as the Eurozone has had increasing economic pressure, savings rates go up. Savings rates continue to be pretty high in countries like Germany, Italy, France, and those products increasingly are not only growing, the asset pools are growing, but the assets are moving out of banks into investment products. So the environment there is quite good generally.
Enter Brexit. Tremendous uncertainty about what Brexit means, and how the UK will ultimately disentangle from the EU, and I'm sure it'll take a long time for that to unwind. But from my standpoint, if you look at it through investment products, there are several structures that exist in Europe. And importantly in Europe, as opposed to the US, which is one homogenous market, Europe you've got 20 different markets. And so the notion of passporting, or creating product in one domicile, and being able to sell it across the Eurozone is critical to success for an asset manager in Europe. And so it's likely, and there are some product structures: OEICs, SICAVs, UCITs. OEICs, for example, are created in the UK, and they're passportable to the Eurozone.
To the extent that the break between the UK and the Eurozone results in folks having to transition OEICs to things like SICAVs, then we're there to do that. We're the largest provider of these services across 11 different markets. Significantly, and I think the big winners will be the offshore centers, Luxembourg, and probably more importantly, Ireland, who have been the winners in the last couple years with regard to flows.
So that's kind of the landscape. That's why we view the Brexit event to be neutral, if not positive, given that we have the most comprehensive set of services across the most markets in Europe. From a competitive standpoint, when we acquired Deutsche Bank's business some years ago, it really catapulted us into leading positions in Germany, Ireland. The Intesa Sanpaolo deal gave us a leading presence in Italy. We've always been in the UK. We've built out our Luxembourg presence.
So there's nobody near us with regard to servicing investment products with the most geography covered across the most asset classes. I would say secondarily, that the US firms probably are more competent in the offshore centers of Lux and Dublin than the European providers would be. There's a couple of European providers that can provide Pan-European servicing, but pretty limited.
So I would say we're at the top of that pyramid. Some of our US competitors have component parts of the European puzzle, but nobody has as comprehensive a servicing capability as we do in Europe, hence the enthusiasm.
- Analyst
Very nice. Thank you. Look forward to updates in the future. Thanks again.
Operator
Your next question is from Brennan Hawken with UBS.
- Analyst
Good morning. Thanks for taking the question. Just one, a quick one on revenue here first. So it looked like your servicing fee rate ticked up here this quarter. I know you guys commented on the new business wins. So is it right to assume that that rate and that sort of fee level would be sustainable and it's just a mix shift given some of the winds that are there this quarter?
- CFO
Brennan, it's Mike. As we've talked about before, there are a number of things that can impact that calculation that you described.
So I would -- and, actually, in particular, the net new business has been a positive here for a while. And as I talked about in the prepared remarks, we expect net new business to add to overall GS fees in the second half of the year relative to the Q2 run rate, but I wouldn't -- again, please remember that only approximately 60% of the GS fee revenue is driven on basis points on assets. So swings in the market, for example, can play havoc with the ratio that you're referencing.
- Analyst
Yes. I get it. But it's the only way we basically have to model your revenues, so that's what we're left to do in the valley of the blind. But anyway, that's fine. I appreciate the commentary. And then one more clarification point also on the expense front.
Seems like you had indicated some upward regulatory spend in your comments, Mike, and so, was just curious about how that was going to manifest itself in the P&L? It seemed like you all had gotten some success in shifting some of that professional services spend up to comp. And so, are you saying that we might see a little bit of an uplift from the 2Q levels in professional services or is that rather going to come through on the comp line?
- CFO
Yes, Brennan. First, I appreciate the compliment and we have had good success making that change that you describe. I do expect that there'll be a little bit of upward pressure on the comp and employee benefit line from the regulatory expenses, but I think the majority will likely show up in other operating expenses, particularly given the very tight time frames that we're dealing with around the resolution and recovery planning in particular.
I mean, the October 1 deadline is very real, obviously, rapidly approaching, and as Jay indicate, the July 1, 2017 one is very meaningful as well. So for both of those reasons, I would expect that outside consulting expense will increase in that Q3 and Q4.
- Analyst
Sure. But that would probably then just follow the same pattern that you all were able to execute over the longer-term, once you get past the near-term deadlines shifting that into a sort of lower priced, but comp-oriented mix down the road, is that a reasonable assumption?
- CFO
That's a very fair assumption, Brennan. Absolutely.
- Analyst
Okay. Thanks for the color.
Operator
Your next question is from Marty Mosby with Vining Sparks.
- Analyst
Thanks for taking my questions. Jay and Mike, I had a bigger question, if you kind of back up a little bit. This quarter feels like, one of the things we've been looking for is an inflection point in some processes and pressures that you've been kind of working your way through.
Mike, I got two for you and I got two for Jay. When you look at, Mike, the efficiency, you've been investing in the efficiency. How far along do you feel like we are? Are we getting to that point where the benefits are going to outweigh the investments?
And then also on the balance sheet restructure, we've been in that for a couple years which really started with the liquidity coverage ratio and capital requirements. Have we kind of come through that because we're starting to see NIR starting to grow again, so have we kind of gone through the inflection point on those two things?
- CFO
Sure, Marty. Let me take both of those. First, from an efficiency standpoint, sure, I feel very positive that in the first half of 2016 compared to the first half of 2015, Project Beacon generated $75 million of net savings. Now, we invested in there, but the point is it contributed $75 million of net savings, and so yes, I do believe that Project Beacon has already shown that it's accretive in the near-term.
In addition, I would point to the success, as we've talked about with several of the other analysts, the success we've had in moving the regulatory expense to lesser expensive full-time employees, rather than expensive outside consultants. I think that's also an important inflection point that has helped us.
Now, it doesn't mean that there isn't upward pressure on regulatory expense, particularly around RRP, but I do think that we've shown that we're executing on the plan that we had previously communicated, which is to make that shift which ultimately saves us money.
On the balance sheet restructuring, I do feel positive about where the balance sheet is positioned. I mean, I don't think we have to look any further than the results of the last CCAR that are now public to note that our mark-to-market sensitivity under the severely adverse scenario is quite a bit better than what it had done previously. And so that was an important step forward for us, from a balance sheet restructuring. At this point, we're fully compliant with the LCR rules. So, yes, I feel good about all of that.
Now, again, the one area that hasn't hit an inflection point yet, is really market interest rates. I mean, maybe the Fed will increase again in the reasonable near future, but boy, outside of the US, it's still been moving in a negative position. So that's the area that I would say we haven't yet hit the inflection point, but I'd like to believe at least in the US, maybe that could come sooner rather than later.
- Analyst
And then, Jay, when we look at the ability to take the cloud we've invested in, since building out the new resources and information. We're talking about those new products, you seemed a little more confident in that, but as we're talking about that and starting to generate some revenues from those new services that we're going to get from the data out of the cloud. And then also you're [guiding] a transition from building out your ETFs to really now putting in GE and becoming more active management, higher fees. So is that transition starting to kind of go through an inflection point, that you can start to see some build-out?
And then, Jay, just overall, as State Street's gone through periods in the past where you've had to go through these transitions, it's set the stage for very good performance after you went through these inflection points. Just if you would comment on how your thoughts would be, compared to past inflection points that we've seen?
- Chairman & CEO
Sure, happy to do that, Marty. Yes, I do think this is an inflection point. I think you started out with a cloud and Beacon, and that's critically important from a standpoint of managing costs in a difficult environment, but even more important relative to continuing to differentiate our services vis-a-vis the competitors and the interest of what clients are looking for today.
So the first point I would make is that some of our successes in the market place are not only a reflection of us producing better capabilities, better products, information-based services, but it's also a reflection of the pressure that our clients are feeling in a low-return environment to outsource more work. So I would put that in the inflection point transition bucket too. I don't see that slowing down anytime soon. So whether it's a mutual fund manager moving to outsource middle office, or in the alternatives world, moving from hedge, now private equity and real estate, there's a surge to outsource those things.
So I think it's a convergence of more outsourcing driven by the environment and our client base based on our continued ability to differentiate our product sets and compete effectively at good pricing to win the business. I think that's a trend that we're likely to continue to see in the cloud, and Beacon is right at the center of that, because this business trades more and more on the ability to provide analytics and information and insight from the processing work that we do, and that's going to continue. The other thing I could add is the regulatory pressure on our clients, again, is forcing both of those things to happen.
I think, similarly, in the world of asset management, we have been on a journey the last couple of years to transition, I wouldn't say completely pivot, but transition our business to maintaining those core products that we have, but building out our ETF distribution capabilities in the US and Europe, investing in higher-yielding products. I think the GE acquisition potentially is an inflection point for us.
In the world of solutions, which is a huge opportunity for everybody in asset management, you need to have enough asset classes and competencies to be able to mix them together to create outcomes. And GE just provides an enormous new set of capabilities for us to compete more effectively in that world. An so I would say it's ETFs, it's not necessarily single asset class products that will deliver to the market place, but this notion of solutions is going to continue to be a key theme in the asset management world, and I think we're well-positioned, and the GE transaction just puts us over the top with regard to capabilities that we can leverage across our global institutional distribution system to continue to grow.
So I do feel like we're passing through a period here where we're getting our costs better aligned for the realities of today. We're moving digitally, which is where the future is going to be with regard to the clients' needs, and I'd say asset management is going through a similar transition.
- Analyst
Thanks.
Operator
Your next question is from Betsy Graseck with Morgan Stanley.
- Analyst
Hello. Good morning.
- Chairman & CEO
Good morning.
- Analyst
I had a question on the NIM. You were able to keep that essentially flat Q on Q and while yields came down a bit, cost of funds came down more. I'm just wondering on the cost of funds side, you had some nice decline in the non-US transaction accounts and I know you've been charging depositors non-operating charges, but I'm wondering what happened in the quarter that enabled a pretty big step-down in the non-US transaction accounts?
- CFO
Sure, Betsy. It's Mike. Two items that I would highlight around that line item on our average rates earned and paid page. Two points impacted that favorably for the quarter. First of all, as you correctly pointed out, we did increase the amount of what we're charging for deposits at a greater pace than the cut, for example, in the ECB rate. So that helped that line item, in particular Q2 versus Q1, the greater amount that we were charging for European deposits in particular.
Second, though it's a little bit of a funny nuance, we do have, in any given quarter, decisions to make around whether we swap the non-US deposits into US dollars and put them with the Fed, or whether in fact we leave them outside the US at central banks abroad. In particular, for a variety of technical reasons, we swapped less to US dollars in Q2 than we had in Q1. And so what that meant was the FX swap costs that we normally run through that line, that was a -- there was a smaller charge for that in Q2 versus Q1.
So it had a similar impact on the asset side, as it did on the liability side, so no net impact to the NIM. And in fact, you can see the decline in the interest-bearing deposits with banks line item that is essentially the partial offset to that. But from an economic standpoint, the piece that I would focus on, is the more disciplined liability pricing particularly outside the US.
- Analyst
Okay. And is there more room for that to run from here?
- CFO
Well, obviously it's a situation that we're monitoring very carefully. At this point, I don't expect that we would see even greater daylight, for example, in EMEA, between what we're charging for deposits, and, for example, the ECB rate. But, again, it's a situation that we'll monitor carefully, and if the ECB moves more negative, it's something that we'd have to look at carefully.
- Analyst
Okay. I just asked, because you mentioned there was a couple of small but one-timers in realizing some gains in the second quarter.
- CFO
Yes.
- Analyst
So as some of these roll off, you've got some opportunity to squeeze liability costs to keep NIM flat in 3Q?
- CFO
Well, again, first of all, I would take that $5 million out. I mean, you see that in the ABS line. Those were four discrete prepayments that I do not expect to repeat in Q3. So I would calculate the NIM with that $5 million out of there. And in terms of Q3 and Q4 outlook for NIM, unfortunately the two main known knowns are the likely reduction in the Bank of England rate, and then just the continued grind in the portfolio as it rolls over, if rates stay static.
So I'd say at least nearer-term there's more nearer-term downward pressure on NIM. But that's factored into the points that I made in the prepared remarks, and the fact that we expect to be probably modestly above the upper end of the [$2.025 billion] to [$2.125 billion] range.
- Analyst
Got it. Thanks.
Operator
Your next question is from Brian Kleinhanzl with KBW.
- Analyst
Hello. Good morning, guys. I just had one quick question, or maybe two here. So I mean, you had some peers that were talking about looking to lower non-operational deposits still, but given you just went through a program of lowering non-operational deposits, and looked relatively healthy for the SLR and also for CCAR, would you look to actually, if you had the opportunity, to expand the balance sheet further, if you saw some more chances to add deposits here at this point in time?
- CFO
Brian, it's Mike. At this point, we really feel very positive about the size of the balance sheet, and the success that we've had over the last five quarters in managing downward the overall level of excess deposits.
So, I mean, they were up very modestly Q2 versus Q1 on average, but I don't, at this point, feel pressure to reduce those further in the second half of the year. And with any good fortune here, maybe in 2017, we'll get some additional Fed fund increases, maybe even in December, and that would probably reduce them further on their own without explicit action.
But it's something obviously, we monitor very carefully and, particularly, in situations where there's potentially a flight to quality, it's something that we'd have to watch very carefully. But at this point, we're really comfortable with the overall size of the balance sheet, and the level of excess deposits here in Q2.
- Analyst
Okay. And was there any fee waivers left in the second quarter? I know it's not as big deal for you, but just curious?
- CFO
No, nothing meaningful.
- Analyst
Okay. Great, thanks.
Operator
Your next question is from Geoffrey Elliott with Autonomous Research.
- Analyst
Thank you for taking the question. Can you give us an update on the search for the new CFO?
- Chairman & CEO
Sure. I'll give you a quick one, Geoff, which is it's progressing nicely, and I would expect in pretty short order we would have something to report. So we're getting near the end of the process, and I'm pleased with the way the process is going.
- Analyst
And then you clearly went through a similar exercise two or three years ago. Can you just explain where your focus this time is maybe a bit different from where it was in the past?
- Chairman & CEO
I'd say we're looking for a world-class CFO of a financial institution, and fortunately, what I've found, and it's, you never know, but in this case, it's encouraging, is that the State Street brand still has enormous pull in the marketplace. I think people like our story, like our prospects for moving through this regulatory environment, like the growth stories, so we're going to have good choices.
- Analyst
Great. Thank you.
Operator
Your next question is from Gerard Cassidy with RBC.
- Analyst
Thank you. Good morning, Jay. Good morning, Mike.
- Chairman & CEO
Hello.
- Analyst
Hello.
- CFO
Good morning, Gerard.
- Analyst
Good morning. Sorry about that. That's okay. It's been a long call, I know.
Mike, can you share with us, in the investment securities book, your yield held up well in the quarter, and I noticed that some of the pieces you gave us, the yields fell for example in the mortgage-backed area. But in the asset-backed securities area, you had a nice pop in the yield in that portfolio. Can you share with us what was purchased in here, or how are you maintaining that [1.92%] yield for the entire portfolio?
- CFO
Sure. So, let's see, a couple different questions in there, Gerard. First, as I mentioned a couple times, we did have four specific securities that were in the asset-backed securities category, pre-pay in the second quarter. And the result of those four discrete securities prepaying in total was a one-time boost to NIR in Q2 of $5 million. So I would urge you to wash that $5 million out of the ABS number. So if you do that, the [1.43%] yield for ABS that you see on the average rates page, would in fact be closer to flat with the [1.32%] from the quarter before it.
If you take that piece out, the main factors or the things that we've talked about, which are on the positive side, we've continued to do a very good job of liability pricing discipline. And in fact, got some benefit from the higher level of charging for deposits, for the euro deposits in particular. Going the other way, though, was in fact the impact of the continued grind, where the maturing fixed rate assets tend to mature at a rate lower than the new fixed rate investment. So, again, it's a moving picture, obviously, but I'd first wash out the $5 million, and then those, the two points that I just made are the main factors for the quarter.
- Analyst
Great. And is it safe to assume the duration really hasn't changed much in that securities portfolio?
- CFO
Yes. It has not changed materially. There's certainly been no material change in our philosophy there, Gerard. So again, it'll fluctuate up and down in any given quarter, but I wouldn't -- we invest through the cycle, no change in philosophy.
- Analyst
Great. And then, Jay, obviously on your Investor Day, you guys have given us the data to support a number of your number one rankings in the businesses you're in, whether it's in the middle office outsourcing or US mutual fund accounting, a number of number one rankings.
Then since the beginning of 2014, if our calculations are right, it looks like you've won about over $2.5 trillion of assets in the [custody new] business. Then I go to your slide 4 in today's slide deck, which is a great slide, and I look at the servicing fees from the middle of 2014 through today, and there's been no growth. Can you share with us what's going on with that business? Again, considering you're doing so well in winning new business; you're a dominant player. What's causing it not to grow?
- Chairman & CEO
Sure. I would say you've got to decompose the components, Gerard, and I would say your lead-in was completely accurate and appropriate and that we are, I would say, disproportionately winning our share of the new business in the market place, whether it's number one in ETFs where we have close to a 70% share, or US mutual funds, or I referenced the offshore domiciles of Luxembourg and Dublin, on and on.
What -- the other things that move the needle on that service fee line would be flows. And over the period of time that you've referenced, there have been outward flows and some higher-yielding products like mutual funds, upward flows in ETFs. You've seen a retrenchment generally from emerging markets, which have higher versus lower fees when you get to more traditional asset classes.
So I would say the effective markets flows and new business are the ingredients which drive that line. And the part I'm most confident about is the new business. The flows we really don't control, but when they move from higher-yielding fee categories to lower yielding, and when they move from products that might be higher revenue products to lower revenue products, we don't influence that, and obviously, the markets. So I would say we think long-term that we're best positioned in those markets that will continue to grow.
Things fluctuate over periods of quarters and years, but for us, it's making sure that we continue to position against the most attractive clients in this segment, and the most attractive segments. And making sure that, consistent with the investor day, that we're keeping our expenses in line so that we can maintain our margin. And as the environment becomes more favorable for some of those products that I referenced, then we would assume that that would flow to the bottom line. We take a long view.
- Analyst
Thank you. Appreciate the color.
Operator
Thank you, ladies and gentlemen. I will now turn the conference back to management for their closing remarks.
- Chairman & CEO
Thanks, Jennifer. And thanks, everybody, for your time an attention today. We look forward to speaking with you at the end of the third quarter. Thanks.