道富銀行 (STT) 2016 Q3 法說會逐字稿

Good morning, and welcome to State Street Corporation's third-quarter 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 being recorded for replay.

State Street's conference is copyrighted, and all rights are reserved. This call may not be recorded for rebroadcast or distribution, in whole or in part, without the express written authorization from State Street Corporation. The only authorized broadcast for this call will be housed on State Street's website.

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

Thank you, Amy. Good morning, and thank you all for joining us. On our call today are Chairman and CEO Jay Hooley, who will speak first. Then Mike Bell, our CFO, will take you through our third-quarter 2016 earnings slide presentation, which is available for download on the investor relations section of our website, investors.statestreet.com.

Afterwards, we will be happy to take questions. During the Q&A, please limit 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 Q3 2016 slide presentation.

In addition, today's presentation will contain forward-looking statements. Actual results may differ materially from theses statements due to a variety of important factors, such as those factors referenced in our discussion today, in our Q3 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 few quarters, we are continuing with the 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 fourth-quarter earnings call on Wednesday, January 25, 2017.

Now let me turn it over to Jay.

Thanks, Anthony, and good morning, everyone. I'm pleased with our performance in Q3 2016 and our ability to deliver positive fee operating leverage for the first nine months of 2016, compared to the same period in 2015. Our results reflect continued momentum in fee revenue and our ongoing commitment to expense management.

Our new business results remain strong, with $1.2 trillion in new asset servicing commitments year-to-date, including $212 billion in the third quarter. We're making good progress in the implementation of State Street Beacon, our multi-year program to digitize our business, deliver significant value in innovation for our clients, and lower expenses across the organization. Importantly, through the execution of State Street Beacon, we are differentiating our capabilities by providing enhanced analytics and insights to our clients to help manage their enterprise data and enhance their operational performance and risk management.

The integration of our recent acquisition of GE Asset Management is going well, with over 260 employees successfully onboarded, and client retention exceeding our objectives. This acquisition extends SSGA's core investment management and alternatives capabilities, and enhances the value-add solutions to our clients.

I'll turn your attention to slide number 5 to highlight our continued progress against our 2016 strategic priorities. We continue to advance our objective to become a digital leader in financial services through execution of State Street Beacon. Throughout the third quarter of 2016, we continued to improve client service and advanced our goal of creating a digitally-enabled platform to improve the breadth of product offerings and efficiency.

Our platform is providing data quicker, better, and with more transparency than ever before. For example, we have delivered a number of new solutions, including net asset value oversight, creating more line of sight into the composition of the fund's net asset value at the end of the day. And enhanced asset owner strategy providing support to asset owners as they in-source asset management. And enterprise pricing web, which prices our clients' funds faster than ever before.

We also have a solution to meet the new SEC modernization roles that were finalized early in October, and we already seeing strong interest from our clients. In terms of driving growth from our core franchise, we continue to achieve strong asset servicing wins, with approximately $212 billion in the quarter. Our new business, yet to be installed at quarter-end, was just over $500 billion.

An example of our efforts to build on existing relationships is that we were recently appointed by our long-standing client PIMCO to provide investment manager services outsourcing in support of $1.55 trillion in assets. Separately, in a mandate that we had won pending final contract negotiations, PIMCO has selected State Street to provide accounting custody, fund administration, and transfer agency services for an additional $140 billion in offshore funds, which is a high-growth market segment.

State Street's industry-leading offshore fund services business and operating platform were key considerations in PIMCO's decision to consolidate their business with State Street. In our asset management business, we continue to generate in our higher-yielding product lines, with $12 billion in Q3 2016 ETF net inflows.

We did experience overall outflows of $36 billion during the quarter, driven primarily by reductions of the cash invested in securities lending, and also money market reform, making prime funds less appealing for certain investors, as well as institutional net outflows. Importantly, these outflows were primarily in our lower-based fee institutional products.

Separately, our State Street Global Exchange Group recently launched State Street Media Stats, a quantitative investment insights tool that draws from digital media and other large consumer data sets. This platform allows clients to quickly and efficiently collect large volumes of data, analyze it, and assess impact on the price, risk, and liquidity of individual assets.

We have now achieved positive fee operating leverage for the first three quarters of 2016 relative to the same period of 2015. State Street Beacon has been a key factor in this progress and is ahead of our original schedule for 2016. We now expect to generate at least $165 million in estimated annual pretax expense savings in 2016, for the full effect felt in 2017.

Returning capital to our shareholders remains a strong priority, and we declared quarterly common stock dividends per share of $0.38 in Q3 2016, an increase of 12% over Q2 2016. We also bought back $325 million in common stock. We are focusing our attention and efforts on these strategic priorities, which we expect 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.

We would also like to let you know that in line with many of our peers, that we will not be hosting an investor day in 2017, given our focus on executing our multi-year strategy that we laid out during our 2016 investor day. We expect to provide a detailed update at our 2018 event, and of course, we'll provide updates on progress, as we always do each quarter.

Before I turn the call over to Mike, I want to note our announcement in September of the appointment of our new CFO, Eric Aboaf. Eric will join us in mid-December. He served as the CFO at Citizens, and prior to that, spent a dozen years at Citi, including the last six as Treasurer. Eric brings a wide range of expertise in global banking, regulation, treasury, and finance to the role of CFO, which he will assume in March of 2017.

We truly appreciate Mike's hard work and efforts through the transition, and he will continue to be our CFO through the end of 2016 fiscal reporting. We look forward to having Eric join the team to further execute the finance and treasury initiatives in support of our strategic priorities.

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

Thank you, Jay, and good morning everyone. This morning, before I start my review of our operating basis results, I'd like to note that the GAAP basis results for the third quarter include two notable items.

First, on July 1, 2016, we completed the acquisition of GE Asset Management. Third-quarter results included estimated revenue of $65 million; estimated ordinary business expenses of $57 million; and approximately $29 million of acquisition-related costs. Second, we recorded a pretax charge of approximately $42 million, related to previously disclosed investigations by US governmental agencies concerning our UK transition management business in 2010 and 2011.

Now I'll refer to slide 6 in the slide presentation for a discussion of our operating basis results for Q3 2016, and for the nine months ended September 30, 2016, which I'll refer to as year-to-date. Q3 2016 results reflect continued success managing our expenses and generating fee revenue growth.

Operating basis EPS for Q3 2016 increased to $1.35 per share from a $1.15 in Q3 2015, and decreased from Q2 2016, which included the benefit from seasonality associated with securities finance. Year-to-date EPS increased 3%, compared to the same period a year ago, driven by a decrease in expenses and additional share repurchases.

Notably Q3 2016 pretax margin increased 190 basis points to 30.7% from 28.8% in the year- ago period, primarily reflecting strong expense management, particularly the continued execution of State Street Beacon, our multi-year program to create cost efficiencies and to digitize our business. On the capital front, in Q3 2016 we declared a common stock dividend of $0.38 a share, representing an increase of 12%, and we purchased $325 million of our common stock.

Moving to slide 7, we're pleased to achieve significant positive fee operating leverage in Q3 2016, compared to Q3 2015. In addition, as you can see on slide 8, continued progress in managing expenses has resulted in slight year-to-date positive fee operating leverage, compared to the year-ago period.

Now I'll turn to slide 9 for a review of our Q3 2016 operating basis revenues. Servicing fees increased from the year-ago quarter and from Q2 2016 primarily due to net new business. Management fees increased from Q3 2015 and Q2 2016, primarily reflecting the contribution from the GE Asset Management acquisition.

Foreign exchange revenue decreased from Q3 2015, primarily due to lower volatility and client- related volumes. Securities finance revenue increased from Q3 2015 primarily reflecting growth in enhanced custody and higher spreads in our agency business. Processing fees and other revenue increased from Q3 2015, due to higher revenue associated with tax-advantaged investments.

Moving to slide 10, net interest revenue decreased from Q2 2016, primarily reflecting lower investment portfolio yields, a temporary increase in wholesale funding in Q3 2016, and a small number of discrete security prepayments in Q2 2016.

Now let's turn to slide 11 to review Q3 2016 operating basis expenses. Notably expense control continued in Q3 2016, primarily reflecting strong progress for our State Street Beacon program and effective management of our other operating expenses. Excluding the impact from GE Asset Management, total operating basis expenses decreased from a year-ago quarter, driven by Beacon-related savings and a significant reduction in professional services costs, partially offset by higher regulatory expenses and costs to support new business.

I'll now move to slide 13 to review our capital highlights. Our capital ratios remain strong, which has enabled us to deliver on a key priority of returning capital to shareholders through dividends and common stock repurchases.

Compared to June 30, our common equity tier 1 ratio increased under the fully phased-in standardized and advanced approach, primarily driven by lower risk-weighted assets, partially offset by the acquisition of GE Asset Management. The September 30 fully phased-in supplementary leverage ratio at the Corporation and at the Bank decreased modestly, primarily due to the GE Asset Management Acquisition. We repurchased $325 million of common stock in Q3 2016 under our common stock purchase program announced in July of 2016.

Moving on to the next slide, I'll briefly discuss our recently completed acquisition of GE Asset Management. The acquisition of GE Asset Management supports our plan to allocate capital to higher growth in return businesses. In Q3 2016, GE Asset Management contributed $65 million in estimated operating basis revenue, and $57 million in estimated operating basis expenses.

We continue to expect the acquisition to be accretive to operating basis EPS for the 12-month period beginning July 1, 2016. We expect Q4 2016 fee revenue and expenses from the acquired business to be similar to Q3 2016 levels. Importantly, as the integration progresses, we expect further revenue growth and expense synergies in the first half of 2017.

Moving to slide 15, I will update you on where we stand regarding our financial outlook. Please note that all of my comments relating to Q4 2016 and full-year 2016 outlook exclude the impact from the acquisition of GE Asset Management.

Q3 2016 results reflected strong expense management, as well as fee revenue growth. We expect Q4 2016 results to support our target to achieve positive fee operating leverage for full-year 2016, compared to full-year 2015, assuming current market conditions. We now expect operating basis fee revenue growth for full-year 2016 to be approximately flat versus full-year 2015.

We expect full-year 2016 operating basis expenses to be slightly lower relative to full-year 2015, and Q4 2016 operating basis expenses to be slightly higher than Q3 2016, as we increase investments in State Street Beacon and are expected to incur greater regulatory-related expenses. Importantly, we now expect to deliver, through the execution of State Street Beacon, at least $165 million in estimated annual pretax savings for full-year 2016.

Moving on to net interest revenue, we expect Q4 2016 operating basis NIR to be slightly lower than Q3 2016 and for full-year NIR to exceed the high end of our prior full-year 2016 static scenario of $2.025 billion to $2.125 billion. In summary, we're pleased that the third quarter positions us well to achieve our 2016 financial objectives.

Now I'll turn the call back over to Jay.

Thanks, Mike. Amy, we're now available for questions.

Yes, sir.

(Operator Instructions)

Glenn Schorr, Evercore ISI.

First question, is the $165 million up from $140 million for the full year, should we think of that as a pull-forward of 2017 Beacon-related costs, or is that incremental cost down throughout the process?

Glenn, I would characterize it as a general acceleration in savings. We're still targeting $550 million for the total program, but importantly the $125 billion of savings that we expect for 2017 has not changed. I really think of it as an overall acceleration, probably some 2018 and 2019 savings coming into 2017 and then some of the 2017 savings coming into 2016. But importantly this point we haven't changed the $550 million.

No problem. We will still take it. And then in terms of the -- there is a lot of moving parts here, so any color would be great. You had decent asset under-custody growth, but the servicing fee was up 1%, can we talk about the dynamics of the type of business you're adding? Because you're winning new business. But what's rolling off and what kind of fee compression we're seeing underneath the covers?

Let me just start that one Glenn. You are right. The AUC quarter to quarter was up pretty nicely. The service fees were up 1%.

I would encourage you not to look at just the quarter. I think if you look at full year we're up 5%, which seems kind of inline with our assets-over-revenue metric that we use. But I'd say in the third quarter specifically we had markets mixed, [EFA] down, domestic markets up, the strong dollar pushback a little bit on service fees. As opposed to the 1%, if you look at three quarters to date, the 5% I think is probably a better reflection.

The business that we're winning, as is typically the case, is all over the place. Year to date, the EMEA business, largely Europe, has contributed over 50% of the new business wins, highlighted by, we talked earlier in the year about the Allianz win and then more recently the PIMCO deal, which is a big deal. $140 billion of offshore assets in a place that because of Brexit and other things, I think will continue to see growth on those offshore domiciles of Lux in Dublin.

The one other point I might make from a highlight standpoint is you have seen some trail off in the hedge fund performance, so we've seen some outflows in hedge funds. My view is that that is more likely cyclical, I think performance recently has improved. I suspect the flows may head back the other way.

But the money is going to go somewhere, so we've seen more money move to other alternative categories, private equity, real estate, which we view as a positive situation from a standpoint of opportunity. So, pretty well balanced globally, a little bit more of an emphasis on the UK on the European markets, given some big deals. And a little bit of mix out of hedge, but moving to some of the other alternative asset classes, is how I characterize the story.

Great. By the way, is the $140 billion PIMCO included in the $212 billion for the quarter of new wins?

No.

Okay great. Thanks guys.

Ashley Serrao, Credit Suisse.

Good morning. Jay, the asset-management consolidation has been a theme and you've been active with GE, and it looks like segment margins are moving the right direction. But when you think about future with investment franchise, do you think you had the right mix of active/passive product or the right European footprint and would you look to add more capabilities via M&A?

Yes Ashley, I would say that the GE acquisition was a big step forward in providing a more diversified and frankly, active oriented asset classes, not only traditional equities and fixed income, but also in the alternative classes. So, that was the biggest gap that we had and I think with nicely filled that gap. You heard from Mike's commentary that we're off to a good start with GE asset management.

I think we've got a pretty decent balance when you look at our passive, which still dominates the AUMs, and the active business. Increasingly we are investing, as we talked about, in ETFs, and we got a good ETF quarter. Not just ETFs, but higher revenue yielding ETFs, which is what I think what drove the 5% year to date and the 5% quarter-to-quarter revenue uptick.

Multi-asset class solutions was another category where solutions generally, but when we can combine the passive and active strategies to produce outcomes. Was also a good statement in the third quarter, we had good uptick in flows in the multi-asset class. From an asset class coverage standpoint Ashley, I think there aren't any huge gaps. Again, I think the GE plugs a big gap and we have high expectations that the GE group who have good track records and a lot of their strategies can be leveraged against the distribution prowess of State Street.

I would say that the other last point I would make is that from a geographical standpoint we are still focused on ETFs in Europe, and I would say that's an unfolding story as we build up some of the distribution into the private banks and continue to enhance the product lineup. Your starting point was the consolidation in the asset-management industry and I happen to think that we're probably at more the beginning of that phase than the end. But we feel pretty good with regard to the competencies that we have to compete active, passive and solutions market globally.

Okay. Thanks for all the color there. And Mike, can you talk about the tactical usage of wholesale funding in 3Q and just walk us through the puts and takes for your 4Q net interest revenue guidance please?

Sure. So Ashley, first in terms of wholesale funding, we did expand our use of wholesale funding in 3Q relative to 2Q by approximately $2.5 billion, and we did that basically to accelerate some of the CD issuances that would otherwise would've had in 4Q under a normal operating environment.

Just given all the uncertainty and the turbulence as a result of money market reform, we just thought it was prudent to go ahead and essentially advance finance with higher levels of wholesale CDs in the 3Q. And so that cost us obviously some NIR, but we expect that to be really relatively temporary, because I would expect to get back to our normal in 4Q.

So as we think about the roll-forward from 3Q to 4Q, it really actually is mainly the story that we've talked about previously. The portfolio turnover, particularly in Europe, continues to see maturing securities at higher yields than what we are able to reinvest those funds in at today. So as a result of that grind in the rates we would expect to see modestly lower NIR in 4Q versus 3Q. There are a lot of moving parts in any given quarter, but those are really the headlines.

Okay. Thanks for taking the questions.

Brennan Hawken, UBS

Good morning. Thanks for taking the question. So, just a question on Beacon for next year. I know Glenn touched on it, but just to dig a little deeper.

Initially I think that the profile for cost savings in the program was to show an increase in 2017 versus the savings you initially expected in 2016. Normally when these programs are devised the second year it works out better than the first, why shouldn't investors believe that that general profile and trajectory wouldn't remain intact despite -- and the idea that you had better savings this year would only lead to even better results next year?

Sure Brennan. It's Mike. In terms of a Beacon, first maybe just stepping back from your question for just a second. I would emphasize I really like we'd done a very good job in terms of project Beacon, not just on the expense side, but also some of the improvements that have helped our overall service levels for our client. So overall, we're feeling really good about the program at this point.

In terms of your question specifically around the savings, the net savings in 2017 versus 2016, at this point, Brennan, we expect that there will be a continued uptick in investments that we're making around Beacon, and we believe that those investments will pay off handsomely in 2018, 2019, 2020. But as a result of accelerating some of the savings into 2016 and given just the track record that we are on right now, we think it is also a good idea to look to accelerate some of the investments. So that includes investments in IT, development spending, testing, infrastructure, all things that we believe will position us with even more confidence for 2018 and beyond savings.

Okay great. So a net number and there's a lot going on underneath the surface (multiple speakers). Thanks Mike.

And then a follow up, pulling back a little bit. When we think about the pressure that is expected to come to bear on, particularly for the asset-management business, the broker sold active side and your clients there from DOL. Is there a way that you are adjusting your services or offerings or positioning yourself to provide further and more enhanced support for those clients as they work their way through this significant change? And how can you basically make sure you are well-positioned to capitalize on potential opportunities as they come out?

Yes Brennan, let me handle that question. I'll take it in two dimensions.

I'll first take it from an asset-management dimension, which maybe wasn't where you were initially headed. But from a fiduciary role, the impact of that on product and distribution, I think it leads to more model-based product. And as is Jay just recently in the last couple of weeks announced a distribution agreement with RBC where they are using -- we've got an investment and a robo advisor, which we'll use the robo advisor to provide asset allocation among ETFs sold through the RBC distribution channel. I think that model, which in this case happens to be sponsored by SSGA, is one of the things that you will see going forward, given the impact of the fiduciary role.

I think if you flip over to the asset servicing side, the fact that we have invested heavily in the ETF servicing platform to provide a lot of online metrics to not only authorize participants but to distributors, position as well as ETFs and other more quantitative model driven products are packaged in order to satisfy the need for the fiduciary rule.

I think you can also say, and this is not a direct link, but the work we are doing in Beacon, which has the effect, and we are already seeing some of this from a service-provider standpoint of giving our clients full transparency into the calculation of net asset values and all the things that result in end-of-day pricing for a product or a group of products, I think advantage the distributors from a standpoint of being able to pull all that together on a timely manner in order to price products at the end of the day.

I would say in some it would be on the servicing side. I think ETF and other quantitative model, different products will be a key contributor to how distribution -- really how product evolves to suit the fiduciary rule. And I think some of the work we're doing in Beacon, the speed, the turnaround, the transparency of pricing will also advantage the product manufacturers who are key clients in order to provide effective packaging of product to meet the new fiduciary rule.

Great. Thanks for all that color.

Ken Usdin, Jefferies.

Might be a little bit of a subtlety, but seems like a slight change in your outlook for full-year fees kind of coming in more flattish than modestly higher, and you had a really good quarter in aggregate. So I'm just wondering, is there something that we should be thinking about third to fourth, or is there just a little conservatism built in given the macro environment?

Ken, it is Mike. Is really the latter. A couple of things, and again, I view these as very minor tweaks as opposed to anything wholesale. But if I look at the macro environment for a second, the currency impact particularly in the UK is a headwind for the rest of the year as compared to where it was earlier in the year pre-Brexit.

As an example, the pound-based revenue that we had is approximately 8% of our overall revenue. We get some benefit obviously on the expense side of that, but if I just focus on the fee revenue, the weakness in the pound hurts the translation to US dollars.

Second, as Jay talked about a minute ago, there continues to be some risk off in the environment. And just even looking at some of the mix change for example from the outflows from hedge funds is the mild headwind, for example for the AIS fees. And then I look at the S&P 500 this morning, I think it was at 2,143 and that's off from where it has been. Again, Ken, I really view these as tweaks, hopefully three months from now we'll look back and say it was conservative, but that's the basic thinking.

Okay. Thanks, Mike. And then similar question on the expense side. Costs came in pretty good again, can you help us understand how much of that Beacon $165 million was already in the third quarter run rate as opposed to lingering pieces yet to come? And the type of magnitude of third- to fourth-quarter step up that you are expecting under the surface? Again, I know you get will help there on the FX side, so just helping us understand the moving parts there too.

Absolutely. First of all on expenses, the Beacon savings, we really have at this point captured the Beacon savings that we expect for 2016 run rate.

So as an example, we expect net investments in fourth quarter of 2016 to exceed the additional savings that we will get in 4Q 2016. Now as I talked about earlier, we expect those investments to pay off very well in 2017, 2018 and 2019, particularly in 2018, 2019. We think given our track record we think that is very shareholder friendly to make those investments at that level.

Round numbers Ken, we are looking at approximately $10 million of additional investment spending for Beacon 4Q versus 3Q. So it is not huge, but it's enough to potentially move the needle. And the other piece that just continues to be an area of pressure is the regulatory expense, particularly the RRP spending, to be focused on for the July 1, 2017 submission, continues to be material.

But I think if we step back from the details in your questions, I would come back to the fact that I think we've done a very good job at managing expenses overall for the full year. Project Beacon obviously has been a big piece of it, but also just clamping down on all the areas, and we are real pleased to be in a position to say that we expect a full-year expenses to be below that of 2015 ex-GE.

Mike, just one quick follow-up, sort of last point there, do you think that's an achievable goal to look forward to again on the operating basis ex-GE type of thing to try to keep that cost outlook as flat as possible as you look forward?

Ken, I think first I'd say it's a little bit early to be giving 2017 expectations, but I think it's fair to say to your underlying point that regardless of the environment, expense management is going to be a very high priority for us next year.

And again, as I said, in this difficult environment, to be able to achieve positive fee operating leverage for the first nine months is a really good accomplishment. And next year we have got the Beacon saves of $125 million, we expect to get some additional benefit from replacing the outside consultants with FTEs, which is a positive economic trade, so we'll get some carryover benefit from that in 2017.

And we continue to focus on the margin target that we talked about back at the Investor Day of 31% for 2018. We continue to rivet on that. I would say too early to give you specifics, we'll give you more in three months, but those are the areas that we are really focused on.

Okay. Thanks a lot, Mike.

Jim Mitchell, Buckingham Research.

Good morning. Maybe we could talk a little bit about in this stress test your binding constraints, the leverage ratio, [Teroh] had a speech where he talked about in the future stress tests maybe proposing keeping (inaudible) and assets flat. How big a help would that be for you and the stress test? It's not always so easy for us on the outside to see the moving parts intra quarter, so is it fair to think that could be a material help in future CCARs?

Jim, it's Mike. First of all a couple of things broadly and then come back to your specific question. First the rule of speech and the NPR that came out that day, at this point it is simply a proposed rule, so I think until things get finalized, I wouldn't overweight them too much.

But your underlying point is an important one. Yes. Keeping the balance sheet flat as opposed to the previous fed modeling, which had the balance sheet growing under the stress scenario, is particularly helpful to us because tier 1 leverage rather than the risk-based ratios as been our binding constraint historically.

So, again, I don't expect that there will be a lot of impact on the next CCAR, because it sounded like most of the impact would come into play beginning with 2018 CCAR. But that is certainly a helpful item, and some of the other potential changes which impact the risk-based capital ratios, again, would likely have less impact on us because the tier 1 leverage has been our binding constraint.

But I would say it's early, Jim. It's a positive, but it's also it's an early-days positive at this point.

Okay. Fair. And then maybe on [NIAL] outlook with a rate hike potentially in December, how should we think about the impact over the following 12 months, any thoughts?

Sure, Jim. First of all, a rate hike, if I just isolate on that causal factor first, I would expect a rate hike to be helpful, to be accretive for us. I would expect it will probably keep less of the benefit from the next fed fund rate hike that we got from the last one which almost all of it accrued to us. I think will probably have some modest increase on the liability side for our clients.

But do expect it net/net to be accretive. First of all it obviously helps us with our floating-rate securities here in the US. It helps us with our loan book, which is mostly a floating rate. It helps us with obviously the central bank deposits, and so all of that I would expect to be greater than the impact on the client deposit rates.

The other piece, just to be balanced though, it would likely translate to a little bit higher wholesale CD costs and also our senior debt, a significant portion of that is floating rate. So it's not all gravy, but it would -- I'd definitely expect it to be accretive.

Just to be balanced though, your question was focused on the US. As I mentioned earlier, we do continue to see the negative impact of the portfolio turnover in Europe, the combination of negative rates and also depressed spreads because of QE over there. You'd want to balance that out, and obviously when we talk beginning in January about 2017 outlook we will give some perspective on that.

Okay. Great. Thanks for taking my questions.

Brian Bedell, Deutsche Bank

Great. Thanks for taking my questions. Jay, maybe if I could ask about the middle-office business. Do you see at this stage of the game where we're moving into a more competitive environment for active asset managers, essentially more outsourcing of mid-office from asset managers? Do you expect more big contracts coming from large asset managers in the future?

And it sounds like Bank of New York is also getting a little bit more aggressive, obviously with [Trow] deal and also even within their more standardized. If you could differentiate yourself in the space and talk about whether you think there is change in the growth outlook and in pricing dynamics in mid-office.

Sure, Brian. Let me take that. The short answer is yes. As there's more pressure on returns, which translates into more downward pressure on the asset-management industry, there's been an acceleration, I'll call in the last couple of years, towards outsourcing more. And some of the deals that we spoke about, Allianz being probably the most prominent ones is anchored in not only back office, but middle office.

I would say we're probably seeing more demand for more comprehensive solutions than I can recall in the past several years, and I think it's a direct result of your comment. So, I do see middle office, back office, comprehensive outsourcing deals, transfer agency, and more and more are coming at us in a bundled way or even in the form of, and I would say the PIMCO and Allianz separate transactions. Both reflect consolidation of more work with a single provider. So I think all of that is in play and all that should accrue to our benefit.

If I isolate our middle office for a minute, you are familiar with the league tables, we have over $10 trillion in middle office assets that we support on our technology. And like most of the activities that we conduct in the asset servicing business, scale matters. So, with over $10 trillion in scale, we have the ability to drive down unit costs, we have the ability to invest disproportionately in our middle-office platform. And so I take you back to Beacon, which is as we automate create more straight through processing, as we on the back of the middle office have a data GX aggregation product, the scale should provide a significant advantage for us.

I think product for product we compare very favorably from a middle-office capability and standpoint because of the breath of services that we support. And I do think, and this is a pivot, if you go from middle office to what is the next frontier, it's who is going to win the data aggregation war. And we've got just short of 10 clients who have committed to us to allow us to be the data aggregator, not just for the information that we hold in our back and middle office, but for all of their other custodian activities as well. And to me that ties directly into Beacon, but the long game here is that if you can be the data aggregator, you get the preferred look at data and analytics capabilities, we referenced a few in my prepared comments.

So I drift on your question, but I think it's a good one, which is there is continued and there will be ongoing pressure in the asset-management industry, all of which should position us to provide more services. Not only more services, but more value-added services as we move up to the data aggregation and global exchange level.

That's actually a good follow on, maybe just one more mid-office and then on the data aggregation, and that would be on mid-office, you mentioned using scale as a competitive advantage. Do you think that would translate into lower pricing for the industry? In other words you feel you can compete more on price rather than improve the margins in that business, that would be one question.

And then you just mentioned on data aggregation, and I guess since I usually ask you this at Investor Day about the revenue potential impact for that. So I don't know if you can, given you're not doing an Investor Day this year, provide any sort of big picture idea about whether you think there will be some revenue traction in 2017 from the data aggregation initiative?

Sure. So let me take the first part, first middle-office pricing, scale effect, margin question. I think that I'm convinced that because of the scale we have, we have lower unit cost to perform in the middle office. We've a good job as standardizing that. But we don't sell it that way.

What we sell is a middle office still is usually transplanting something that is done internally to an outsourced model, so we're selling the value, not the price advantage. And I think that people that evaluate our middle office, they view it against their own in-house capabilities and they view us making the investment in technology usually in more contemporary platforms to be a big advantage.

So I would say the scale effect is to our advantage. We work hard not to lead with price, but yet lead with value and preserve the margin. The point is obvious, but as the asset-management industry is under pressure, we are feeling that pressure too. So the ability to differentiate and show collectively how we can provide a more effective and more efficient model when we combine our customers' front office, for our middle, back, et cetera, is really the way we look at that.

With regard to data aggregation and global exchange, I think it's a slow building opportunity. The -- I'll just pause on data aggregation for a minute.

The more you do, the better you get. The greater advantage you have, which is once we wire together not only our digital back and middle office, but we start to wire other custodians back and middle office. There's a huge advantage to somebody bringing business to us because we have already prewired those relationships. And so we're making a pretty big investment in what we call data GX, which is the aggregation layer of information, not just for State Street, but for other institutions.

I think that you've seen some of the media stats and other data and analytics products that sit on top of that. And I think that is when you will really start to see some revenue momentum. So I would say it's a slow burn but a steady upward bias on the revenue side. And as we get into 2017 we will see if we can find a way to provide some dimension around that for you.

That would be great. Thanks very much.

Alex Blostein, Goldman Sachs.

Hello, guys. Good morning. I want to follow up on the asset-management business with a couple of questions. I guess just from the GE business clearly the margins are pretty low, like in the low teens right now. As you guys think about integrating this business, what do you guys think the margins can ultimately go to, that is part A.

And part B, I recalled when you announced a deal, there was a piece of the deal that hasn't closed as part of that transaction. Maybe an update on where that revenue stands and what is the probability of that revenue chunk coming in over the next few quarters as well?

Yes, let me take that Alex. As you point out, the GE asset-management margins at the beginning are not what we would like to see, and part of the synergy opportunities which is inherent in the deal and which is likely to unfold over the next two or three quarters. Should get that margin at least up to where SSGA is, but we have margin aspirations that far exceed what SSGA is today, and that's part of the mix that leads to the 31% and 33% margin targets in 2018 in 2020.

I think that at least the first couple of steps of that are well understood, and we are well on our way and I have high confidence that we will achieve the synergy opportunities.

With regard to the incremental GE business, other GE affiliates that could bring into the mix, making great progress. Huge and helpful support by GE and I suspect that we will bring most of that incremental opportunity into this mix. Which is office of CIO business, which just makes is bigger and more impactful in that segment.

Yes makes sense. And Mike, quick question for you on the balance sheet and really around the deposit pricing. You guys have been able to successfully flex your muscle in the non-US front for the last couple of quarters. Stepping out a little bit in 3Q., how much room is there to continue to charge for deposits outside the US, because obviously it's been helping you guys funding cost.

Sure Alex. First of all, I appreciate the kudos, and you're absolutely right, I think we have done a very good job at that in 2016. The -- I would say a couple of things, first this continues to be a work in process. And as we look at 2017, as I mentioned earlier, one of the headwinds that we have overall for NIR is the portfolio turnover, particularly in Europe, with the negative rates and the very low credit spreads. The grind is truly material for NIR for 2017.

One of things that we're looking at is, what -- can we offset that by additional actions on the liability pricing side? And I would say at this time we're simply looking at various options, not at this point ready to announce some additional actions, but that is an area that we are keenly focused on.

And then second, obviously if the ECB cuts further, we would have to look harder ourselves at following at least any decrement that the ECB would make. Early days, but this continues to be a huge area of focus for us, Alex, both here in Boston as well as our EMEA Management Team.

All right. Thanks.

Mike Mayo, CLSA.

Hello, can you talk about the CFO transition? You're 30% done with Beacon, 70% more to go. And you have one CFO passing the baton to another CFO in the midst of a major restructuring and digitization program. Also, I wasn't clear, so Mike will be leaving December and then you have a new CFO coming in March, or can you just explain how that handoff works?

Sure. Happy to do that, Mike. First let me talk about the baton handoff. Eric Aboaf joins mid-December and so he will observe the year-end close, Mike will be with us through year end and through essentially the close of the 2016 books. And then Mike will transition out, Eric will be on board.

I might just take this opportunity just to talk just for a minute about Eric's background. I think you know some of it, but he in his most recent six years with Citi he was the Treasurer but before that for I think an equivalent period ran the financial planning and analysis part of Citi, and within that also oversaw the custody business. So importantly he comes to us not just with deep financial expertise, but with very direct experience in the asset-servicing business.

With regard to your opening point, the Beacon activity, well Mike certainly reports on and has some visibility to it is largely centered in the operating environment. Mike Rogers, who is the President and Chief Operating Officer is really on point with most of the Beacon activity.

Some of it would affect the corporate support groups, but it is primarily in the asset servicing, custody, middle office, back office. I would see no blip in transition and would only hope that Eric with his knowledge of this business might bring a fresh set of eyes, a new insight to what more we can do. And I think to an earlier point, and you seen it this year.

We started out with a plan for Beacon, we accelerated that plan. Nobody here is expecting the sun to shine on the environment, so we are working hard to find new opportunities in order to accelerate Beacon, expand Beacon, and I would hope that Eric would be nothing but a fresh set of eyes to see what things we might've missed.

Just one follow-up, your year to date pretax operating margin of 29% is flat year over year and it's below some of your peers. I know your target is 33%, so in simple terms, like if you are explaining -- your elevator pitch, why and how can the margin improve from 29% to 33%?

Well Mike, it's simply through the, primarily the execution of the Project Beacon. We do expect the expense saves from Project Beacon to drop to the bottom line and ultimately by the culmination of the program at year-end 2020 to be at that 33%.

I would also suggest to you that you will have an even earlier milestone to look at, given that we are focused on the 31% margin in 2018. So there will be a report card coming up on that Mike quite a bit sooner.

Let me not lose the opportunity. I know with this audience and this discussion we tend to focus on the cost effective Beacon, but I can't overstate enough how impactful it is when our clients start to see the impact of better data, better information, they now have a transparency into how we make the sausage with regard to net asset value calculation.

When your clients start to see the positive impact of this effort, it just energizes everybody to go faster, do more, and we've started to see that just in the last couple quarters.

Thank you.

Betsy Graseck, Morgan Stanley

Hello,, morning.

Morning.

A couple of questions on the balance sheet. Just wanted to understand if you feel like there is any opportunity to be pulling down non-operating deposits from here, or have you done everything that you think you need to do on that side? Just thinking about the balance sheet size and how you think it is going to traject over the next couple of quarters.

Sure Betsy, it's Mike. I think it's fair to say that particularly with money market reform and the turbulence there, that there is likely to be some upward pressure on non-operational deposit levels in Q4. I feel good as we look back at 2015, we did a real good job at managing that, mainly focused on client pricing and really working with clients to figure out other alternatives for them. That is an area where there's certainly the potential for upward pressure.

Beyond that, I really would go back to some of the earlier discussion around Europe. I think that's the area that we're also focused on in terms of tighter liability pricing, some of that may also push down excess deposits which would be just fine. But the liability pricing in Europe will also be a high priority for us over the next several months.

Okay, and then we obviously had one rate hike and we are expecting another one in the not too distant future. As these rates have gone up, is there anything that you can point to, to suggest that maybe some of your non-operating deposits should be classified as operating? Could you walk us through what the timeframe is and the fact pattern that you need to see in order to do that?

And I'm asking that question with the background of trying to understand if there is an opportunity to potentially extend durations of the security book and pick up some NIR that way over the coming quarters.

Sure. So Betsy, first it's early days, but we do have work underway. And really it is an ongoing initiative, not a one-time episodic event to look at and carefully characterize our deposits as operational or non-operational. And I would expect that work will continue to 2017 and at this point out expect that we will probably get some benefit as a result of that.

At this point it is way too early, I wouldn't try to quantify the NIR benefit for you or the overall level of deposits, but I do think that is an area of upside opportunity.

Okay, but no change to the construction of the investments at this stage?

Not at this point, certainly no change in philosophy. If in fact we did see some of the deposits that have historically been characterized as non-operational, if we saw them being more sticky, then that's something will certainly look at, at that point in time.

All right. Thanks.

Gerard Cassidy, RBC.

Good morning. Jay, can you share with us, obviously the GE deal has closed now, State Street historically over the years has done acquisitions, what are you seeing in terms of the outlook? Not asking if you are going to do a deal next quarter, but can you give us some color of what is going on in terms of potential further acquisitions, either in custody or asset management?

Yes, Gerard. I would say we just came through a cycle of three year strategic planning with the Board, and acquisitions were not a big part of that conversation. So I would say that the big A is unlikely, the little A is maybe more likely. And when I think of places where we could perhaps use a little help, and it is probably more the product side.

There's two places I land would be in asset management, and not contrary to my early point, I think we've got a pretty comprehensive set of capabilities in asset management. But if there was a team or there are a couple of narrow gaps in the asset classes that could be in scope.

And then the other big place that I would talk about potentially growth or expansion through acquisition would be the business that we'll call global exchange, which I referenced earlier in the data aggregation. And then more importantly on top of that the data and analytics business, the data and analytics opportunity which I think is significant and is a real battleground for a number of different financial firms.

It would be my expectation that we would -- if you take data and analytics and separate those two things, the data is one part and I think in some respects it is the harder part, which is aggregating and providing real-time data insights to the front office. But on top of that is analytics, whether it's risk analytics, whether it's some of things we do with big data, I could see smaller acquisitions on the data and analytics side, which would take advantage of the data position we have to provide more robust analytics.

Those would be the two places that potentially we would be advantaged by smallish acquisitions versus organic development. I don't see in a pure custody, just to state the obvious.

Okay. If the pure custody episodic event happened whereas somebody's large portfolio came up, no interest, or you would have to always consider something like that?

I think two things I would say, one I think the regulatory hurdle would be high for the big asset servicing firms to be further concentrated in the custody business. And then I would also say that traditionally whether it was the Deutsche Bank acquisition or IBT or even Intesa Sanpaolo, it filled a gap. Deutsche Bank in Europe and Intesa in Italy, and I don't see real gaps. If I look at our geographic coverage, we would love to be doing more in China and India, we're all over it, acquisition's not likely way to get there.

Other than that, we're pretty well developed in most of the markets that would be attractive accent servicing markets. And if you looked at it through a product lens, Gerard, I think if you look at it all the way from beta where we have over 60% share on the ETF servicing to the traditional asset classes to the alternatives, again, we're pretty well positioned. We think there's a meaningful opportunity in the real estate asset class which is brimming with assets to do more outsourcing there. I just don't see big gaps and I think it will be a high hurdle from a regulatory standpoint.

Great, and then shifting to the balance sheet Mike, I know the securities portfolio dwarfs your senior secured bank loans that you show on page 12. The $3.5 billion portfolio that you have, can you give us a flavor for where you see that going over the next 12 months relative to the balance sheet? Is it going to grow our stay that size? And second, what are you guys assuming for the through the cycle loss rate from that portfolio?

So Gerard, first in terms of the overall size, again, no change in overall philosophy. So I would expect that our leverage loan block would continue to be a relatively small portion of the overall balance sheet. Perhaps modest growth from where it is today.

We have a yield on that block currently of approximately 3.7%, so it's an attractive book and at this point we've had, knock on wood, a very good credit experience there. I feel like we're doing a good job of underwriting and managing the credits there.

I really wouldn't put at this point, Gerard, a long-term expectation out there. Again, I would expect to beat the overall portfolio averages, given our credit underwriting and our bias towards being at the higher end of the scale. At this point I really wouldn't try to put a long-term estimate on it, but it is something that we will continue to manage and we are very sensitive to the changes in the credit cycle.

Thank you. I appreciate the answer.

Vivek Juneja, JPMorgan.

Have a couple of questions. Firstly on servicing. Wanted to go the back to the first question, if I look on page 12 of your supplement, and I look at year-to-date 2016 versus year-to-date 2015, servicing fees are down 1.1%.

Trying to reconcile that with the earlier comment. And even if I adjust that for the FX fee revenue, let's assume we give all of that hit to servicing, it's basically flattish year-to-date 2016 versus your 2015. And I'm comparing that with your AUCA 3Q 2016 versus 3Q 2015, it is up 7%. And in fact if I do a similar rough FX adjustment, probably up 8%.

So can you help explain A, the year to date you are down 1.1% in your operating servicing fees revenues, why that is the case and why it is such a big gap versus your AUCA?

Sure, Vivek, it is Mike. First of all, a couple of things are very important here. Number one is, we talked about earlier, we've seen a challenging change in the business mix here in 2016 relative to 2015. We've talked about this on prior calls. We've seen, for example, more pressure on emerging markets than what we've seen here in the US. So basically the impact of seeing rotation from emerging markets, for example, to the developed markets, particular the US, has a real negative impact on the ratios that you are looking at there.

Second, as we talked about earlier, we've seen some outflows in terms of the hedge funds in particular, not all hedge funds, but certainly that has been a negative in terms of our overall AIS revenue. And as we've talked about previously, our AIS revenue also tends to be at a higher unit revenue per asset service than the other books of businesses.

And then on top of that, if you do adjust for currency end-markets, that really is the story. All the more reason that I would strongly suggest you look at the overall margins on the business as opposed to looking at the ratios relative to assets, because all the factors that I just mentioned play havoc with those ratios, particularly if you're looking at it in a short-term period.

Okay got it. So it's the higher fee businesses that are really facing more -- it's a mix shift there.

And importantly, obviously we don't have a crystal ball in the future, but as Jay talked about earlier, we do expect over the long haul to get some help from things like additional outsourcing opportunities for private equity funds, as well as real estate funds. That would actually help the mix over the long term.

In addition, I think it's fair to say that the over the long term we think emerging markets is in fact a very good place to be. And ultimately, we would expect that will see some rotation back there and we'll see some help on the currency side there relative to what has been a challenging environment, certainly call it over the last year.

Okay. Got it, got that one. EPS fee rates, could either of you talk a little bit about what you are seeing on EPS pricing? There has been more talk about how much your competitors are cutting pricing on those.

Yes, Vivek, let me take that, this is Jay. There has been, and I think that we were a part of that mix several quarters ago, and we adjusted some of the fees on some of our, I call it commoditized type ETFs.

We continue to focus our efforts on introducing ETFs that are more differentiated and therefore, have better revenue characteristics to them. So, we don't foresee, although we always look at whether or not it makes sense for us to adjust fees in order to gain volume. But again, this is on the more commoditized ETFs. I think there will continue to be pressure on those commoditized ones. Mike, I don't know, do we have ETF yield for the third quarter, the $12 billion in ETF?

I don't have that off the top of my head, Jay. We can certainly with IR follow up on that separately.

We can get you that, Vivek, which might give you a sense of, close to 10 basis points would be the yield on the ETFs flows in the third quarter, just to give you some sense.

Okay great. And that's staying fairly sticky, Jay, than last quarter or two after you cleaned up the pricing a couple of quarters ago?

I think it is fairly sticky other than, keep in mind, Spy, which is the big S&P 500, can act like a trading security, particularly around quarter end. So if I isolate that, I would agree with your comment. It's been pretty steady.

Okay. Thank you.

Brian Kleinhanzl, KBW.

Thanks. Just a quick question on the GE deal and potential expenses that you are looking for in the first half of 2017. Can you just maybe outline, not the number, I know you won't give that, but where you expect to see the expense saves coming from? I know you mentioned before that they were an asset servicing client already, so I would imagine expense saves there, is it just personnel or where else could it be coming from?

Let me start that, and then Mike can jump in. If you look at the GE asset-management deal, whenever you combine two asset management deals you'd expect a fair amount of synergy in the core corporate support kind of activities, and so that is one big bucket of opportunity.

Another would be that while GE brought some capabilities that were not robust, at SSGA, namely the alternatives, there were some alternatives to SSGA and maybe more importantly, they also brought a pretty significant fundamental equity and fixed income set of capabilities. And shortly after the announcement, we announced a reorganization which brought those groups together.

So there's a fair amount of synergy just tied up, and when you take your fundamental equity business at SSGA and combined with GE, and get synergies out of that. So I would say it is in the corporate support areas and also in the different asset classes where, in many cases SSGA had some capabilities, just not as robust as the GE asset management.

The only thing I would add, Jay, and Brian, to your question is, while we haven't given you specific synergy numbers, I would remind you that we funded the GE acquisition through the pref issuance and it's a result of expecting that the overall transaction will be -- we expect to be accretive in the first full 12 months beginning July 1, 2016.

You can basically conclude that the earnings contribution we expect from the organization including the synergies that Jay just mentioned would be more than sufficient to pay for the cost of the prep. So that at least gives you a way to size what we are expecting from the expense synergies and the additional revenue that Jay mentioned earlier.

Okay. Great. And just one quick one. I know you mentioned the alt servicing space a couple of different times here as a source of fee pressure, but are you seeing greater pressure than what the overall industry is with regards to the redemption of the overall performance? Are they done, say x-percent, are you seeing something a multitude above that?

No. I would say no and probably even a little less. We're anchored in some of the bigger, more institutional names, and I'd say they have weathered the storm a little bit better than the rest of the industry, so no. And we also, it is a point of view, but I think if you look at performance, performance recently has improved, and so I suspect this is not a secular, but rather a cyclical trend where assets flow in and out.

Okay great. Thanks.

Geoffrey Elliott, Autonomous Research.

Thank you for taking the question. On the GE asset-management acquisition, when you talked about that before it sounded like you were expecting a ramp-up in expense saves and synergies to get started in 4Q, and now it sounds like 4Q, the contribution's going to be similar to the third quarter and then the ramp-up happens more next year. So I just wondered if there had been any changes to the way you're thinking around the timing there.

Jeff. It's Mike. No particular change. We do expect to see some incremental benefit in Q4 from the organizational changes that Jay mentioned a minute ago. The main point here is to emphasize that we expect the bulk of the expense and revenue synergies to really kick in Q1 of 2017.

Great. Thank you.

Thank you, Amy, and thank you, everyone for joining us on the call. We look forward to speaking with you in January when we discuss the fourth-quarter results. Have a good day.

Thank you, this concludes today's conference, you may now disconnect.