道富銀行 (STT) 2020 Q4 法說會逐字稿

Good morning, and welcome to State Street Corporation's Fourth Quarter 2020 Earnings Conference Call and Webcast. Today's discussion is being broadcasted 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 hosted on the State Street website.

Now I would like to introduce Ilene Fiszel Bieler, Global Head of Investor Relations at State Street.

Good morning, and thank you all for joining us. On our call today, our CEO, Ron O'Hanley, will speak first. Then Eric Aboaf, our CFO, will take you through our fourth quarter 2020 earnings slide presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.com. Afterwards, we'll be happy to take questions. (Operator Instructions)

Before we get started, I would like to remind you that today's presentation will include results presented on a basis that excludes or adjusts 1 or more items from GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our 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 and in our SEC filings, including the risk factors in our Form 10-K. Our forward-looking statements speak only as of today, and we disclaim any obligation to update them even if our views change.

Now let me turn it over to Ron.

Thank you, Ilene, and good morning, everyone. Earlier this morning, we released our fourth quarter and full year 2020 financial results. Before I review our results, I would like to reflect on how State Street successfully adapted to the unique operating environment in 2020 supporting our clients, communities and the financial system, all while advancing and positioning the business for future success.

2020 was a year like no other in recent memory. As we entered the year, few could have predicted how volatile the operating market -- operating environment would be as the health crisis precipitated by the COVID-19 pandemic resulted in a global economic recession, which the world is still dealing with. Against that backdrop, government, central banks and financial institutions like State Street needed to act quickly to assist in limiting the impact of this crisis on the financial markets and the global economy. 2020 also highlighted a number of racial and social injustices that we must act to address. When faced with these economic and social challenges, I am proud of how State Street team members around the world lived our values of being stronger together and a trusted and essential partner to our clients and communities, all while generating solid earnings growth for our shareholders in 2020.

As the pandemic worsened last year, our global operating capabilities allowed us to adapt quickly and deliver products, services and results for our clients when they needed us most. In addition to the client-focused product and service enhancements we made in 2020, we continue to transform our operating model by simplifying our operations, increasing automation and driving productivity and efficiencies while continuing to invest in our business.

State Street has been on a journey to transform its operating model for the last 2 years, and we expect that we'll be able to deliver further improvements during 2021 to drive cost lower, self-fund investments for the future and transform how we compete and operate in the years ahead. At the same time, the volatility in markets demonstrated the strength of our global FX franchise, where we retain the #1 market share position with asset managers and achieved an approximately 30% uptick in revenue. We continued our intense efforts to innovate throughout 2020 with the further development and delivery of the State Street Alpha front-to-back platform, which has gained traction with clients. Through the open architecture nature of the platform, we have been able to rapidly increase functionality through a number of partnerships with leading data and analytics providers, unlocking new sources of revenue. We signed 6 Alpha clients in 2020, where early adoption has helped us accelerate our development. The Alpha pipeline remains strong.

While the Alpha platform remains an integral part of our future strategy, we also remain laser-focused on improving the financial performance within investment servicing, which is the core engine of our business. We recently enhanced our institutional services client-facing strategy, and during '19 -- and during 2021, we will leverage improvements in client coverage, segments and regions to broaden and drive investment servicing revenue growth over time. As a result, our strategic moves, the strength of our capabilities and operating model and the commitment of our team members enabled successful navigation of 2020 and improved year-over-year financial performance, which I will now discuss further.

Turning to Slide 3. Fourth quarter EPS was $1.39 or $1.69 excluding notable items. Relative to the year ago period, fourth quarter total revenue declined 4%, largely driven by the impact of interest rate headwinds on our NII results. However, fee revenue increased 2%, reversing recent trends and demonstrating an improved servicing and management fee performance as well as strong FX trading results. Despite an increase in transaction processing, total expenses were flat year-over-year, excluding notable items. At the end of the fourth quarter, AUC/A and AUM both increased to record levels, supported by higher period end markets. At Global Advisors, we had another strong performance in ETFs and cash. These results in both businesses provide good step-off points for 2021.

Turning to our full year 2020 results. We made solid financial progress relative to 2019 as we work to drive fee revenue growth higher and total expenses lower. Full year EPS was $6.32 or $6.70 excluding notable items. EPS results were up 17% and 9% excluding notable items, despite the dramatically lower interest rate environment. Supported by year-over-year improvements in servicing and management fees, very strong FX trading results and a higher revenue contribution from CRD, which continues to perform well, total fee revenue increased 4%. However, total revenue was roughly flat year-over-year as a result of the impact of interest rate headwinds on NII. Our team drove total expenses down 1.5% year-over-year, excluding notable items, as we continue to build on the strong culture of expense reduction that we successfully established in 2019. Operating leverage was positive and margin was up in one of the most challenging years in history.

To conclude my opening remarks, State Street faced a number of unprecedented challenges during 2020. As a result of our operational capabilities and innovation, we were able to successfully navigate those challenges, all the while acting as a trusted and essential partner to our clients and communities and generating solid year-over-year earnings growth for our shareholders. As we look ahead for the first quarter of 2021, our Board has authorized up to $475 million of common stock repurchases, which is in effect the limit set by the Fed. We are well positioned for and looking forward to returning significantly more capital to shareholders in the future. In addition, the Board has also authorized the partial redemption of our Series F preferred stock, which will further benefit our common shareholders following its partial redemption in the first quarter.

And with that, let me turn it over to Eric to take you through the quarter in more detail. And then I will return to update you on our medium-term targets.

Thank you, Ron, and good morning, everyone. Turning to Slide 4, and before I begin my review of our fourth quarter and full year 2020 results, let me briefly outline $145 million of notable items we recognized in the fourth quarter, which totaled $0.30 of EPS that will collectively help us deliver another year of declining expenses in 2021. First, we took an employee severance charge of $82 million to eliminate approximately 1,200 positions, mostly in middle management, which will be partially offset by in-sourcing and critical hires during the year. This complements the senior management reductions we made 2 years ago and the ongoing reduction of junior roles through automation that were deferred during the COVID-19 pandemic. We expect this to generate savings of approximately $120 million in 2021 and about twice that in the following year.

Second, we took a $51 million occupancy charge for real estate to reduce our total office space across 20 sites by about 1 million square feet or approximately 13% of our total square footage. This is the start of our process of reconfiguring our office space for a post-COVID environment. We expect this action to generate savings of roughly $30 million in 2021. We try to minimize repositioning charges, but we have delivered 2 years in a row of underlying expense reduction while investing in our business and want to do so again in 2021.

Turning to Slide 5. I will begin my review of both our 4Q '20 and full year 2020 results. As you can see on the top left of the table, we finished fourth quarter with strong revenues. Total fee revenue increased 2% year-on-year and was up 5% quarter-on-quarter. And while interest rate environment continues to be a headwind, the absence of the $20 million in third quarter true-up combined with a stronger-than-expected balance sheet growth led to a 4% quarter-on-quarter improvement in NII. Total expenses ex notables were flat year-on-year but increased 2% quarter-on-quarter, including currency translation and higher variable costs. On the right side of the slide, we show our full year 2020 performance. And despite the challenging operating environment, dramatically lower interest rates and a suspension of buybacks, we delivered full year positive operating leverage of 1.4 percentage points, a 50 basis point improvement in pretax margin and EPS growth rate of 9% excluding notable items. Our GAAP results were even better across the board.

Turning to Slide 6. Period end AUC/A increased 13% year-on-year and 6% quarter-on-quarter to a record $38.8 trillion. The year-on-year change was driven by higher period end market levels, client flows and net new business installations. Quarter-on-quarter AUC/A increased as a result of higher period end market levels and better client flows. At Global Advisors, AUM increased 11% year-on-year and 10% quarter-on-quarter to $3.5 trillion. The year-on-year and sequential quarter increases were both primarily driven by higher period end market levels coupled with net ETF and cash inflows, but offset by continued institutional outflows in the equity index product line. Our SPDR ETF business recorded its second highest quarter of net inflows, driven by strong U.S. and European flows, taking total net ETF inflows to over $43 billion for the full year, almost 30% higher than last year.

Now on to Slide 7. Fourth quarter servicing fees increased 1% year-on-year, including currency translation. The increase reflects higher average market levels, softer-than-expected sales in 2020 as well as lower levels of client activity and normal pricing headwinds. Servicing fees were flat quarter-on-quarter, including currency translation as higher average market levels were partially offset by a continued normalization of client activity. On the bottom left of this slide, we summarize some of the key performance indicators of our servicing business. AUC/A wins totaled $205 billion, while AUC/A yet to be installed amounted to $436 billion in the fourth quarter.

As we look ahead, we are focused on generating the level of gross sales volume needed to offset the typical client attrition and normal pricing headwinds, which we think is about $1.5 trillion or more of [new] (corrected by the company after the call) AUC/A each year. The amount of gross wins needed to offset these factors will vary year to year and be impacted by a number of factors, including product mix. This would include Alpha mandates, which were over 25% of our second half AUC/A wins, though, as I have mentioned before, the sales cycle and installation of these more complex solution-focused services take some time.

In 2020, we've had some strong success in growth across our top 50 asset manager clients as well as within our insurance and asset owner client segments. We have been disappointed, however, with our sales through our mid-sized asset managers in North America and EMEA and are implementing a plan to address these areas of opportunity. On the bottom right panel, we highlight some of these tactical enhancements to our institutional services strategy, which involves expanding coverage to a total of our top 350 clients and diversifying our pipeline across segments and geographies.

Turning to Slide 8. Let me discuss the other important fee revenue lines in more detail. Before I begin, you will notice that for the current and prior periods, we have reclassified the AUM-based fees that Global Advisors receives for acting as the marketing agent for the SPDR Gold ETF from FX trading services into the management fee line. Going forward, we think this reclass better reflects the management fee performance at Global Advisors. Inclusive of this reclass, fourth quarter management fees reached $493 million, up 3%, both year-on-year and quarter-on-quarter, including the impact of currency translation. Year-on-year management fees benefited from higher average market rates and the strong ETF inflows, I mentioned earlier, partially offset by money market fee waivers of about $3 million, net institutional outflows and the timing of cash outflows.

Our fourth quarter investment management pretax margin reached 32%, which you can see in our segment reporting in our financial addendum, and we generated significant positive operating leverage. Regarding money market fee waivers, we currently expect they will continue at the current rate of $5 million to $10 million per quarter company-wide in 2021, which is included in our outlook that I will discuss further shortly.

FX trading services had another strong quarter. Fourth quarter FX revenue increased 25% year-on-year and was up 20% quarter-on-quarter, demonstrating the strength of our top-ranked FX franchise for asset managers. Year-on-year and sequentially, FX revenue benefited from substantially higher indirect FX volumes as well as stronger market-making revenue on elevated volatility as we help clients rebalance their global portfolios in the light of ever-changing economic and political conditions. The full year 2020 FX revenue surge of approximately 30% will obviously make the 2021 year-on-year comparisons more difficult. Fourth quarter securities finance revenue fell 21% year-on-year, primarily driven by lower enhanced custody balances and agency spreads. Securities finance revenue increased 5% quarter-on-quarter, however, mainly as a result of both higher agency lending assets and higher enhanced custody balances as we saw demand for some leverage reemerge. Finally, fourth quarter software and processing fees were down 7% year-on-year due to lower on-prem CRD revenue. Software and processing fees increased 19% quarter-on-quarter as a result of sequentially stronger CRD revenue and positive market-related adjustments.

Moving to Slide 9. We show CRD revenue growth and business performance metrics. We have again separated CRD revenues into its 3 categories given the lumpy revenue pattern inherent in the ASC 606 revenue recognition accounting standard for on-prem revenues in particular. Fourth quarter CRD revenues fell 9% year-on-year, largely as a result of the timing of revenue recognition in the fourth quarter of 2019 but was up strongly at 16% quarter-on-quarter on higher renewals. CRD demonstrated very strong revenue growth for the full year, driven in part by the success of the CRD wealth strategy earlier in the year, with total stand-alone CRD revenues up 14% year-on-year and with the more durable SaaS and professional services revenues growing 18% relative to full year 2019.

On the bottom right of the slide, we show some of the highlights of the State Street Alpha front-to-back platform sales during 2020. In total, we signed 6 Alpha clients during the year, including 3 in 4Q, which included 1 new client and 2 clients converted from existing relationships. The Alpha pipeline remains promising as clients begin to realize the transformational potential of the platform for their technology and portfolio management needs.

Turning to Slide 10. Fourth quarter NII declined 22% year-on-year, but was up 4% quarter-on-quarter. The quarter-on-quarter increase in NII was driven by the absence of the $20 million true-up in the third quarter. Not including that true-up, the significant investment portfolio balance growth and higher average loans, coupled with a $17 billion of higher average deposits, which were worth about $10 million, and approximately $5 million of episodic FX mark-to-market swap benefits over quarter end were enough to offset the ongoing headwinds of the low interest rate environment on investment portfolio yields. Each quarter, we try to offset the persistent effect of low rates in the portfolio by taking these sorts of tactical actions. In some quarters, we'll be able to fully offset the headwind like we did here as we put the $17 billion of the deposit surge to work, but that won't be the case every time.

On the right side of the slide, we show our end-of-period and average balance sheet highlights. Last quarter, I noted how we expect to operate around $190 billion of average deposits, but that our deposit levels might increase given the Fed's continued expansion of the money supply. As it turns out, we've begun to see the tailwind and now expect to operate at even higher levels of client deposits and more in line with our fourth quarter average or even higher. We will be opportunistic from here regarding the deployment of cash and the expansion of our investment portfolio, but we also need to be mindful of currently tight credit spreads and the potential for OCI risk from interest rate changes.

On Slide 11, we've again provided a view of the expense base this quarter ex notables so that the underlying trends are readily visible. 4Q '20 expenses were held flat year-on-year but increased 2% quarter-on-quarter, excluding notable items and including the impact of currency translation, which was worth about 1 point in the fourth quarter. Relative to the third quarter and ex notables, we achieved a decline in the largest expense segment of comp and benefits, while occupancy and information systems costs were held flat. However, this was more than offset by higher transactional processing and other expenses in the fourth quarter. Transaction processing increased 10% quarter-on-quarter as a result of variable costs tied to higher market data volumes, sub custody balances and brokerage volumes.

Other expenses rose 8% quarter-on-quarter as a result of higher marketing and professional fees. For the full year, total expenses were down approximately 1.5% ex notables relative to 2019, demonstrating the solid progress we are making in improving our operating model as we continue to reduce expenses, self-fund investments in our business and more than offset natural expense growth. We want to be down again in 2021, which I will detail shortly.

Moving to Slide 12. On the left of the slide, we show the growth and evolution of our investment portfolio in 2020 as we supported clients with the MMLF, and we thoughtfully put higher levels of client deposits to work to support NII. On the right of the slide, we show the evolution of our CET1 and Tier 1 leverage ratios. As you can see, we continue to navigate this challenging operating environment with extremely strong and elevated capital levels relative to our regulatory requirements.

As Ron noted, we are excited that our Board authorized a new common share repurchase program for the first quarter, up to $475 million, and which is in line with the new Fed limits. We're also optimizing the capital stack by redeeming $500 million of pref stock, which will have a benefit to our common stockholders starting in 2Q.

Turning to Slide 13. You could see a summary of our 4Q '20 and full year 2020 results. I've already covered fourth quarter in detail, so let me say a few words about our full year results, given that we've been on a journey to turn around growth and improve margins and returns. Following a 3% decline in total fee revenues in full year 2019, we successfully drove a 4% increase in total fee revenue growth in full year 2020. Many initiatives came together to successfully make this happen. Following a 6% decline in servicing fees in full year 2019, we intervened to moderate pricing pressure, we revamped our coverage of our top 50 clients, and we executed on our Alpha strategy, leading to an increase in servicing fees by 2% year-on-year, which made for a real turnaround.

At Global Advisors, despite a challenging year on our long-term institutional index product line, our ETF business had a very strong year with total flows up 30% year-on-year, and our cash business performing quite well. Our FX trading services business had a remarkable year in 2020 as a result of higher market volatility and record client volumes, and we reaped the benefit of our prior investments in our #1 position with asset managers.

On expenses for the full year, we continue to demonstrate our ability to drive cost out of the business, recording a second consecutive year of total net expense reduction excluding notable items and adjusting for the acquisition of CRD, all the while investing in our products and capabilities. All told, excluding notable items, State Street delivered full year operating leverage of 1.4 percentage points, a 50 basis point improvement in pretax margin and EPS growth of 9%, notwithstanding some of the interest rate headwinds, and GAAP results were even stronger across the board. All that said, we have more to do in 2021, so let me get into it.

Turning to Slide 14. Let me cover our full year [2021] (corrected by the company after the call) outlook as well as provide some thoughts on the first quarter of 2021. As I usually do, let me first share some of the assumptions underlying our current views for the full year. At a macro level, our rate outlook assumes that short end rates remain relatively flat, and there is some modest steepening to the yield curve in line with the current forwards and anticipates modestly slowing prepayment speeds. We're also assuming around 7 to 8 percentage point-to-point growth from equity markets in 2021 as well as normalized market volatility, which impacts our trading businesses.

So beginning with revenue. We currently expect that fee revenue will be flat to up 2% for 2021. And fee revenue ex trading will be up 3% to 5%. This includes servicing fees growing towards the top end of the 3% to 5% range. Regarding the first quarter of 2021, we expect fee revenue to be down year-over-year by low single digits, perhaps down 2% to 4%, given headwinds such as the outsized FX trading revenues we saw last year due to volatility in the early days of the pandemic in March.

Regarding NII, we expect full year 2021 NII to be down 14% to 17% on a year-over-year basis as investment portfolio yields continue to grind lower from prepayments and reinvestments. Regarding first quarter of 2021, we expect NII to be down about 6% to 8% sequentially, driven by the continued impact of lower rates and day count, and should stabilize there and be somewhat range bound, assuming that our rate assumptions do not change significantly.

Turning to expenses. As you can see in the walk, we expect expenses ex notables will be flat to down 1% on a nominal basis in 2021 due to our continued focus on resource and infrastructure optimization and currently assume that currency translation will be a 1% headwind in this estimate. This net expense reduction includes approximately 4% to 5% of variable costs and ongoing business investments in areas like CRD, Alpha and tech infrastructure and automation. Regarding the first quarter of 2021, we expect expenses to be largely in line with this guide year-over-year and consistent with the seasonal expenses usually occurring in the first quarter. We also expect releases of provisions for credit losses during 2021 of at least 1/3 of what was built in 2020. Taxes should be in the 17% to 19% range for 2021.

And with that, let me hand the call back to Ron.

Thank you, Eric. Turning to Slide 15. I would like to update you on the current thinking on our medium-term targets, which we now aim to achieve by the end of 2023 or on a run rate basis for 2024. At this time, we still consider these target levels to be the right ones for our business and our shareholders. As a result, they remain unchanged, as you can see from the slide. However, we now expect that these targets may take longer to achieve than we had initially anticipated, largely as a result of exogenous factors.

We set these medium-term targets in early December 2018. Soon thereafter, interest rates fell as the Fed tried to stimulate a slowing economy in 2019 and then again, as COVID hit in 2020. The market went from expecting in 2018, the Fed to approach 3% by late 2019 to ending 2020 at 25 basis points with no rate hikes expect -- with no rate hikes expected until at least 2023. Meanwhile, long end rates also fell from about the 2.90% level at the time we gave the targets to just -- to average just 90 basis points during 2020. All told, we estimate that the sharply lower rate environment since 4Q '18 has impacted our 4Q '20 pretax margin by about 5 percentage points and ROE by around 2.5 percentage points. We also witnessed a large downdraft in global equity markets in late 2018, followed by a steady rebound in U.S. equity markets, but international equity market averages over the last 2 years were down.

While we are clearly operating in a dramatically different environment relative to when we set our targets, we have made real progress. We went from a 3% decline in fee revenue in 2019 to a 4% growth in fee revenue by reversing the trajectory of our servicing fees and delivering in our global markets business. We are evolving our business model to become an enterprise outsource provider, while at the same time, enhancing our investment servicing capabilities and client coverage, distinguishing us from our competitors. We've also systematically reduced net expenses ex notable items, which has helped us begin to close the margin gap to our peers by about 2 percentage points. We remain confident in our ability to deliver ongoing strong expense results.

In summary, though interest rates have impacted the timing of our medium-term targets, I am confident in the direction of our business, and we will continue to innovate to meet our clients' needs and drive business growth, while also focusing on improving productivity to achieve our goals.

With that, operator, we can now open the call for questions.

(Operator Instructions) Your first question comes from Alex Blostein with Goldman Sachs.

So first, Eric, for you, maybe just to clarify some of the comments you made around servicing fees. So you talked about $1.5 trillion in sort of annual client attrition. Is that a -- that's about 4%, I think, of your AUC. Is that sort of what we should be thinking about as kind of like a gross impact on revenues as well? And qualitatively, how does that compare to prior periods? Has anything changed that sort of drives this churn higher?

Alex, it's Eric. Thanks for the question. We're trying to be real clear about our sales expectations for our business because at the end of the day, that is part of what we do every day, and we do it across segments, across regions, across client groups. And I think to kind of give you some perspective on that, we wanted to be clear that to actually have to demonstrate net new business, right, so to be able to offset the nominal amount of attrition that we always get, which is a few percentage points, and actually overcome that plus deliver some amount of net new business growth, we need about $1.5 trillion of gross new sales a year to accomplish that. And we think that's what would really contribute to the rebound of growth that we'd like to see.

Now in truth, we've not gotten there this year. This year, net new business was flat, and you saw our AUC/A wins at about $800 billion. And so it's just obviously an area of pretty intense focus. But I think it's the kind of area that we feel like we can make a dent on. If you step back, we've made really good progress on our top 50 clients where we rolled out a coverage process and set of executives about 2 years ago, and we've seen the growth there. We've seen it in a couple of segments. And now we need to broaden that and deepen that kind of coverage intensity across the rest of the franchise.

Yes. Alex, I'd like to just add to that. I would not want to leave you with the impression that there's a client retention problem here. If anything, client retention has gone up. But if you think about things like what the market is facing in terms of reduction in funds, for example, or if you think about M&A, oftentimes, that presents an opportunity for us. So there's a small amount of attrition broadly defined. It's as much asset attrition as it is client attrition. And what we're trying to be here is very clear on how we think about our -- what we need to do from a sales perspective and what we're doing about it.

Great. That clears it up a bit. Speaking of M&A, Ron, I wanted to ask you a question around SSGA. Obviously, there's been several headlines around potential strategic actions State Street could make around its asset management business. And in the past, you also talked about the drive for scale in that business just like what you're trying to provide to your clients. So maybe you can update us on your latest kind of strategic thinking for SSGA when it comes to either acquisitions or divestitures? Obviously, there is a JV headline out there as well. And as you think about sort of these various avenues, what is the ultimate kind of financial and strategic goal you're trying to achieve for State Street as a whole when it comes to SSGA?

Yes. Alex, I'm not going to comment on market rumors. But what I'm going to say is what I've said before. We have a very strong franchise in SSGA. It's particularly strong in the ETF space, the cash space, the indexing space. It's got an increasingly strong position in ESG. Having said that, as we've said before, we see the world evolving. And therefore, we need to think about how to add capabilities, both product and distribution capabilities or distribution access to this. So we are -- it's not new. Any time you ask us about this, I think I answer it more or less the same way that we're constantly thinking about this.

We've made some steps over the past several years in terms of organically adding really important product capability, fixed -- for example, fixed income ETF, ESG capabilities. We launched the low-cost range of funds. We created the distribution arrangement to help propel those low-cost funds. So we will continue to look at those things, and we'll continue to look at inorganic activities if we think it's the best outcome. And to answer the last part of your question, what we're looking to do is to best position SSGA for growth. It's a remarkable asset. It's got a lot of potential, and we'll do what we need to do to best position it for growth.

Your next question comes from Ken Usdin with Jefferies.

Eric, just a follow-on on the NII side. I just wondering if you could help us understand, you talked about some type of step off from fourth to first in terms of NII and then stabilization. And I'm just wondering if you can walk us through the pieces of what are still moving through other than day count in the first quarter. And how much premium AUM was in the quarter? And is that part of a rate of change that you can see any type of -- help that stabilization or benefit thereafter?

Ken, it's Eric. Sure. Let me describe first maybe third quarter to fourth quarter, to give you some context and then fourth quarter to first quarter and then kind of the -- what we see from there. Going into the fourth quarter, we have the usual headwinds from investment -- from the investment portfolio and actually higher premium amortization than we've had previously. And that would cost us sequentially about $35 million. That's kind of the headwind. Now that will come back because that headwind is attenuating each quarter, but that was a headwind.

Against that headwind in the fourth quarter, we had some unusual benefits. We had the FX swap mark-to-market, which was about $5. We had a surge in deposits, both in developed markets and in emerging markets. Remember, they're valuable in emerging markets worth about $10 as a tailwind. And then we built our investment portfolio and added quite a bit of loans at -- to the tune of about $20 million. And that was a larger build than usual, but a remunerative one. And so those are the kind of features that held us flat in effect from 3Q to 4Q.

I think if we go into first quarter, you kind of take each of those in pieces. The investment portfolio headwind, it's probably going to be about $25 million instead of $35 million. So you see it attenuate. And part of that is that the prepayment speeds are neutral, we think, from 4Q to 1Q. We have some tailwinds of deposits and loans and investments, but that's probably worth about $10. And then we still have a couple of headwinds. We have the unwind of the swap mark-to-market which sequentially is worth $10 because you got to double up the positive turns negative. And then you have day count worth another $10 as a headwind. So that's kind of what gets us to the guide that we gave.

Once we get through the first quarter, I think what we expect to see is that stabilization. And what we're effectively expecting is that the investment portfolio headwind, which was $35 million, becoming $25 million, is going to start to trend down to $10 million a quarter. And why is that? Partly rates have been kind of working through the -- on the yield side and partly because prepayment speeds, we expect to start to attenuate as we see higher rates. And so we do expect some lesser headwinds. And against that, we think that the actions that we take on a more traditional basis will be worth about plus $10 million. And so we'll be roughly neutral and stable from 1Q to 2Q and 2Q to 3Q and so forth. Obviously, it will be range bound. And obviously, it will be -- there's always a little bit of lumpiness that we get into. But that's our best estimate of what we're seeing today based on the curves, the expectations of rates and so forth.

So Eric, sorry, if I can speak that back at you. Does that mean kind of a $50-something million decline fourth to first, if I got all your add ups there, $10 million -- $25 million and 3 -- and $10 million and $10 million and $10 million? Just trying to understand what that all gets to.

Yes. I think I said 6% to 8%. So I think we're looking at, whatever, $35 million decline in the first quarter and then stable from there.

Okay. Sorry, got it. Understood. All right, great. And then just one follow-up on a big picture, unfortunately, another news item to ask you about we're going on. Now, I guess, 9 months since the BlackRock ETF headline news was out there as well. And I know it's a specific client. But there's a way of just helping us understand just what needs to happen for that to either be codified as you're keeping it or going away? Just any commentary would be helpful.

Yes. That process is still underway. We're working very closely with them. They have not made any decisions at this, but we are feeling reasonably positive about them.

And Ken, it's Eric. I'll also just remind you, though, that is a growing -- it's a growing business, a growing asset at quite a high pace, right? And so I think the last time we had one of these, it took 3 years from start to finish to kind of work out from discussion to RFP to response and so forth. And so I think there's -- you just have to factor that into the -- any scenarios that you run.

Your next question comes from Brennan Hawken with UBS.

This is Adam Beatty in for Brennan. Just wanted to focus in a little bit on some of the softness you mentioned in the U.S. and EMEA mid-market space. And wondering if you could help us maybe size that a little bit, recognizing your efforts to broaden and diversify the business, just in terms of the core of what you've got right now, either maybe size it or talk about the impact that had on your '21 guide. And also interested in any interaction with the activities of the pricing committee there in terms of either structuring, pricing or what have you in order to better retain or win business.

Sure, Adam. It's Eric. Let me start. I think the way we think about our business on the servicing side is across segments, right? We have asset managers, we have asset owners, we have insurers, and our business is more geared to asset managers than the other segments. And so we've historically built our franchise there, but we've actually had quite a bit of success in other -- in those other segments as well.

Within asset managers, what we're starting to find is over the last year -- last 2 years, the last year in particular, we've actually secured more growth in the largest of the asset managers. They're obviously winning when you look at the external data. And either less growth or in some cases, decline in the midsize and smaller asset managers. And so what -- and that gap can be -- that gap in a particular quarter or a year could be a 2-percentage point growth gap. It could be a 3- or 4-percentage point growth gap. It bounces around. And so what we're finding is that we really feel like we have the right coverage and intensity and kind of seniority focus on the largest of our clients. But our midsized clients are really an important part of our franchise. We built our franchise on them. We provide really, I think, outstanding products and capabilities. And we're finding -- we need to spend both senior time on the midsized clients as well as the time of our relationship managers and client executives.

And so this is really about intensifying our coverage of those groups and helping them see the strength and the opportunities and the products and services that we can offer, and make sure we're top of mind that we're building on share of wallet. I've got share of wallet statistics for top 250 clients, and that includes the midsized players. And really executing in that area, day in, day out, product 1, product 2, product 30, product 50, it's literally down at that level of granularity where we're focused now.

Excellent. That's helpful in the dynamics. And then just a quick follow-up on MBS prepays. I appreciate the detail from before on that. Recognizing, of course, that interest rates will be the main driver there, do you feel as though this past year, 2020, there was any type of pull forward in prepayments or refinancing, such that a reversal and downward tick in rates might not generate the same level of prepays as previously? Or is it very much still linked to rates?

Adam, it's Eric. I always like to hope that prepayments are burning through, that there's been a onetime pop and then they're going to attenuate. But I've learned that hoping isn't a strategy, right? We just have to operate through the environment. I think what we've seen is certainly a surge of prepayments starting in the end of 2Q, right, once people figured out how to do the paperwork during COVID in 3Q and 4Q. And our best estimate is informed by the various modeling providers, we subscribe to 3 or 4 of them because we need that diversity of opinion, suggest that prepayment speeds should probably continue into the first quarter. And then will begin to edge down from there in the second quarter and the third quarter with some stepwise improvement.

That said, we've got -- I think we've got to live through time here and just see how it plays out, and we'll know more. What we're trying to do though is make sure that we're always taking the actions that we can on investment portfolio, on deposit reinvestment, on loans, because that's something we can control, and we need to stay focused on those actions.

Your next question comes from Betsy Graseck with Morgan Stanley.

This is Ryan Kenny on behalf of Betsy. So we saw the OCC stablecoin approval come through earlier this month. Just wondering if that has any impact on State Street and how you're thinking about your blockchain strategy going forward.

Yes. Ryan, this is Ron. In terms of direct impact, first, the OCC doesn't regulate us. And secondly, it directly impacts or, if you will, poses most challenge to the payments banks. For us, in general, it's probably neutral to positive because anything that stimulates more interest in blockchain and particularly more interest in digital currency is going to create a custody opportunity for us, and we have been investing fairly significantly in that space.

As we've said in the past, blockchain itself is actually quite an important part of lots of things that we're doing in custody and asset servicing. And increasingly, we see digital coins, cryptocurrency as part of the holdings within our client base, and we'll continue to invest in that. But the OCC's work itself is, I would say, not directly relevant to us at this time.

And then one quick other question. Wondering how we should think about the impact from money market fee waivers in 2021. Is it in the run rate now? Or should we expect any uptick from here?

Ryan, it's Eric. A good part of it is in the run rate. I think we said about $3 million in 4Q. We do expect it to tick up 1 more step, and we're now expecting about $5 million to $10 million a quarter in the coming years. So I think we're much less exposed than others. We don't have retail money market funds. We don't have high net worth funds with higher fees. So -- but those are the figures.

Your next question comes from Brian Bedell with Deutsche Bank.

Eric, maybe just to continue on the net interest income guide for '21. Just -- if you can just talk about your earning asset assumptions for the year and deposit growth strategy, realizing, obviously, they spiked up in 4Q but as you're building your servicing business and you're trying to enhance some of the deposit strategies. Maybe if you could talk about that and your assumptions for '21. And then in fact, also on the premium amortization, I think, you said, $35 million from 3Q to 4Q. So is that about a $170 million level? I just wanted fact check that.

Brian, it's Eric. Let me do those in reverse order. I think the -- what -- the $35 million was the headwind we're seeing on a quarterly basis from 4Q -- from 3Q to 4Q in the investment portfolio. And that was a combination of the investment yield grind down and actually higher premium amortization because we're still living through that wave. What I then said is that 4Q to 1Q, we thought the combination of the investment portfolio headwind, including premium amortization would be about a $25 million headwind. And then I said starting in second quarter, we thought it would trend down even further to closer to $10 million, $15 million and $10 million in those out quarters each quarter. So I think what we're starting to see is an attenuation or have that expectation, which partly is the kind of tractor of the investment portfolio playing through and partly lower levels of premium amortization expected as speeds begin to edge downwards.

In terms of the deposit forecast and the earning asset strategy. On deposits, it's really hard to gauge. The Fed continues to expand the money supplied by, what, about $120 billion a month. We're a 1% or 2% of the deposits. So we pick up deposits just by being here every month. So there's some amount of tailwind. It's just really hard to read, given lots of talk about stimulus bills, asset allocation and reallocation from risk to risk on to risk off to barbelling. So I think right now, we're assuming that we're going to at least stay at these fourth quarter level of average deposits with probably a little bit of edging up. And so we're not at this point expecting yet another surge, but you just don't know, and I think we'll obviously respond as it happens.

In terms of asset strategy, that's a tough one. I think it's tough for us and for every other bank because we can certainly take some risk on the curve, but you don't get paid very much for it. And so I think there's a balance that we're making, which is how much dry powder do you want to keep. And so then when you do see a spike of interest rates, you can edge or leg into that at a higher and better return versus forsaking some income in the short term. And we're -- our investors are always kind of carefully thinking about that, trying to be opportunistic and will come and go. And we'll do that in treasuries around the curve. MBS, you've seen us build up our MBS book over the last year by a solid $10 billion. I think we want to just be careful there. We want to -- we prefer some of the prepayment-protected subsegments. We've done a little bit of credit. We want to be careful there too, because credit is impacted during the CCAR and SCB process. So it's a pretty diversified approach, I think is the core of our strategy, looking for opportunities, and I think as we see some of those, we'll act, and we'll certainly report on them to all of you.

That's great color. And then on the -- just back to the $1.5 trillion that you mentioned of growth servicing wins to offset some of the headwinds. Can you talk about the cross-sell portion of that? So this would be adding different new services to existing clients. Maybe how that's sort of tracking within that outlook. And then also the importance of SSGA's indexing business as they cross-sell to asset servicing clients.

Yes, Brian, it's Ron. Cross-sell is a very big piece of this. I mean, if you think about what Eric said earlier, you look at 2020 performance, it was largely the same in 2019. The fastest-growing segment or the segment that accounted for the most growth was, in fact, our global client division, which is our largest client. So by definition, we weren't adding many to that, if any. But what we were doing was growing substantially in there. And that will be a key part of our growth going forward for both traditional asset servicing products as some of these providers continue to consolidate -- some of these institutions continue to consolidate providers, but also for front-to-back Alpha activities as we install -- either fully install Alpha or even put Charles River in, in a situation where we have the middle and the back office, but not the front. So that's a key part of it.

And as we think about the numbers, certainly, the ability to have common clients where we're both the asset servicer and the indexer is attractive. We always look for those opportunities. That's not in the assumption that Eric is describing there. So what we really were trying to do here in response to many questions we've gotten is more or less dimension of what we need to do to grow revenue. Obviously, that number, it's based on averages. So to the extent to which in a given year or a given quarter, we're bringing in higher fee kinds of assets, then obviously, the $1.5 trillion goes down. So that's the way to think about it. You could never, at the end of any particular quarter, say, well, if you're not a quarter of the way there, are you making it or not making -- you got to go 1 click down and see what was the nature of the kind of underlying business, which you'll be able to understand from us.

Your next question comes from Rob Wildhack with Autonomous Research.

You called out some reduced client activity as pressuring servicing fees in the fourth quarter. Just wondering how that played out with respect to expectations. And then more qualitatively, the level of client activity you're thinking about into the outlook for next year -- well, this year 2021.

Yes, Rob. It's Eric. There are a number of features in how we quantify the growth kind of headwinds, tailwinds of our servicing business. Client activity is one of those that fluctuates and really represents some of the trading volumes of our clients because there's some tolling that we do for that. In particular, cash and derivative trades tend to have more likely have tolls than others just because they're a little more complicated. ETF creation, redeem that kind of stuff. So it's a part of our fee schedules that we try to quantify, but it has a long list of kind of volumetric elements.

I think on a year-on-year basis, 4Q '20 versus a year ago, that -- those -- some of the client activity volumes actually trended down. So servicing fees, it was worth about percentage point of servicing fee headwinds. That's an example of a time it hits against us. For full year 2020, it was actually a positive of almost 2 percentage points. So we saw that as a tailwind. And obviously, the -- all the activity in first quarter, second quarter, in particular, was helpful.

Next year, we're going to have to lap ourselves on that. So it'll probably be a 1% headwind. So it's got that kind of effect. And what it does is it reminds us that everything matters in our business to drive growth, right? If there's an equity market tailwind or headwind that matters, this client activity matters as well. Net new business, right, in particular, I referenced kind of the importance of gross new sales matters. And then there's always the normalized fee headwinds. And the good news on that last one is that those have normalized back to something pretty close to historical levels.

Okay. And I wanted to also ask about the business that you're forming with Microsoft, IHS, TIMCO and others. Can you give us some more detail on the structure there? What products and services you'll be contributing? And how the potential offering there will compare to your stand-alone offering today?

Yes. Rob, it's early days. You're referring to hub, and it's early days there in terms of what's going to happen. And our view was that given the role that we play as a custodian as well as our own Alpha product that this was a good initiative to hang around, if you will. We also have clients that are part of it. But it's just very early days in terms of how that's going to develop. Its initial focus is on data and data usage and helping firms kind of manage and employ data in a more efficient way. But again, it's so early on, there's really not much to report.

There are no further questions at this time. I would like to turn the call back over to Eric Aboaf for closing remarks.

It's Ron. I'll take it. Thank you, everybody, for your time and attention, and we look forward to following up with you.

This concludes today's conference call. You may now disconnect.