Q4 2019 Earnings Call
This quarter 2019 earnings conference call in webcast today's discussion is being broadcasted live on State Street website.
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I would like introduced I mean to sell Feeler global head of Investor Relations.
The Street.
Good morning.
Thank you all for joining us.
On our call today, our CEO Ron family will speak first.
Eric I block, our CFO will take you through our fourth quarter and full year 2019 earnings slide presentation, which is available for download any investor Relations section on our website investors see Street dotcom.
Afterwards, we'll be happy to take questions. During the <unk>. Please limit yourself to two questions and then re queue.
Before we get started I would like to remind you that today's presentation will include results presented on a basis that excludes or just one or more items from GAAP.
Reconciliations of these non-GAAP measures the most directly comparable GAAP or regulatory measures are available in the appendix 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 reference in our discussion today and in our SEC filings, including the risk factors in our Form 10-K .
Forward looking statements speak only as of today and we disclaim any obligation to update them, even if our views changed now let me turn it over to Ron.
Thanks, Charlie and good morning, everyone.
Turning to slide three we announced our fourth quarter in full year 2019 financial results. This morning.
Fourth quarter EPS, and we were adult were 73.
6% respectively.
29.
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Sure person.
<unk> fourth quarter EPS was adult were 98.
It was 13.3 person.
Relative to both the prior year period, and the third quarter 2019.
Please to report that our fourth quarter pretax margin improved reaching 29.1 person. Excluding notable items. We also saw an improvement in pretax margin a global advisors relative to the third quarter 2019.
Before reviewing our performance further let me talk some sort of the macro factors that had an effect in 2019.
Following the dramatic global equity markets. So often like 2018, our results over the course of 2019 benefited from the steady recovery over the U.S. equity market during the year.
International equity markets improve somewhat average levels in 2019 were still down relative to the full year of 28 team.
Total industry fund flows were favorable to 28 team primarily driven.
My broad based flows in Europe , and strong money markets.
However, in North America industry flows into long term funds remain negative, albeit muscles in 2018.
We experienced three interest rate costs, and lower long and rates, which impacted.
As well as low market volatility for much of the year, which in turn impacted our markets businesses.
For full year 2019 result, also reflected the impact from the still elevated level of industry servicing the pricing pressure, which moderated from in the second half of the year.
As a result of these headwinds it was clear that we needed to take aggressive management actions to stabilize revenues and reduce expenses, while keeping client satisfaction for center all we do.
I'm pleased with the progress we made and how that translate into results, particularly in the second half of the year.
Assets under custody and administration increased 4%.
Order to a record 34.4 trillion.
We saw strong level of new wins during the quarter totaling 294 billion, which took our total wins in 2019 to just over 1.8 trillion within touching distance from a record amount of wins in 2018.
You have to be installed.
Two trillion order run.
Global advisors assets under management increased 6%.
Quarter to a record 3.1 trillion supported by higher period end market levels and strong U.S. and European net flows tourist fighter range would be tier.
During 2019 Global Advisors recorded 100 billion in total net inflows driven by strong.
Institutional and cash outflows relative to 28.
Relative to the year ago period fourth quarter total revenue increased 1%, reflecting improved servicing and management fees driven by stronger equity markets, partially offset by lower end markets revenues.
On a sequential and year over year basis fourth quarter total fee revenue increased 5% and 2% respectively.
Full year 2019, total revenues decreased 3% year over year as a result of lower fee revenue and an eye on partially offset by the positive contribution Charles River development.
We're pleased that we were able to begin to grow servicing fee revenue again with her focus on client service.
Servicing fees increased 3% during the second half of 29 team relative to the first time for the year.
During 2019, we implemented a number of client initiatives to drive better service quality and deepen relationships.
This included the completion of our senior executive client coverage model for largest clients.
We also implemented a new client onboarding process that has enabled us to scale rapidly and take on large trunk lines of business well also meeting client service requirements.
Further we implemented changes to better manage client pricing decisions would be establishment of an executive deal Review Committee.
We know that there's more for us to do and as we begin 2020 reigniting totally revenue growth remains a core strategic priority for all of those.
We believe the building out or front to back out the platform strategy provides an attractive value proposition.
One.
During 2019, we undertook significant actions to improve our operational efficiency and reduce expenses.
This time last year, we launched a comprehensive firmwide expense savings program to aggressively managed down expenses, driven by new resource discipline process reengineering and automation efforts.
Initially targeting 350 million of gross expense saves, we subsequently increased or expense savings target to 400 million, which we exceeded finishing the year at 415 million in gross expense savings.
Part of our efforts were into tackling head count growth, which had a bit which had been too high for too many years.
During 2019, we successfully reduced total head count by 3% from year end 2018, driven by automation and standardization as well as process reengineering with high cost location head count down by over 3400.
As a result, we reduced our full year 2019 expenses, excluding notable items and CRD by almost 2% both exceeding our initial target of one person.
As we look to 2020, we remain focused on reducing or total expense base again.
This past December I outlined the outcome of the initial reassessment of our technology cost structure in the coming year, we are targeting a change in the trajectory of all righty expenditure aiming for it to be flat to down 2%. During 2020, excluding notable items for resource discipline in process reengineering efforts.
We're also targeting a reduction of total expenses companywide, excluding notable items by approximately one person during 2020.
During 2019, we were also particularly focused on balance sheet management as a result of a number of deposit initiatives as was improved client engagement. We have recorded a third straight quarter of total average deposit growth in.
In addition, as a result of an improvement of balance sheet under stress.
Following the 29 CMC CCAR stress test, we increased our quarterly common dividend by 11% to 52 cents per share.
Further we returned 2.3 billion to our shareholders during 2019, including 500 million of common share repurchases during the fourth quarter.
I.
Clued during my first year as CEO in 2019, we've faced a number of challenges, but through our actions. We have made measurable progress towards our goals, particularly expense management capital return.
My focus for 2020, we'll continue to be on delivering a distinct value proposition and world class service to our clients, enabling us to reignite revenue growth well generating further expense reductions.
Sustainable improvements are operating model.
We remain confident in the trajectory of our business, we expected our global reach and expertise in servicing and data analytics combined with our unique front to back out for strategy.
Enable us to realize our vision of becoming the leading I subservicer asset manager and data inside provider to the owners and managers of the world's capital.
And with that let me turn it over to Eric to take you through the quarter in more detail.
Thank you Ron and good morning, everyone before I begin my review of our fourth quarter and full year 2019 results I'd like to take a moment on slide four to discuss several notable items.
In Fourq to 19, we recognized 110 million of pre tax repositioning costs, consisting of severance and real estate, which sets us up to drive further process automation and organizational reef rationalization in 2020.
We also had 29 million of acquisition restructuring charges, primarily related to Charles River as expected.
And in addition, we had a $44 million gain related to the tender of sub debt in Fourq, you 19, and a 22 million after tax costs associated with the redemption of our series E preferred securities.
Taken together, we recognize notable items of 95 million pretax or 25 cents per share you'll find a bit more detail in the appendix.
Moving to slide five on the top panel, we show our quarterly and full year gap results.
On the bottom panel we show results ex notable items for those of you want to see some of the underlying trends.
I would note that we were able to generate positive operating leverage in the fourth quarter on both the gap Nx notable spaces, helping to improve our for acute 19 pre tax margin, both the quarter on quarter and year over year.
Turning to slide six we saw end of period, you see a levels increased 9% year on year and 4% quarter on quarter.
Year on year move was driven by higher end of period market levels and Klein flows partially offset by previously announced client transition, which is now largely behind us.
Quarter on quarter. There you see a increase was mainly due to higher end of period equity market levels Klein flows and net new business.
Hey, you in levels increased 24% year on year to a record 3.1 trillion driven largely by higher end of period market levels and strong net inflows of approximately $100 billion, which were spread relatively evenly across our institutional cash and despite a range of VTS.
Amidst a challenging organic growth environment for asset managers State Street Global advisors realize the U.M. share gains during the year in both the money market funds and the costs are low cost CTF right.
It's a reminder, that our business is positioned to further scale its offerings and to improve margins in doing so.
Moving to slide seven servicing fees were up 1% year on year and 2% quarter on quarter.
As Ron discussed while industry pricing pressure persists, the pace of quarter over quarter servicing fee headwinds continue to moderate in Fourq. You 19, with this quarter's results showing three consecutive quarters of stable to increasing servicing fees, primarily driven by higher average market levels and new business.
And while equity markets were supportive over the course of the year, we're confident that management actions taken since late last year, including the rollout of our new client coverage model and newly formed executive pricing Committee have had and are continuing to have an impact.
Nevertheless, there is much more to do as Ron mentioned driving higher servicing fee growth will remain a strategic priority in 2020.
And we continue to see significant interest in our front to back Alpha platform. We now have four winds always have expanded our scope of business with existing clients.
On the bottom right panel. This page. We begin included some sales performance indicators to provide a little more texture.
As you can see how you see a wins totaled 294 billion in 14, 19, and approximately 1.8 trillion for the full year.
The sizable wins this quarter and throughout the year again demonstrate the benefit of our scale and capabilities as we build new relationships and continue to grow existing client relationships by providing additional products and services.
Turning to slide eight let me discuss the other fee revenue lines, beginning with management fees for to 19 revenues were up 6% year on year, primarily due to higher average equity market levels and inflows from F and cash partially offset by mix changes away from higher fee institutional product.
Yes.
Compared to Threeq, you 19 management fees were up 4% driven by higher average equity market levels and inflows from Bts, partially offset by outflows from institutional.
FX trading services were down 7% year on year, and 4% quarter on quarter has a business was negatively impacted by low volatility levels, partially offset by higher volumes.
Securities Finance revenues were also down 8% year on year, and 4% quarter on quarter, due mainly to lower industry volumes and spreads.
Finally software and processing fees were up 18% year on year, and 54% quarter on quarter, reflecting higher CRD revenue and positive market related adjustments.
Moving to slide nine you'll see in the top left panel five quarter summary of CRD Standalone revenue and pre tax income.
For Q1 9, CRD generated 126 million of Standalone revenue, which was up 4% year on year and 48% quarter on quarter I.
I would again remind this audience the lumpiness inherent in the U.S.C. six so six revenue reporting accounting standards and not to read across any one quarter's results.
On the upper right panel. We've also included a comparison of Securities 2019, Standalone revenue versus an estimate of 2018 revenue.
Form of for the see six so six reporting standards had we own the business for the full year.
As you can see CRD generated 401 million of revenue in full year 2019 up 8% versus 372 million of estimated pro forma revenues in full year 2018.
On the bottom right panel, we wanted to provide you with a bit more texture around the momentum were seeing in the business and how weve enhance it since our acquisition last year.
We remain confident in the revenue and cost synergy goals announced the time of the acquisition.
Turning to slide 10, and now I was down 9% year on year, and 1% quarter on quarter with our NIM declining 19, and six basis points respectively.
The sequential decrease in Eni was primarily driven by the absence of episodic market related benefits seen in Threeq to 19, partially offset by increased deposit balances.
Excluding the episodic benefits seen in Threeq, you and I would've been up 2% sequentially.
Our deposit gathering initiatives continue to generate benefit average total deposits are up three straight quarters and up 3% year on year.
Interest bearing deposits are up 9% year on year.
Noninterest bearing deposits have been study for the third straight quarter at approximately 29 billion.
On the earning asset side, we targeted careful growth in client lending and a modestly larger investment portfolio with both the average for Q loans ex overdrafts and the investment portfolio up 12% year over year.
On slide 11 were again, providing a view of expenses this quarter X. Notable so that the underlying trends are readily apparent.
Year over year are for Q expenses, excluding notable items were down 2% and flat quarter on quarter.
You can see consistent improvement in the comp and benefits as well as several other lines.
As you recall, we announced in 2019 expense program. This time last year with an initial target of 350 million.
Thanks to a significant company wide effort, we achieved approximately 415 million saes in full on the full year exceeding our initial targeted by nearly 65 million.
And so let me provide some color on a couple optimization initiatives that were really helped us reduce costs last year.
First supplier negotiations and consolidation had been a big focus we've made great strides in both telecom and tech infrastructure services, while also consolidating the number of our IC vendors.
Second the organization has been focused on realizing greater productivity automation initiatives launched last year have now led to four consecutive quarters of total head count declines, resulting in high cost location head count reductions of about 3400 this year more than double our original target of 1500.
More to come in 2020, as we continue to work on every line of the piano.
Moving to slide 12 during the quarter. We returned a total approximately 686 million of capital to shareholders and for the full year 2019. We returned approximately 2.3 billion of capital are presenting 108% of net income available to common ads, we executed our 2019 secret.
Plan and delivered on our priority of increasing our capital returned to shareholders.
Moving to the Rightside of 12, you can see that both the standardized and advanced approaches CET. One ratio is at a healthy 11.9% even at that level of capital return.
We also consciously reduced our tier one leverage and SLR ratio was primarily driven by the post see car redemption of our series E preferred stock, which is worth about 12 cents vps.
We remain confident in our capital position and believe that we have incremental opportunities to continue to optimize our capital structure as changes to the capital rules are finalized.
Turning now to slide 13.
I'd like to cover our full year 2020 outlook as well to provide some thoughts on the first quarter of 2020.
Before I start let me first share some of the assumptions underlying our current views for the full year.
At a macro level, we are assuming slow global growth.
Interest rates based on the current forward curve and a modest uplift from equity markets as well as continued low market volatility, which impacts are trading businesses.
So beginning with revenue.
We currently expect that fee revenue will be up 1% to 3% for 2020.
This includes servicing fees growing modestly at the low to middle end of this range.
Management fees growing at the high end of this range and C or D revenue should grow at low double digits.
Regarding the first quarter of 2020, you would expect fee revenues to be down quarter over quarter by low single digits, perhaps 2% to 3% given headwinds such as the expected asset mix shift by a single Cline and asset management as well as seasonally lower C or D revenue.
Regarding and <unk>, we expect it to be down 5% to 7% in 2020 versus 2019, driven by the carryover impact of lower market rates and some continued rotation in the deposit book.
Regarding first quarter of 2020, we expect and <unk> to be down about 5% sequentially driven by the full quarter impact of the october's fed rate Cod lower day, count and the fourth quarter long term debt issuance.
On a positive no we do expect that and I should largely stabilized in the second half of 2020.
Assuming of course that there isn't a significant change in the interest rate environment.
Turning to expenses as you can see and the law. We will continue to be laser focused on expenses and expect to achieve approximately 4% to 5% in savings driven by our continued focus on resource discipline and process engineering as well as our technology optimization plan.
This will include a reduction in headcount at an additional 750 roles in high cost locations in 2020, which is related to the repositioning charge I mentioned earlier.
These expenses will be partially offset by approximately 3% to 4% of ongoing business building investments in areas like C or D.
Tech infrastructure and the variable costs of new business growth.
They see this should yield and net 1% reduction excluding notable items in 2020 total expenses.
Regarding first quarter 2020, we expect expenses to be largely in line with this god year over year and consistent with the seasonal expenses usually occurring in the first quarter.
Taxes should be into 17% to 19% range for the year, but we expect first quarter 2020 to be at the high into that range.
And finally, given our strong capital position and recent capital optimization, we expect to continue to actively return capital to common equity holders in the form of payouts and returns subject of course to the federal reserve scenarios and associated approvals.
So moving to our summary of full year 2019 results on page 14, we were pleased to see fee revenue improve over the course of the recent quarters as management actions and moderating fee pressure helped drive total fee revenue up 2% in the second half of 2019 versus the first half.
At the same time, we can to navigate a challenging interest rate environment, and enhance and I would deposit gathering initiatives with three straight quarters of total deposit growth.
We also successfully executed on our full year 2019 expense savings program significantly exceeding our initial savings in head count reduction targets.
And helping drive down expenses X noble notable items and C or D by 2% year over year, demonstrating our ability to bend the cost curve.
We're committed to doing more in 2020.
Finally, we continue to optimize our capital structure and delivered on our promise of increase capital return to shareholders with approximately 2.3 billion in capital returned in 2019 for a total payout of 108%.
And with that let me hand, the call back to Ron.
Operator can we open the line questions.
Oh, sorry, My day to ask a question you want me to press Star one on your telephone to withdraw your question press the pound or Heskey.
Please standby lobby composites una roster.
My first question comes from Brennan Hawken or can you be <unk>.
Your line is now open.
Hi, good morning, Thanks for taking the question.
Eric you just ran through.
Actually color on expectations for the year in one Q.
One that I was hoping to dig a little end on as the fee revenue side.
I think he said that the once you see revenue growth down 2% to 3% sequentially and you gave a couple of factors does that guidance.
Include what we've seen so far year to date in the equity markets, which has been pretty robust or is that a potential offset if it proves to be durable through the quarter. Thanks.
Brendan it's Eric the the guidance as effectively as a company to the end of the year and obviously, if there's large dislocation between then and now we factored in I think you'd say equity markets are up volatility still though on a you know in trading is still pretty a pretty light we've not seen that big January .
You know a uptake that Ah I think we used to say four or five years ago.
You know interest rates are been or you know call. It pottering around so I don't think there's a lot a that's really changed and this is a an outlook effectively based on what we what we see a what we see now.
I think as I described you know Theres. Some of this is just the the usual seasonality like in Charles River, which you know peaks in fourth quarter, just because of the cycle sales that's come through and then dip in first quarter.
Yeah, we have some build visibility into into servicing fees asset management fees I I noted will Oh, I'll take a as a bit of a step by step down.
Trading we'll see so it's kind of a combination.
That does that we're looking at.
That's that's all really fair thanks for that color and then when we think about some of these robust equity markets that we've seen and.
You guys have.
We are we done a really good job will try to get your hands around the elevated the pressure that you were seeing you know.
Early 2019 and leading into that.
In the past we've seen some breakage in fee rate when equity markets rallied really hard.
Really fast because you're you're servicing fees are not all just purely contractually.
Big percentage of 86 basis points on Oh and assets under custody.
Some of them or are you know inflation somewhat ever paid to activity levels and the like so can you help us think about should we be prepared for optically the way we model State Street, some fee rate pressure here in the near term.
Just because of those mechanical factors rather than thinking I, just I know some people think that when equity markets go up. Okay. Then the servicing fees going to go up with with a few right being flat.
In the past it hasn't worked out that way. So just trying to think about how to calibrate for that thanks.
Hi, Brendan it's Ron.
Let me begin on that I mean in the past you're correct.
There has been a cycle when you've seen sharp equity markets.
Followed by you know a re look by the client base.
Uh huh.
You know a wave of fee renegotiation.
And that's still possible I think what's different this time is firstly we have.
Comprehensively and through the client base either.
They're bidding or bidding in some instances we've been the proactive ones wanting to.
Control of the situation.
We've tended to get more term out of these things and in general.
Level of partnerships its between Austin or clients now is that are much higher level.
So I would suspect my my.
Expectation would be that certainly there'll be some conversation, but I would not expect oh, it's the same kind of effect that we've seen in the past or give me when I was hoping so yeah friend and I'd just add the kind of quantitative slide to this is remember most of our fee schedules in the servicing business or based off of averages average broker.
Order or multiple months within a quarter or.
What have you and so it's worth just remembering that if you take through the the appreciation stock market indices and I think there's a good table in the top right of a page six in our slide deck you know the S&P and this is for Q4 Q, but if you. If you think about it on a full year basis, which I think.
A number of you had the S&P was up 29% and appeared to end of period that feels great. But the average was up only 6% right. You know the 85 average point to point was up 18% on average was actually down 4%. So it's really the averages that are factoring through and I. Just encourage you to think about.
So as you think about modeling the a you know the servicing fee facts and in effect and in addition, yeah. Those are what the but what we focus on both from a from a as we think about the calculation the servicing fees, but also with declines so I think about it.
As part of the billing process.
That's great color, thanks, and apologies for jumping into weitz straight off the bat millennia [laughter].
All right thing.
Our next question comes from Glenn Schorr with Evercore. Your line is now open.
Hi, Thanks.
Curious if you could talk and you might have touched on little bit like if you could touch up on your deposit optimization efforts what's working.
And where you are through the process you've been going through client by client 4% growth is good.
Do you consider any of it.
Repo environment related then transients, just just curious to get the mark to market on that.
Sure Glenn it's a it's Eric let me start a you know deposit initiatives for something that we really that began to focus on oh late in the fourth quarter of 18, I think I'd say and then you know it's been an intense effort for.
For five quarters now and it really is in response to thinking about how do we serve our clients with our balance sheet now as you say, sometimes its deposit sometimes it. So you know cash money market sweeps and yes a manager.
Times. This some of the sponsor repo that we do so there's a series of different.
Areas I think it's particularly the results of those initiatives you know on a year on year basis, or a young north of $10 billion of deposits tend to be more on the interest bearing side because that's what's.
What's discretionary.
It's common probably three buckets the largest the buckets is a working with our custody clients and thinking about how to serve them on their discretionary cash sometimes its ah, yes, and manager is sometimes its insurers.
Sometimes it's the Oh the pension funds.
So that's enough that's probably been the biggest piece. We've also I think built up over time, a book of corporate deposits as remember not only do we have partners and suppliers for corporations, but because of our capacity of the pension plans right. We have often an introduction from the pension the.
Defined benefit pension plans are for one plan into the corporate treasurer, and so that creates a natural access and the third bucket is you know, we always supplement with a little bit of.
Cds or broker deposits, but I think that's been probably the smallest is this the three buckets. So those are the kinda initiatives. We've taken they've been I think material in terms of continuing to build our balance sheet, which then lets us a you know provides enough.
Oxygen effect for us to build our loan book, our investment portfolio or trading book and so that's kind of part of how we think about running the bank and then specific to your question of what had been.
Better different lower or higher because of quantitative easing or not I don't think the initiatives would have been a particularly different I do think there is more deposits in the system in the banking system and we've seen some of that probably starting in the second half of the third.
Water.
And that kind of period, when the fed began to intervene and into the fourth quarter, it's hard to dimension, how much the red Sun, you and I, both three to the fed ha reports and that kind of gives you a little bit of an indication.
I appreciate that and maybe one more on just the servicing wins to 94 in quarter one eight for the year. If you look at that that's.
Over 5% organic growth now obviously, it's a gross number not net.
No. If you want it share just a ballpark range of where where net is.
But then the specific question is if you can help us with the composition of whats in the one but not yet funded pipe I see some of the press releases I see somebody T.F. wins in there in the fourth quarter, but.
Maybe just help us think through what's in there.
Yeah, Glenn it's Ron it's a mix of things that are in there. Its some of that is true.
One offs meeting a we've won something.
It's in the queue to be installed it'll be installed. We're typically just given the nature of our classes, which tends to be larger asset managers enough and owners or when we when we win something we install in francesc.
Sometimes it could be very conventional business like.
<unk>.
Very large mutual funds when earlier in the year, but some other funds are more complicated than others.
Yeah.
Once it's done in a particular sequence around their phone boards. So there's some of that in there or you can probably or draw the conclusion that the more complicated.
Yeah.
Later.
The other thing that's in there, though is increasingly the nature of our business is that we're not just winning.
You are counting refinement.
But we're winning phone.
Or a portion of the front to back maybe there's some middle office in there there might be some Charles River in there so often times, which we're seeing is a installation of another service for an existing client, where we had an install earlier in the year.
That's the way to think about it.
Got it okay. That's it's interesting I appreciate and is it is it in and around the range of the average.
Margin, because I know, calling piece by piece would be impossible, but just like the ones, but not yet funded.
Is it coming in as it at a at a higher level average level or below average slow.
Lend itself it gets a it I think as Ron said, it's a mix its a.
We'll see it's a mix of fee rate and it's a mix of timing and as you could see the could be installed plus was Oh, hi, a quarter ago. Its high again this quarter and so sometimes this installs more quickly sometimes more slowly. So just just Ah I know it's hard.
The model I, just encourage you to put a big big band around it.
Cool well your outlook comments help so we'll take it to that.
Thanks, guys.
Our next question comes from 10, a single Jefferies. Your line is now open.
Thanks, Good morning, guys.
Follow up on the <unk> and <unk> outlook Erik I was wondering when you talk about the expected decline next year can you just give us a little bit more color on just the dynamics of how much and how.
The lower rates from last year still roll through on the NIM.
And also against you know your point about there being some excess deposits in the system, but you're still growing these deposits from your strategic initiatives can the balance sheet also expand to continue to expand from here. So I guess it just a split dynamic of what happens on the NIM side versus what happens on the balance sheet. Thanks.
Yes, Ken it's a it's Eric you're right that's a year, you're asking the volume question and the rate question. So maybe a let's let me let me do that in that order I think from a volume perspective.
The two drivers that we see in this business our firstly the.
The amount of wins that we have in a in cost see an accounting because those typically come with those Ah Ah residual deposits that side of the frictional deposits.
In the in the system and so.
You know those old those will come based on the kind of the win rates that we have in some of the installation I think the other one is the deposits in the system and I think we've we've clearly seen a bit of an uptick a you know quarter over quarter.
Based on the the bank wide data as well as some of the.
Some of what you've seen in our results in a couple of the other banks, but you've all seen then the fed statistics I think the question is what happens to deposits in the banking system over the next year.
Did we just did the fed in effect with its easing a.
Process over the last.
456 months get us to a new level and then we just.
Go back to the.
Slow.
Build off of that or is there going to be more or less that activity and I'll leave that one. So you know for you. The says to think about I think that once the uncertainty. So yeah. We do expect some amount of modest deposit growth I think the what we're careful on on deposits and we still.
Expect to see a certain amount of continued rotation from non interest bearing into interest bearing or you know interest bearing into treasuries, because you're seeing that in the underlying.
You know asset holdings of our of our clients and in the industry and as we think about the volume of deposits going forward.
We've been comforted that there have been three quarters in a row of us of stable noninterest bearing deposits, but I'll remind you third quarter and fourth quarter of 18 actually saw an uptick in a in non interest bearing deposits and then it it fell by Falcigno.
Secondly in the first quarter, a 19 from for Q1 8, So we're we're hesitant to.
Yeah, So things that we're we've gone to a sea change we.
Like to see a you know a flattening of that line, but where we're hesitant to to call that a sea change just yet which is why we do think there will be some continued rotation.
In the in the in the coming in the coming quarters in year I think from a rate standpoint, it's everything you'd expect is long rates fill a still have a negative effect on a full year basis against for the long rates I guess I should say long rates have a negative effect as the tractor of the investment portfolio plays through and you know.
Yes long rates pop up 30, 40, 50, Bips you still have that playing through to a negative you have the short rates had are kind of have been reset and so we're going to let's say three or four quarters to lap ourselves and so you have that affects a playing through.
And then you know you have some as we think about the first quarter as an example, you've got some.
Transactional impacts right as we call those crafts, we replaced them with long term.
Dead right, because we have to lack requirements and so in effect I end up with a higher net income, but the Oh I get it or we get higher available to common but we also have a.
We also have more interest expense because of how the you know the Pinellas County, Florida, So anyway, I am hoping I covered Ah Ah you up most of which there you up and just one more just balance sheet structure question to your point on the preferred you did that redemption. You said you were able last quarter, you're able to do that before get even the final.
Could you continue to do more in that.
Ahead of getting the Finalization of SCB here. It is now SCB finalization and really lead any further decisions you make about the balance sheet structure and then copper elections. Thanks.
Yes, Ken Fair question, but obviously, we're you know any any kind of decision by by US around see car about you know interim capital actions is is something that we just don't have an ability to to telegraph beforehand or to.
Or two was to really just got I. Just tell you. We always look at the full range of what we can do we're always conscious that there are.
Periods immediately after see car one tends to have an opportunity it gets a little more delicate in the first quarter. So let me let me just leave it at that it's a it's a kind of thing where I don't think timing matters a ton about when we when we take our capital actions, but.
The you know we are looking at obviously the change in the in the in the leverage rules and importantly, we need to see how the FCB comes through and.
That's a that's out I think we'll know in the coming coming weeks and then we'll start to gear up for the you know for these ah fit or annual and you'll see CCAR process.
Our next question comes from Alex smoking with Goldman Sachs.
Your line is now open.
Thanks, Good morning, everybody, Eric I was hoping to dig into and I are in the quarter I'm, sorry, also a deposit cost trends if I look out the non U.S. side. It looks like it was a negative you know for best got a number I know, there's some FX dynamics that are all through that that could create a little bit of noise, but can you help us understand just kind of.
Were you guys are in terms of deposit costs, how you expect that to all from here and if theres anything one off this quarter that the outside.
Yeah, Alex a it's Eric I think there are couple probably elements here that are flowing through the deposit costs in the U.S. side, and then the non U.S. side and the.
The page for those of you on the phone or that's probably best to look through is the financial agenda that we have a page seven there's a detailed sort of average balance sheet table the last eight quarters.
For everyone.
On the U.S. side, you see our deposit cost you know came down I think a nice 19 basis points.
Most of that is on the U.S.U.S.C. side. Obviously this is domiciled do not the currency view, but it's a it's indicative and that's really the effect of that October rate cod and the full quarter effect of that coming through adjusted for you know our mix of pricing and so forth and so I think you.
So the right sort of betas in that kind of 50% range that we've been seeing.
Flowing through that line.
The non U.S. domiciled, the little a little Messier part of what you see there and that one Sal.
That those those interests that interest expense fell more than a than you would naturally expect it actually win from a positive interest expense to up to a credit in effect a part of that was remember the CB moves and we we moved as well, we actually our beta with a with.
On that he CB.
We had begun.
Hi.
NIM in the international markets as other banks are doing as well.
Given that it seems like it's going to be negative not for us.
Temporary period, but for US you know for for the foreseeable future and so.
Getting through to I think that banking industry is beginning to reset what kind of NIM should be earned on deposits because of the of that change and then we also have a less in the in the FX swap costs and so we had less swap expense, which then.
Goes through that line of the of the you now and that we have enough footnotes and that just bounced around a bit with offset being on the interest earning assets.
Got it that's helpful. Thanks, and then a slightly bigger picture question do you guys on profitability I guess, one and take a step back obviously very nice move on expenses. This year and do you guys have more to do next year.
I guess when you go back a year or so ago Yada slide out talking about medium term pretax targets, a kind of shooting for two percentage point improvements in pre tax margin. That's still the case, but I'm curious what what's the base and what total and maybe the destination here because in 2018 pretax margins were 2029, you guys are kind of 26 ish.
This year so I.
I guess off of which be should be thinking about the two percentage point improvement. Thanks.
Hi, Alex it's a it's Eric let me start on that because I think it's something that we've we've obviously been thinking through the markets.
We set those up with the markets what a certain point they worked against US both on the equity markets stock, which is largely bounced back and that we need to kinda, it's going to take a few more quarters to get to a place where were well. We're pleased that was in our outlook, but it was also at a time went on and I write was expect.
Good to go up and I was actually gone the other way and I think I mentioned in one of the comp is late last year that.
That does that change it eni costs us effectively two points of margin.
That said that's just a that's just information I think when we think about how we need to run this business.
We still need to do.
Drive towards those are those targets and drive to those targets at pace than I think we've been.
Clear that at the time, we set those.
Pre tax margin was in the 28% range and I tell you. It for a 26% now you know we need to we've got plans to get to 27% and 28% and 29% and ultimately get that a three handle or the 30 handle on margin. Because we think this is a business that should operate at that.
Level and I think if you work through some of our.
Guidance for this year, you see us making headway on margin.
Driving revenues up and expenses down and I think you'd continue to expect that kind of.
Leverage operating leverage and margin expansion is a you know is kind of hanam out and kind of.
Kind of a fundamental part of our planning process. So we're standing by those targets. We think they're important they were they were well sad and and those are that's where we're headed.
Great. Thanks, so much for that.
Yes.
Our next question comes from Brian Patel with Deutsche Bank. Your line is now open.
Great. Thanks, good morning folks.
You just come back to the I'm, the pricing pressure concept and asset servicing <unk> when detail I did Miss if you could just clarify the did see fees down 2% to 3% Q1 just the servicing asset servicing fee.
I wouldn't have that for one Q, but the broader picture brought a question is we've had that 4% pricing pressure I think that you identified Eric a while back and that had been moderating to that sort of.
2% headwind to just just want to get your thought about that headwind coming into 2020 and clarified that that's that is a separate from a mix shift in when I talk about that as a the to common mix shift towards the T.S. and away from mutual funds, which are.
No were lower revenue capture, albeit they are just as I believe there just as profitable because of lower cost of servicing them.
If you could just talk about that dynamic in the.
As how that shapes that 2020 went to 2% up for surface and fees.
Why don't I begin this.
Brian because there's too.
A lot in what you asked in terms of.
Pricing and how we think about.
On on pricing.
Pricing pressure I mean, if you look back on this business.
Hi Memorial Theres.
Kind of enduring.
On deflation in the business, which we will come through.
No we live with.
And that's been a result of a combination of business growing it's always a scale.
So.
And that's been historically or two persons Theres also been mix shift that's been underway. Since then too I mean the.
Mutual fund.
Is not new would certainly accelerated over the last few years, so and we expect a mix shift continue maybe other factor in here is there's increasing concentration amongst your providers.
Very large market share.
Among.
Providers, but obviously as those providers get larger.
Nature of the rate.
So.
And as a therapy they are paying a fluff merchandise. So but this is the nature of the business and that's what we have to deal with.
So.
We do think and believe it said that.
It's worth.
The pressure that we saw a starting at 18 and.
19, we think that's abating, but we are this is a business, but has lived and we'll continue to live interface.
Okay ongoing fee pressure, which is why.
Since we've refocused on our operating model.
Uh huh.
And that can not only.
But oh become more and more profitable in that kind of environment.
Right right, sorry, let me add a little bit quantitative.
Estimation so.
So.
Ron.
Summary, there so on on pricing I think as he said historically, there's always been a two percentage point or so a headwind on pricing for years.
Okay.
Two years, we saw that pick up 4% of headwinds.
I was kind of 17 18, and then last year thing about 18 to 19 that was also 4%.
Headwinds.
Roughly.
Roughly speaking and then I think we've described how we've been marching through a set of renegotiations and.
Oh and resetting of.
So.
Ah.
Ah ha and quarter times.
As we look into our book of business and think about this coming year, what's factored into our out out look is approximately a 3% pricing headwinds of down from the 4% and you know we've got some visibility good visibility into first quarter in second quarter and so that's that's factored into.
To to our outlook on servicing fees on a full year a full year fit.
To your point of where does mix come out mix comes out and how we describe client flows and activity and it's been relatively neutral activities up a little bit with clients kinda transactional activities that slows you're right tend to work as a way around so that's been a more neutral effect in aggregate relative past history, where it's been a.
A slight positive as a point or two.
And then finally on first quarter U.S. I'll, just remind you that what I guided to on a on fees for the quarter was down 2% to 3% in aggregate for fees. The Downdrafts that I noted were in management fees.
And in C or D.
And so a vial mission I didn't really covers servicing fees, because we effect, we expect those to be flattish.
And.
And we'll see how they play out so that's our current expectation.
That's that's great color. Maybe then just on C or D. You do you guys reiterated the or the revenue and cost synergy or outline that you had a from from day one.
I know, that's mostly a 2021 impact in terms of where you want to be maybe just an update on sort of the or through the timeline into that or or how you're thinking about 2020 in terms of a part of that 260 to 280 million revenue goal for 20.
One in other words a is that.
Making material progress do you think in 2020 as it relates to cheer gotten there.
Brian It's Ron.
I would say, we absolutely are making material for growth.
Firms synergies that we outlined both revenue and cost Oh.
But those.
In the timeframe that we described earlier, but the more important impacts.
For the even greater impact.
<unk> has been around.
Our core business.
And changing the nature of the conversation in the relationships that were happy with our clients.
As we noted.
We.
Find for.
Okay front to back deals.
For.
2019, so just over your ownership I'm sorry in these deals which in essence we.
We have a comprehensive and complete relationship with the client front to back.
Type line, there remains very strong and even in those cases, where.
For likely outcome.
Uh huh.
It's changed the nature of how we're dealing with our clients from one or product provider to true.
Business process outsourcing.
Outsourcing partner with these clients I think that front.
Carry on it.
He was fundamentally change.
Picture of our servicing business.
That's great and is it more of a linear progression through 2021 or more of a hockey stick into 21 as the deals or as you signed these deals.
In terms of revenue [noise].
I do expect it will be largely linear but with a bit of an uptick as we continue to build up the platform I mean, we announced over the over the year.
Series platform partners that we that it hopefully.
Sure.
These are providers that are plugging into our platform and typically weak.
Where we get a share of those economics, and I think you'll see at an increasing rate over 20 and 21.
The number of those kinds of providers on the platform and you'll see them the increasing importance of.
Platform economics.
To be less linear or more.
It's like how any platform gross.
It starts so small and the momentum builds is more more become portable.
Brian indirect that adds to that the the if you think about the revenue trajectory on the synergies for example.
Part of what you'll see is some of the leading indicators like bookings have started to pick up you. So those were up 28% on a year on year basis, and so that's what it will begin to drive that the Charles River Kinda specific revenues. This year and next year I think in contrast to that some of the red.
And you synergies or around connections with the state Street, a base of revenues and in particular, you know the trading Ah the trading and sponsored repo kind of revenue activity.
Thats a that that Weve quickly tried to Lincoln to Charles River tense actually happened earlier in the three year cycle than later, just because of the of the speed at which we can either make the the client or kind of connections or the you know order management system connection so they'll be a mix than I think sometime this year.
We'll we'll probably a do maybe a maybe a more fulsome kind of where are we.
It's where a year and a half two years into this deal and ER and try to share more information sounds like that would be helpful.
Perfect that's great color. Thanks, so much.
Your next question comes from Sexy consist with Morgan Stanley . Your line is open.
Hi, good morning.
I Betsy.
[noise], Eric I wanted to just a Eric I wanted just dig in a little bit on some of the comments around the expenses I think during the prepared remarks, you mentioned.
Yeah, Theres more to come and I would expect that just wondering.
Should we anticipate the pace of change the rate of change other expense reductions is something you thinking continue for the next few years or is this a.
You know 2020, we get the 1% down and then.
No. It's more pulled it steady or continue to grow said well I should take it to you, but you know could throw in line with just core expense pressure. So just wanted to get your understands that the duration of your expectations around the more to come thanks.
But let me begin on that and what we're not giving guidance beyond 2020 points I would say that our ambition is to continue to.
To manage.
Since is down offset by the necessary investments that we need to make.
We believe that there's more room for productivity improvement or automation efforts are underway, but we have much more in front of most than what we've accomplished.
So we see a path to.
Continued and ongoing expense management.
We through 2020, <unk> and likely beyond the way I would think about it and part of that as you.
If you're going to win in this industry. That's what you need to do or we've talked about the servicing fee pressure we've talked about.
Pressured the that's on our clients, but it's also just about being able to scale.
The.
Level that we need to.
Think about the amount of new business that we brought in the.
Those assets could only been brought in if there were confidence on the part of the client base that we would be able to scale, but I just think that to be a leader in this business we have to continue.
The improvement driven by automation driven by process redesign.
To be able to take on business like though.
If we get.
Good.
Hi, just gonna say, if we get a slightly different rate environment, where rates come down again do you feel like you have the flexibility to ramp up that invest that.
Expense reduction.
Betsy, it's Eric that was probably where I was going to go I think we're quite conscious that in a a slower topline.
Growth environment, we're signaling 1% to 3% on fees. This year, that's a year, where you want to hold expenses.
Actually bring them down right, because we need to create some some real operating leverage and margin expansion and so yeah. I think part of the answer your questions. If if if if revenue growth is in the you know that low single digits, then expenses coming down is the is the right answer I think to your point.
And and a precise question that you know it's a if revenues take a you know a downtick, whether its interest rate driven or something else on the equity markets or something.
Then we would go deeper into expenses and we you know ration, our reinvestment and just do it at a perhaps at a different pace, we'd find ways to to what to accelerate some of our other optimization efforts you've seen what we're doing and I T. For example that we described in December we.
Deeper there and just just think about where we were in December I'm. Sorry January of 2019, you know, we announced one person down and felt like a you know through the middle of the year the environment hadn't gotten appreciably different and so we ended up with 2% down I think that's that's the kind of.
Incremental action, we would find a way to deliver.
If the if the environment, we're not a favorable.
Okay. Thank you appreciate it.
Our next question comes from Jim Mitchell with Buckingham Research. Your line is now open.
Hey, good morning.
Maybe first question just on the C. One ratio standardized jumped 60 basis points looked like a 5 billion dollar reduction and art anyways.
What drove that and is there more the two there.
Jim It's Eric I.
I think here a year on the capital ratio pages, where we've shown this quarter, both a standardized and its Dan.
We did that because you know our binding constraints now is effectively both they're almost right on top of one another.
And I think you need to be a scientists to really understand the trend in each of those capital ratios. So let me try and I'll, we'll do a follow up if necessary. So standardized remember is more volume driven with some very relatively simplistic factors and so the.
Standardized ratio.
Actually.
Improve because standardized star double ULAE fell.
Sequentially and that occurred in particular.
In the the synchronize our R.W.A. have our FX activities and our secure.
Securities Oh, I'm, sorry, our SEC lending activities.
And that's kind of related to the lower levels of volatility in the market in lower action So that was.
The biggest downward driver of standardized if you take out your Phd and want to think about advanced RW way.
Our advanced sort of you a went up which is why the advance ratio came down sequentially and the advanced RW way increase because of loan growth.
And investment portfolio growth and a little bit of Ah ops risk.
Primarily so those were the little bit apples and oranges, but that was the driver I think from our perspective, we it just it's a good reminder, that we live in a in a world of both and we are obviously, we'll we'll manage to both I think what I found comforting.
You know notwithstanding all our capital actions that we've taken and our higher pay out we actually are at real healthy capital levels and that obviously gives us flexibility going forward. It sets us well sets us up well for this cycles see car.
And you know we can take things from there.
Obsolete standardized is what matters for see car in that going up is certainly a nice positive so but maybe just as the second question. Following up on your guidance of kind of fee revenue growth of 1% to 3% just maybe that pushed back a little bit on it if I look at Fourq, you fees and nor.
I realize for.
Seasonality and processing fees, and then just annualize for Q I get to almost 2% growth in 2020, so it doesn't feel like a very ambitious.
Target when you think about the S&P has now currently 8% above four Q average level. So you have a pretty big tailwind in the markets you have about 3.5% of growth from.
Hey, you see a that's yet to be installed at 1.1 or two trillion us equivalent to three and 5% gross debits market tailwind and you only have about 2% fee income growth is there something we're missing I know you talked about 3% reduction in the fee rate, but seems like there's.
Could could be a little better than that and just please feel free to talk the down from that.
[laughter] Kim it's Eric you know I'm trying to come up with a realistic forecast because to be honest, we'd actually like to be a realistic of what we're seeing and we also want to a new back to one of the earlier questions. If we're realistic on revenue will do the right thing on expenses and so both the older matter and.
Business, but I think just a realistic forecast and obviously you know something you know changes dramatically you know will up or down you know that that could have an effect. So let me. Let me just go through the pieces that you have a sense. So on servicing fees, we said to the you know.
Lower middle end of the 1% to 3% range. So I think that's pretty clear I think if you think about it the equity markets in the U.S.
On average and the averages matter here are will probably be up in the.
You know and are in the high single digit so that will provide a couple.
Percentage points tailwind in a fees.
There may be a little bit of they'll be obviously, some amount of net new business, but there's also the fee headwinds failed at 3% that comes the other way.
Yes that we need to overcome and so that's why we get to the lower to middle end of the one a 3% range and remember there's some businesses that are in servicing fees that are driving very quickly. A we've noted for example, AMEA, sometimes or some of the asset management space, but there are others like you know our head.
When clients are actually tending to be relatively stable or even in downdraft in some cases, and so that works in different directions. So there's some puts and takes within the portfolio that were always conscious of I think on management fees. We said the upper end of that range and I think you could have a square that with a lower step.
Often first quarter of 2020 that I I mentioned in my prepared remarks.
Trading Hum Yeah, I think trading is trading right now I think you've seen it kinda trend downwards over the last year, I think volatility as and feel like it's it's it's a it's it's moving up fast it's not moving up fast right. It's a you know it's stable at best.
Leverage you know from hedge funds or from a those who borrower land in the SEC finance business. If you look at the industry data is actually down year on year and I don't I don't see a quick turnaround for that and so I don't want to gear up business model to you know.
An automatic recovery and ER and trading volatility and opportunities to to find wider margins and so forth and then there's our Ah software and processing fee other line and I think we've given.
A good clear guidance on a on a.
Charles River and like you say you just have to be careful about the annualization the processing fees and other I think just this quarter processing fees and other were up about 25 bucks higher than would have naturally been expected than a year ago quarter over quarter and if you look at the full year I think.
There's a there's that or even a little more in full year 19 than in full year 18. So you may want to think about annualizing.
Either both 18, and 19 or even look back to 18, just because there's a range of possibilities there.
Okay, All fair points I appreciate the color.
Our next question comes from Brian Kleinhanzl. He doesn't have your line is now.
Great. Thanks.
A quick question on the guidance you did mentioned that there was changes and leverage ratio coming forward FCB could also be coming through and then either been that factor into the guidance or if those came through positively that would all be incremental to the guidance you gave.
Brian It's Eric all that's a that's a hard question because if I answer it I'm going to I'm going to I'm going to I mean, a show show all my cards and I can show all my cars I don't know what the see car cards are going to are going to be like and so [laughter]. That's a that's a tough one I think what we do.
Now is.
We know the amount of the you know capital returns last year, we have some amount of view on this coming year, but we're still guessing and so I. It's it's a you know you I think I think what you should probably two from modeling perspective, and what we would expect you to do is think about the capital return levels.
So we've been at last here you know as at least a starting point all I'll, let you.
Take us wag, if you wanted to add a little more not at that but at least start with last years I think that give some some earnings accretion to the P.S. line parts of the retirement of of shares.
And that should a that should factor into.
Your estimates and our that does factor into our your assessment, presumably in our guidance.
Okay. Thanks, and then separately when you mentioned the pricing headwinds in 2020 of 3% is 3% the new normal or do you still expect that to go back towards the 2% level of ahead when it has been historically.
Brian It's Eric that's that's that's a hard question to answer now I think we'll have a better sense of that you know later this year in 2020, because what we will get to is where are we with clients with whom we need to adjust pricing in 17 and eight.
18, or 60, though they tend to be 357 year contracts will be some that start to come through I think there'll be some balance of trade discussions with those clients there'll be some different types of deals. We do in the you know in 2020 and 21 thing about the front to back deals.
I've kind of a different patina to them, whether they come with more middle office or.
Sometimes with a broader array of.
Service.
I may not factoring differently. So I think it just early to tell I I will I will certainly I'm sure at this point next year give give some kind of indication for 2021, I think we'd like it to come back down to 2%.
But you know we don't want to build a business model to that right now which is partly why we've been so in fabric about you know notwithstanding the fee growth that we're expecting this year that we continue one or reduce expenses.
In this in this plan.
Great. Thanks.
Our next question comes from Michael Carrier with Bank of America. Your line is now open.
Thanks, just a quick one from me you mentioned in the quarter some market related adjustments and software fees curious just what that was in a material and then in the one Q fee outlook with the client mix item that you highlighted.
Sure. It's a it's Eric Mike Let me take the first part of that.
On the the the the market related items and.
In the software and processing fees.
There are several the larger ones are tied around.
The asset management business, where.
Our kind of true underlying activities there is an activity where we see funds.
With our own capital and obviously, if those funds do well or if there's a.
Equity market uptake you tend to have apart positive mark to market, because they're effectively on our balance sheet.
The second one is we've got some compensation programs that tied that are tied to a different investment vehicles and because of how the accounting works.
Those and again tied it's I think it's relatively typical in asset management because the way. The accounting works is you tend to have a mark to market effect and the and an accrual effect, but they tend to be a at different time periods and so in appreciating markets.
As we had this year they tend to be positive in falling markets like we had at the very end of a.
Fourth quarter of 18, they were negative and that's why we have a big swing those are the.
A couple other smaller ones, but those are the lumpy items that we just effectively a b to live with.
Mike, It's Ron <unk>, Oh, Oh pickup the second part of your question there.
Sure.
We have a very large clients, where we do.
We have a comprehensive asset management relationship with them and like lots of other.
It's a large corporate as its de risking.
From a risk on type of assets, which are higher fee.
Who.
Fixed income and liability driven kinds of books, which would sort of lower fees. This client happens to be large.
It will be meaningful.
Assuming it takes place as we expect.
Sometime in early 2020.
Alright, Thanks, a lot.
Our next question comes from Mike Mayo with Wells Fargo Securities.
Your line is now open.
Hi, I have a one question that addresses the headwind in one for the solution. So.
First in terms of the problem pricing pressure, which you addressed you said, it's gone from 4% headwind to 3% headwind.
Maybe.
Maybe not 2%, but a little bit better I guess isn't some of that improvement due to the run off of low margin Blackrock.
And.
After you have.
Assets to be installed equaling, 3.5% of eight you see.
Is that why you are conservatively guiding for 1% to 3% fee growth.
And if pricing pressure is really abating on a core level why is that.
Mike It's Eric I think there a couple of different pieces there on the on the pricing pressure I think we tried to be real distinct in our certainly internal analysis, but also our disclosure around pricing pressure relative to other drivers of the fee.
Servicing fee line. So the other drivers our net new business, which would include a client transition.
Or a or added business. There is we talked about flows and activity which has been relatively.
Modest and that we talk about market. So we talk about the different buckets.
Consciously because it helps us better manage and I think if you. If you go through some of the description I gave the fee headwind, we do expect to be a lighter from 44%. This past year over year in 2020, we expected to be closer to.
3% I think we do expect some market uplift in 2020, that's in contrast to effectively no market uplift in 2019, if you look at the averages and you look at the averages around the world.
And an average those.
And then on net new business would be which would include some.
Some of that either added clients or the occasional a transition out.
We do expect that that would be a bit positive in 2020 based on some of the.
The the last a year of significant wins and in 2019 to your point it was actually.
Flat.
In a fact and that was because of that that client transitions, that's a little bit of compare and contrast.
Mike on your question on a.
The pressure so maybe the better way.
To describe it as we see the effects of the pressure abating.
Some level clients course want to have the past feed proposition that they can we've gotten better managing not and we've gotten better through the addition of additional services like Charles River and the Alpha platform of being able to respond to a fee reduction with the.
With.
Either a consolidation of business offsetting new business a deeper.
Broader share of wallet so maybe.
Maybe the way to think about it is.
There's always ongoing fee pressure and the times higher or lower but it's always there.
In the meantime, we've gotten better managing it both in terms of how we actually go about managing but also in terms of the.
Additional services, we should know bring to bear.
And then as part of the solution to that as you've mentioned is getting more efficient reduced head count four quarters in a row and really technology. So.
I know you just hired a new chief Technology Officer.
If you could just give some sense of your technology priorities last year.
Tech spending I guess went up 4% to 2.1 billion, where do you expect the tech spend to go.
Andy I know I've asked this I asked this had the annual meeting last year, but you ended the decade, what they were 26% pre tax margin and it was 29% when you first converted to the cloud just and this predates you are on predates you Eric but when you look back at that and you say okay. What.
Are you going to do different the next few years that you've maybe should have done understates, we should have done earlier last decade.
So.
Theres a lot of your question, Mike, Let me try and answer it efficiently.
Focus last year was on firstly being ruthless and or prioritization of what was important.
Trying at a much more closely to the needs of the business first the or clients secondly, what we needed to do for operating model and thirdly, what we needed to do for ongoing improving ongoing operational resiliency.
We're very careful about the incremental investments, we make but we need to make incremental.
That has set us up.
That is that.
If you will the actions we took in 2019.
Let us know to be focused on what we think are the right priorities.
Well go some personnel that we focus weren't consistent with the priorities that we'd so.
And now we need to just get better at executing those priorities.
And we feel we've got a plan in place to do that so.
What we told you is that Youve seen our historic growth.
Intention is to then the expense growth just like we've been overall expense growth.
We'll do that combination of continuing to Reprioritize did gross impact to the will be.
Reasonably high but will be offset by the investments that we need to make the continued to be position the way, we want to be with or client.
Result of that.
Arresting the growth, but probably still be slightly.
With that.
Okay, I'd say total tech spend should increase what like 1% shoe percent any numbers are just a little bit higher.
No no let me, let me just to clarify.
We Oh, we were very clear in December that.
Our tech spend has been a this this past year 18 to 19 is been up right and up way too high and the high single digits at the 8% to 9% range.
And our plan this year, which is factored into the outlook is to have tech the flat to down 2%.
Yeah and that would be dawn.
It's important to understand through.
Just like we manage overall expenses there'll be.
Some gross reduction in text funding offset by lower amount of tuck investments to get those two way.
Got to slightly down or kind of spending.
Got it alright, thank you.
Our next question comes from Rob Wild with Autonomous Research. Your line is now open.
Morning, guys Rod in December you highlighted some hiring to target growth from the asset owner space can you talk about the competitive dynamics in that business and any differences from the asset manager side and is that something you're emphasizing is it real strategic priority in the near and medium term.
Rob we are emphasizing that as a priority for.
Couple of reasons first we lump sum of the capabilities that we have are increasingly relevant space the house at owners space.
In the system pass was much more about costs to the only maybe little bit of accounting.
And increasingly asset owners of typical.
Large media mountain owner, Firstly, some form of an asset allocator and in many cases, they have their own investment activities alongside with are doing with third parties.
So it lends itself to the array of services that we have the cycle time on them tends to be a little bit quicker.
With the different selling cycle involves publix, it's a very prescribes selling cycle.
So it's something that we believe we can leverage lot of the capabilities that we hope and it's not like we're not present in that business already.
But we believe there's opportunity to grow share as those that segment needs more and more consistent capabilities that we have.
Got it and then on the asset management side, there's obviously been some.
Consolidation in the broker space and I believe there was some.
Speculation at this could have an impact on distribution to state Street products do you think thats the case and maybe more generally can you discuss how you're thinking about your distribution strategy is that landscape keeps evolving.
That's a good question and there's I think that that's.
We're still in early stages in the I mean at one level.
It.
It's leveled the playing field for distribution so.
For those that were in some ways sharing revenues are paying to be on platforms or when it goes to zero you don't write checks anymore for though so.
It's in some cases for off and others were not the only once it's reduced or expenses, but it's also.
Harder to get.
It's harder to pay for no.
The positioning.
What we do think.
It will cause is with.
If you will transaction fees no longer.
The primary criterion.
The investors, we believe that it's going to.
That it should enable us to point investors to what they should be focused on which is liquidity of the products.
The true cost of moving in and out of the product and we've got or in the Spider range. We've got some of the most actively traded products out there.
Very liquid.
From cases deeper and more liquid than the underlying assets. So we think this is an opportunity for us archery focus liquidity, so I'd be importance about four or.
For investors, but early early days from us.
Great. Thank you.
Our next question comes from track Cassidy with RBC. Your line is now open.
Thank you good morning run and Eric.
Sure Brian can you share with US you talked earlier about business wins in this been a whole mix of different.
Products that you have succeeded with this past year.
Can you talk to the front to back business wins would please new because of Charles River.
What types of customers are you seeing.
Grab on to that type of full array of products is a completely new customer or is that no existing customers that are now willing to give you that opportunity that go front to back.
Drug the the.
Pipeline.
His we're pleased about the pipeline is that it's a true mix of clients.
We would have expected that our existing clients were quite where we had a large position already.
And therefore in daily conversations with them.
Would be interested in this and that's certainly has played out and in most of the instances.
Signed in 2019, there were some existing relationship.
What would spend or.
Very gratifying is that.
We have in the pipeline and working very much through them towards what we would expect to see.
Mandates fine.
2020 or early 2001.
Clients, where we had no relationship for just a very very minor relationship where they.
See the advantage of being able to have a platform it might be off the street products or not but a platform that integrates at all.
And use them.
Give them the ability to reengineer.
Under their own.
It's too as I said earlier.
Just an entirely different set of conversations with clients not about.
We will do capacity for you.
Fraction point lower.
And it's much more filed.
What are you trying to achieve in your business.
Interestingly.
As you'd expect some of the clients.
Are those that are or are challenged.
Bryerman others are those that are already winning in the environment and are trying to figure out how theyre going to be able to scale for the next five or 10 years. So it's a rich mix.
Clients and we think they just very very large potential for us as we go forward.
Very good and then maybe Eric I know, there's been a lot of talk on the call about the.
Pricing pressure that you guys have seen.
You know went up to 4% now seems to be coming in a little bit and you talked about the mix of your business repricing, which may be contributing to the reduction can you talk to the pricing competition, though are you finding that your competitors.
Our less price competitive than maybe two or three years ago or has it really remains unabated.
Gerard its Eric I think it's actually a mix of.
Competitors in some cases and clients and others that actually tribes, so the pricing or you know headwinds and so.
If you think about it you know we are the largest of the provider so the asset manager segment.
Wes and in or around the world as a custodian.
And and fund accounting and I think it's those clients the asset manager clients in particular that have actually borne the brunt of some of the challenges and the investments industry and so in some ways or you know where were work, we're we're or near to the bull.
As I have where there's disruption in the investments industry and that's a that's.
That's that's been why I think we've been disproportionally impacted it's kind of the the effect of having that larger share position.
I think we've always seen competitors come in and out of our industry. You know certainly those in the other segments RMBS of our position asset managers.
But I don't I don't think it's as much come competition driven change there's always some of that but I don't think it's as much of that and I tell you a for every large competitor that's in the ascend theres a large competitor you know who's the beginning to to fade and you know.
Focused on other areas or sometimes there's a small disrupt are coming in there other small players.
Deciding that there are other areas to to refocus so I.
I think a little more client driven than than otherwise.
Well, thank you and I appreciate the time that you spent on the call. Thank you.
Thank you thanks.
There are no further questions at this time I will turn the call over to Frano handy for closing comments.
Thanks, very much everybody for your participation in your interest.
This concludes today's conference call you may now disconnect.