Q1 2020 Earnings Call

Being broadcasted life on state Street's website, <unk> investors not state Street Dot Com. This conference call is being recorded for replay State Street's conference call is copyrighted and all rights or reserve. This call may not be recorded for rebroadcast or distribution in whole or in part with the expressed written authorization from State Street Corporation.

And the only authorized broadcast of this call will be Whos on the State Street website now I would like to introduce Eileen adult Beeler global head of Investor Relations that State Street.

Good morning, and thank you all for joining us.

On our call today, our CEO, Ron Oh, Hanley, well speak first.

Then aercap, while our CFO will take you through our first quarter 2020 earnings slide presentation, which is available for download in the Investor Relations section of our website investors that state Street dotcom.

Afterwards, we'll be happy to take questions.

During the Q in a please limit yourself to two questions and memory Q.

Well, we get started I would like to remind you that today's presentation will include results presented on a basis that excludes or job one or more items from gap.

Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix towards my presentation.

In addition, today's presentations 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 and our form 10-Q.

Forward looking statements speak only as of today, and we disclaim any obligation to update.

Even argues change now let me turn it over to wrong.

Thanks for calling in and good morning, everyone.

You will have seen the today, we released our first quarter earnings results.

I'm pleased with our performance during such turbulent times and I'm proud of our team members worldwide, who achieved these results.

The Cobot 19 hope crisis has necessitated a rapid curtailment of economic activity, which in turn has driven significant financial market volatility in a worked up liquidity and some fixed income markets.

The markets in general and State Street, specifically have withstood the volatility well.

Central banks moved quickly to help alleviate market structure and state Street's longstanding business continuity planning supplemented by rapid innovation has enabled us to operate protect our employees and serve our clients exceptionally well throughout this period, we have continued to execute against our strategy, which is reflected in our strong perform.

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Before discussing our quarterly financial performance I want to review some of the actions that we have taken in support of our clients and to protect the safety of our global workforce, all while remaining focused on state Street's operational excellence resiliency and business performance.

Turning to slide three I will outline some of the key aspects of state Street's response to the pandemic.

As a global company operating at 29 countries, we have been addressing the corona virus since its very inception.

Significant operations and approximately 3000 employees in China, we have somewhat of a head start on adapting our global operating model to the rapidly changing needs of our clients as well to the safety concerns of our approximately 39000 employees across the globe.

Our actions in response to this global health crisis have centered on maintaining employee safety and business continuity and resilience, while concurrently supporting our clients for financial markets and the broader economy.

Let me start with our people.

Here are senior global crisis team has worked continuously since mid January with local management and relevant authorities across the world to safeguard employee health and well be.

Our IP capabilities rapidly allowed us to add capacity for remote access solutions, while also maintaining fiber safety and today approximately 90% of our global workforce is working from home.

We announced the through the end of the year, we suspended any workforce reductions other than for performance or contact reasons in light of the cobot 19 crisis.

Believed this is the right decision for our people our clients and our communities that aligns with our culture and values and reflects our financial strength.

We are undertaking actions to offset the cost of this decision, which we will describe later in the presentation.

Let me turn to our clients in the broader markets.

Macroeconomic environment remains uncertain and the pace and timing of an economic recovery will influence investor behavior financial market conditions, and our clients or the owners and managers of the world capital.

State Street plays a central role in the infrastructure over global financial system. This credit crisis has demonstrated our deep operational capabilities at a time of significantly increased business volumes.

Our global operating model has enabled us to run split operations, where we can efficiently transfer work with minimal disruption.

To client service at a time when we have seen significant expansion act in activity.

For example in March we experienced a 50% increase and back office transactions and an over 80% increase the middle office transaction.

Similarly valuation checks for NAV calculations due to significant asset price moves, which typically run at approximately 70000 per day. It is high as 1 million per day at the height of the market volatility.

Due to the scale and reach of the current Koeppen 19 crisis asset owners and asset managers had been impacted globally with many struggling to cope with market disruptions reduce workforces limited access to normal workplace infrastructure and continuing uncertainty to assist these clients. We are focused on <unk> number of priority.

During the last few weeks.

First we have increased our level of client engagement communication, ensuring we better understand client needs and how we can rack rapidly assist them in this unique and challenging environment.

Second we are maintaining a state of operational readiness through increased iced tea resource capacity.

With strong and tested business continuity plans put into action as I mentioned earlier.

Third we are providing a suite of liquidity solutions.

State Street has a range of short term cash investment options for our clients, including deposits centrally clear repo and access to a full range of money market funds VR, our investment portal on connect.

Global Advisors also has a number of specialized cash strategies.

In addition, our global credit finance team supports clients with overdraft capacity and committed lines of credit.

We also stand ready to support the broader economy.

They treat is actively assisting our clients to tap various federal reserve programs that support the flow of liquidity and credit.

Facilitating approximately 50% of money market mutual fund liquidity facility or M.L., a usage, while also serving as the custodian and accounting administrator for the commercial paper funding facility.

Many clients appreciated that we work closely with the federal reserve to set up the M.L. up and enable clients to access liquidity, even before is fully operational which help clients stabilize their funds.

As we look out over the longer term evolving needs of all of our clients are at the center of our strategy to continue to be our clients central partner and provide the technology and scale they need to grow when the current uncertainty dissipates and global macroeconomic conditions recover.

We believe this crisis will only accelerate the desire clients to outsource more of their operations and partner with a fully capable front to back provider like State Street.

Turning to slide four I am pleased by the direction of progress of our strategy is demonstrated by our strong first quarter performance.

Relative to the prior year period first quarter total revenue increased 5% and on a sequential quarter basis total revenue increased 1%.

First quarter EPS was $1.62 up 37% year over year, an oral we was 10.9%.

Im pleased to report that our first quarter pretax margin improved by over three percentage points to 25.6% excluding notable items.

Despite the unprecedented levels of equity market volatility during the first quarter. Our results benefited from the relatively stable domestic equity market averages relative to the fourth quarter of 2019 market averages were materially higher than the year ago period as result of the dramatic global equity.

The market sell off in late 2018.

Industry flows were positive in aggregate as investors move from long mutual fund positions into E T ups and money market funds.

At State Street, we saw a particularly strong recovery and U.S. flows relative to the first quarter of 2019.

While FX volatility remained low levels for the first cost for the quarter. Our result, ultimately benefited from materially higher levels of FX volatility volatility experienced during the latter half of the quarter and the market tumult associated with Cobot 19.

That volatility plus our multiyear innovation investments led to record FX results.

First quarter and <unk> benefited from significantly higher deposit levels as clients turned to us as part of their flight to quality, despite dramatic long and short end rate reductions.

Assets under custody and administration fell 7% quarter over quarter to 31.9 trillion as a result of lower period and market levels. We saw healthy level of new wins during the quarter totaling 171 billion assets you have to be installed stood at 1.1 trillion.

At quarter end.

A global advisors assets under management fell 14% quarter over quarter to 2.7 trillion as a result of lower at period end equity market levels.

Global Advisors recorded 39 billion of total net inflows during the first quarter the highest quarter of net inflows for the year.

Net inflows were driven by strong inflows in cash and good inflows in institutional business as clients turned to state street's offerings in a time of turmoil.

After experiencing net outflows in January and February I would note that March was a particularly strong month for ETF business with our Spider suite of VTS gathering more than 20 billion in net inflows.

Aided by the integration of Charles River development, we continue to see that our front to back Alpha platform strategy provides an attractive value proposition for our clients and building on this remains a key focus for us in 2020.

We signed a large sovereign wealth fund as a front to back client in quarter one.

The front to back State Street Alpha pipeline is developing it advancing well with a good mix of deal sizes functionality and scope.

Turning to expenses first quarter total expenses were down 1% relative to the year ago period. Excluding notable items. We are building on the strong culture of expense management. We successfully established during 2019, when we undertook significant actions to improve our operational efficiency and.

Fences through a comprehensive from white expense savings program.

Today, we are more focused than ever on driving productivity improvements and automation benefits as we strengthen our operating model even during this unprecedented period.

In addition, as a result at the current environment and our decision to suspend workforce reductions, we're taking additional expense actions, including hiring freeze for non critical operational positions.

We also continued to very carefully manage all discretionary expenses.

To conclude what we cannot predict the scope and duration of the pandemic and the associated economic impact we will remain very focused on three core priorities first supporting our employees in our communities second providing service and operational excellence to our clients and third driving value for our show.

Sure holders.

While the markets, maybe unpredictable, we're well prepared to navigate this volatility with a strong balance sheet capital position and proven operational capabilities.

We at the State Street remain outward looking globally connected and laser focused on helping our clients achieve better investment outcomes for the people they serve.

State Street has navigated through good times, and bad or clients for over two centuries, and this moment will be no different we stand ready to support our clients and our global workforce in any capacity we can.

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 to start my review of our first quarter results I'd like to go to slide five where you see we reported EPS of $1.62 up 37% year over year.

On the top left panel I would call your attention to two items first our FX trading business had extraordinary quarter generating revenues of 459 million off record volumes and increased client demand, which I will spend more time discussing shortly and second we had a 36 million dollar provision expense with the sequential increase driven mark.

By the effects of the cobot 19 on our economic forecasts.

On the top right panel, we had $11 million of expected pretax acquisition restructuring charges, primarily related to Charles River as was 9 million of after tax costs associated with the redemption of our series C preferred securities.

On the bottom left panel we show our quarterly results X notable items for those of you want to see some of the underlying trends I.

I would also note that we were able to generate positive operating leverage in the first quarter, helping to improve our first quarter.

2020 pre tax margin year over year.

Turning to slide six period, and asea levels decreased 2% year on year and 7% quarter on quarter.

Year over year, you see a were affected by previously announced client transition that had a de minimis effect on year on year revenues.

Quarter on quarter. The are you see a decrease was mainly due to lower ended period equity market levels.

As a reminder, approximately half of our CH reported on a one month lag. So some of the impact the equity sell off seen in March has not yet reflected here.

Hey, you end levels decreased 4% year on year, and 14% quarter on quarter to 2.7 trillion driven largely by lower end of period market levels, partially offset by strong net inflows over both time periods.

Emits extraordinary market conditions for asset managers in first quarter stay treat global advisors saw net inflows of 39 billion largely driven by cash and institutional inflows.

Unpacking, the first quarter, you I'm trends a bit it with a tale of January and February versus March has after seeing modest net outflows in the first two months for the quarter Global advisors saw strong inflows. So approximately 45 billion in March with 27 billion cash inflows and 23 billion any Ts.

Global advisors, so strong inflows of more than 10 billion in March alone into spy, our Premier S&P 500, Mcf offerings, and the largest and most liquid product in its class.

Moving to slide seven servicing fees were up 3% year on year has the core business continued to regain momentum and down 1% quarter on quarter on lower equity markets.

As Ron said, the investment services business significantly elevated client activity inflows during the quarter, particularly in March and successfully navigated the activity with minimal service disruptions.

Through this stressed environment, we believe clients realize perhaps more than ever the value of our scale and capabilities during exceptionally challenging market conditions.

By way of an example, a number where asset manager clients have express gratitude for their partnership with State Street, and the fact that our investment servicing business has worked tirelessly to ensure that their fund investors are able to buy sell in monitor their fund performance, both accurately and timely which gives them the strong sense of confidence they deserve.

On the bottom right panel. This page. We've again included some sales performance indicators that underlying this dynamic.

As you can see you see a wins totaled 131 billion in first quarter with several deals coming through the pipeline in late March.

We do expect to see some near term slowdown in sales, but assets to be installed as if the first quarter period end is strong at 1.1 trillion.

And we still expect fee pressure to remain moderated as it has in recent quarters.

Turning to slide eight.

Let me discuss the other fee revenue lines.

Beginning with management fees first quarter revenues were up 7% year on year, but down 3% quarter on quarter, driven by lower average market levels and mix changes away from higher fee institutional products, partially offset by positive mix changes in each yes.

As I mentioned earlier FX trading services were up 64% year on year, and 68% quarter on quarter as the business saw record volumes and increased client demand given market volatility admits that little bit 19, pandemic something I'll be discussing more.

In more detail shortly.

Securities Finance revenues were down 22% year on year as investor asset mix shifted towards lower spread fixed income assets and as hedge fund de leveraging in foreign markets drove down the enhanced custody demand.

Revenues were down 17% quarter on quarter due to similar factors.

Finally software and processing fees were down 41% year on year and 49% quarter on quarter.

As you know this line includes certain business revenues, such as charity softer fees as well as other lumpy items, such as the amortization of tax advantage investments.

Certain currency translation impacts and the mark to market adjustment on employee long term incentive plans.

These other items are worth about $65 million negative this quarter as opposed to the usual slight positive.

Moving to slide nine we wanted to provide some incremental color around the extraordinary quarter, we saw in the FX trading franchise.

For several quarters now we've been highlighting that our FX business had been confronting historically low volatility levels, but that we had been focused on expanding the client base and building share of wallet, while reinvesting in our broad set of platforms.

This quarter, we were the us well positioned to support our clients' needs as volumes and volatility levels surged to the cobot 19 pandemic.

Spring elevated client demand across our various areas FX trading venues.

As you can see the FX sales and trading business, including direct effects and Kosi FX. So a 40% increase in volumes from average levels, all or FX trading platforms, including FX can act in current ex soft 50% increase in volumes over the same period.

On the right hand side of this page. We've included the most recent your money rankings related to the FX business, including its number one ranking for real money asset managers for two years in a row to give you a sense of the depth and breadth of this important franchise.

[noise] moving to slide 10, you'll see in the top the panel a five quarter summary of CRT standalone revenue in pre tax income.

For first quarter CRD generate standalone revenue of 100 million, which was up 1% year on year and down 21% quarter on quarter.

I would again remind this audience the lumpiness inherent see six so six revenue recognition standards and to not read across any one quarter's results.

Having said that we do expect some disruption go live date and professional services fees over the coming months has onsite activity is currently somewhat curtailed.

On the right panel. We began included some texture around the momentum we've we're seeing in the business and how the integration is progressing.

We continue to remain confident in the revenue and cost synergy goals announced at the time of the acquisition.

Turning to slide 11.

I was down 1% year on year, but up 4% quarter on quarter. The sequential increase in Eni was primarily driven by increased deposit balances and episodic market related benefits of approximately 20 million, partially offset by long term debt issuance costs.

Average assets were up has average deposits increased 10% quarter on quarter from fourth quarter 19 with period end deposits, increasing 41% quarter on quarter as we saw wave a flight to quality client deposits surge at the end of March, particularly from asset managers, we were there to.

Support our clients.

We since seen deposit levels receipt somewhat in April, but they still remain elevated versus 14 19 levels.

End of period assets were also driven up by 27 billion as we help clients access the feds new money market mutual fund liquidity facility or mm Lf State Street facilitated just over 50% of the M.L.S. volume as we asserted or leadership role in supporting our clients and the Smith functioning.

Markets.

Moving to slide 12, we've included some color here on the loan portfolio as well as the company's allowance for credit losses.

As you know state Street's loan portfolio is relatively small typically 10% or so of average assets and generally consists of high quality and conservatively underwritten mix of fun finance leveraged loans commercial real estate in municipal loans.

On the right panels. This page of included some incremental detail around the loan book and its characteristics.

In the current environment I'd note a few highlights as a first quarter.

Approximately 91% of the book is investment grade with 84% of the on balance sheet exposure to investment grade and 98% or the off balance sheet exposures.

The leverage loan portfolio portfolio of approximately 4 billion has relatively low exposure to cyclical sectors. Currently infocus and has an average rating of double b, which is stronger than the traditional index.

Compared to Fourq to 19 average loans grew 912 average loans grew 12% while period end loans grew 23%, primarily driven by elevated Klein overdrafts as we help clients facilitate the higher settlement of trades and FX activities during March.

These overdrafts have already receded in April.

Moving to the bottom left panel the total allowance for credit losses increased by 35 million to 124 million. If we add it to reserves largely related to the effects. The covert 19 pandemic on the end of March economic forecasts.

On Slide 13, we began provided a view of expenses this quarter X notables so that the underlying trends are readily visible.

Our first quarter 20 expenses, excluding notable items and seasonal expenses were down 2% year over year, driven by resource discipline, and reengineering efforts and down 2% quarter on quarter, primarily driven by the timing of foundation funding lower travel and lower professional expenses.

We continue to execute on many of the investments and optimization savings initiatives detailed earlier in the year and believe that taken together. These various efforts position us to navigate the extraordinary market conditions seen in recent weeks and meet our expense goals.

We're making good progress on lowering compensation benefits costs occupancy costs and other costs.

And I T plus are lumpy, but on track to.

Given the potential impact of the Cove at 19 pandemic on revenues, we obviously need to begin to intervene further on expenses and now expect to take them down 1% to 2% for the full year.

Just won't be easy, but we've begun to accelerate our plans that will adjust as we know more.

First as Ron mentioned earlier for the remainder of the year unless the crisis concludes earlier earlier, who will assist spend most workforce reductions. We also instituted a hiring freeze for non critical positions.

Second we see opportunities to dig deeper in noncompensation expenses, such as occupancy contractors travel and other professional fees.

Third we will be judicious about the reinvestment needed to drive growth in our business and finally, we will adjust as the situation develops.

[noise] moving to slide 14, you can see that we maintained strong capital and liquidity levels during first quarter, whether standardize CET, one ratio, which was binding for first quarter, ending at 10.7% and our LCR ratio essentially flat quarter on quarter.

As you can see in the middle right panel are SLR in tier one leverage ratios ended at 5.4% and 6.1% respectively with a sequential decline largely driven by an influx of flight to quality client deposits.

We have the room to support our client activity under both ratios, especially given that the SLR would have been 7.1% post implementation of section floral two on April 1st.

During the quarter, we returned a total of approximately 683 million of capital to shareholders, including 500 million in share repurchases before we acting coordination with other GE said members of the financial services form agreed to temporarily suspend our repurchases in second quarter.

We remain confident in our robust capital levels and our ongoing ability to continue to deploy our balance sheet to support our clients the financial markets and the broader economy.

Turning to slide 15, now we've provided a summary of our first quarter results.

As we mentioned earlier throughout this crisis, we have been differentiating ourselves by proactively reaching out and assisting clients for these difficult times, our resiliency during heightened volatility and our ability to execute record volumes without sacrificing service quality has created goodwill with our client as we look to the feature in the post cobot 19 time.

Period.

That said the potential lengthen depth of impact of the cobot 19 pandemic on the economy has made the operating environment uncertain.

This uncertainty obviously introduces a higher than usual degree of variability into our financial outlook.

However, I would like to share our current expectations for the remainder of 2020 under a certain set of assumptions.

While we believe these are reasonable set of assumptions there was a broad range of possibilities regarding the potential length of the cobot 19 pandemic and the scale the economic impacts as such the current expectations. We are providing sabre represent one potential range of outcomes, but they are not representative of the full range of potential outcome.

That may actually occur.

So with a very difficult second quarter economic situation in front of US we assume global central banks keeps short short term rates low and that long and rates than flowed up to about 80 basis points by year end.

We assume equity levels in second quarter to be consistent with March averages and potentially flowed up in the second half of the year.

This would leave average equity market levels for 2020, lower as compared to 29 team.

Given these significant changes to the economic outlook. We currently expect that fee revenue will be down 1% to 2% year on year for full year 2020.

Looking at the component pieces of our fee revenue.

Let me go through each one.

Beginning with servicing fees, we expect they will be down 1% to 3% driven largely by lower than expected market averages.

We continue to seek good underlying health and momentum in the servicing business, although there may be a slight slowdown in the sales pipeline over the near term as clients adjusts the new operating environment.

Moving to management fees, we would expect now that they will be down 3% to 5% year on year, depending on equity market performance.

Including included in this outlook the zero interest rate environment introduces the likelihood of money market fund fee waivers, which are highly sensitive to short term rates and could have a modest impact of approximately $10 million to $40 million on our business largely in the second half of the year.

Our markets businesses will continue to be informed by the trading environment. We expect the spike in FX trading at revenues will subside with market volumes and volatility while securities Finance will continue to be impacted by lower levels of leverage.

Within software and processing fees, we remain confident in the C or D deal synergies. However, the uncertainty in the operational pressures introduced by the coated 19 pandemic on the front office clients is now expecting to create go live delays and slow down professional services projects.

I have several current CR declines as a result, we now expect security revenue to be up mid single digit percentages year on year full full year 2020.

At this time, we would expect software and processing fees ex CRD add to it likely be between 60 and $70 million per quarter for the rest of the year absent any further significant market related adjustments.

Regarding the second quarter of 2020 on a sequential quarter basis, we expect overall fee revenue to be down 5% to 9% depending on depending on our much lower equity market levels with servicing fees towards the minus 5% ended the range management fees coming in towards the mine.

It is 9% ended the range and considering some reversion in the trading revenues.

Regarding Eni, we still expect to be down approximately 10% year on year for full year 2020 as I previously indicated in mid March primarily driven by the impact of low rates and the relatively strong performance in the first quarter.

For the second quarter, we currently expect NII to be down about 11% quarter on quarter X episodic items, driven by the full quarter impact of lower rates, we expect an eye to stabilize by the fourth quarter.

Turning to expenses, even during this unprecedented period, we remain laser focused on driving sustainable productivity improvements and automation benefits.

We expect that full year expenses X notable items will now be down 1% to 2% exceeding our original goal of down 1% as I mentioned earlier.

In regards to our provision expense Twoq results will be driven by updated economic forecasts embedded in our new Cecil models, plus any specific reserves.

At the end of March we assumed a number of factors in a range of scenarios for our general reserve.

Among those numerous inputs are dominant scenario add to Q GDP, if minus 12% and full year GDP of minus 2%.

How do we move to a different dominance scenario for full year GDP was minus 6% for example than we would have roughly built an additional 50 million of reserves on simplifying of course and there are dozens of important variables. But this example gives you a taste of the sensitivity of the Cecil reserving process to potential economics.

In areas.

On taxes, we continued expected will land within the previously provided range of 17% to 19% for a tax rate for the full year. So some discrete items are expected to drive down that rate by about four percentage points lower for second quarter.

And finally, we begin included our previously disclosed medium term financial targets in our earnings presentation. This morning, because we believe they are the right targets.

However, with the onset of the Cobot 19 pandemic in a significant uncertainty around the magnitude and duration of its impacts raises the question regarding the timing of when we might realize those targets, which were set on a run rate basis for 2022.

We're not changing the timing at this point, but we'll continue to monitor the length of the cobot 19 anticipated impact closely going forward.

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

Thanks, Eric Operator, we can now open the call for questions.

Ladies and gentlemen to ask a question. Please press star and the number one on your telephone keypad, well pause for just a moment coupled acuity roster.

Your first question comes from Alex Blostein with Goldman Sachs. Your line is open.

Great Great. Good morning, everybody Eric Thanks for the updated detailed guidance I guess first question maybe around deposits. So no below march levels, but above I guess, you set forth quarter, obviously, it's a really wide spread there. So so maybe just give us a flavor for where deposits currently state and April.

At all on average.

And then importantly, as you guys think about the capacity to absorb any additional deposits or sustain the current levels. How should we think of that with respect to your capital leverage ratios, how how much what were you guys will be able to take them.

Alex It's Eric let me start on the deposits and just give you a little bit at textron the trends because I think that that would help you and obviously the the deposit levels move quite a bit if you recall back in fourth quarter, our deposit levels were about 165 billion an aggregate and.

In January and February they were literally just spot onto those averages what started to.

To change was a surge we saw at the beginning of March and so if we just think about the first half of March were running at about 185 billion of average total deposits.

Second half of March spiked, a 235 billion and not together is what got us to.

Drove the higher averages for the quarter and I think you saw our end of period print was north of 250 billion and we literally operate at that level of deposits for about a week at the very end of the quarter.

In terms of today, they've been running somewhere around 200 210 billion. So still at a hefty and I'll fall kind of risk off levels, we're seeing that flight to quality.

And we're certainly there to support our clients would you expect them to AEP down and.

I think the question is what's the pace of that do we get a resurgence or not.

But theres a theres arranges scenarios.

What I would say is because it's deposits now are.

Our facilitation a way for us to facilitate.

The needs of our clients right were there for them on overdraft, where there for them on deposits for there for them on repo, where there for them on the on supporting them at the fed facilities and I think were.

We're delighted to do that as much as possible.

In terms of the capacity as I said in my prepared remarks, I think we've got.

Ample capacity at these levels of deposits to support our clients you see our capital ratios, whether it's the SLR.

Post the April 1st change is quite high.

And that can that set.

Uh huh.

On a reported.

On a on the new basis about 7% against the 5%.

Level, you should tier one leverage we still ran well this quarter and that's against the 4% minimum so theres certainly some range, there's not unlimited range, but you know our perspective is that if deposit stay.

In the at levels that they are at today, the kind of 200 to 210 billion, that's quite comfortable for us and we're here to do what we need to for our clients.

Got it that's helpful detail. Thanks for that and then my second question is around CRD, So revenues about $100 million in the first quarter, that's up only 1% I guess year over year, I think that business has been growing and that kind of high single digit range and you guys were obviously, helping to increase that further.

Is that sort of the impact of Cowen 19 already playing out in the first quarter results and that's really kind of the slowdown or is there something else going on.

I guess as you look at the pipeline and the front to back wins that you guys been highlighting over the last couple of quarters any way to help us frame kind of the revenue backlog and that part of the business.

Timing to recognize it understanding that obviously the current events could make move that timing up and down, but just hoping to get some flavor there. Thanks.

Alex Let me start on that and then I'll turn it over to Eric.

We are well we remain very pleased with the impact that C or D is having an ARPU on our business.

The front to back pipeline continues to grow.

And it's it's having CRT as part of that.

Toolbox, if you will.

As I mentioned before in some cases, we don't end up in the end with a full front to back, but we end up with it built out relationship or even a relationship that we didn't have before for example, the one front to back when we had.

We had this quarter or that we announced this quarter.

It's not even an existing client advisors yard your state Street, so from an overall enhance they treat value proposition that's working well.

There are noted.

The reported revenues are very very sensitive to.

Accounting rules the accounting treatment.

And we did it's very sensitive to win when we're delivering things and if deliveries gets changed were quick contours of something gets changed those affect the timing of reported revenue. So.

Strategically this remains a.

Portland, and trickle business for us, it's driving a lot of new activity, it's driving activity.

The profitable back office for us So we remain unchanged on its important to us strategically.

Eric can talk about book.

The actual financial impact.

Your question.

Sure Alex it's a it's Eric so.

The quarterly revenues are always lumpy and I'll, just remind you that.

For a mid size Cline will.

We will bring in when it's on an on premise basis potentially you know $510 million.

Essential.

Installation when it goes live.

You know the smaller clients, obviously are 1 million 2 million 3 million and so you can see on a base of 100 million. You've got you we could see big swings in in growth rates positive or or negative so I wouldn't read too much into that.

Well, we have done it started to think through the.

The likely revenues for the business this year and this business in contrast to our servicing fee business.

Has more onsite kind of work that needs to be done it theres onsite sort of co development to integrate our platform with an asset managers. There's professional services billings that also go with that so between the professional services billings just being slow down with work from home and then the go live dates.

Likely to be pushed out I don't think they'll be we don't we don't expect them to two to to not be there, but we do extensive lengthening of the those go live dates.

We're now.

Looking at revenue growth at about 5%, 6%, we said mid single digits as opposed to the low double digits that we had expected this year and we think thats, mostly going to be around timing as opposed to.

Underlying performance the.

The pipeline.

In CRD specifically is.

Healthy it's continued at the levels that it had been just a few months ago and the interest in.

In securing mandates from our clients, we think is actually as strong as ever.

Great. Thanks for taking the questions.

Question comes from Glenn score with Evercore. Your line is open.

Hi, Thanks.

A quick quick question on the loan book.

So.

I heard you 11 clear. Thank you on what the environment, you underwrote, you and what it could be and the worst environment in second quarter. So.

I'm trying to think through if you look at the composition a loan books fun finance and overdrafts. They don't scare me much at my gut is not much of the reserves are focused on that so is it correct.

To say that most of the reserving goes towards the 4 billion Levered loads in the 2 billion commercial real estate and.

I'm just curious if you can contextualize a little bit more about.

Quality those portfolios because what you said looks good but 36, they see it starts adding up in terms of just reserving muscle.

When it's Eric I think you've got the right Fred mine on the loan book some modest size loan book, which is 10% of our total assets.

And if it's pretty diversified both across categories and then within categories. So fun finances. As you mentioned is primarily capital call finance loans.

With recourse to some of the largest and post premier investors in the world were.

That's that's a pretty attractive business area for us and one that thats grown nicely.

Leverage loans is an area that we obviously in this environment, we'll spend a little extra time on I'll come back talk about that in a moment and then commercial real estate overdrafts communities are pretty are pretty straightforward.

You are right to hypothesize that.

More than a majority of the reserves for our book is for the leverage loan book.

And the recent were reasonably comfortable with this book not to say that things will happen on the individual name here or there is that it tends to be enough market book average rating is about a double b.

As opposed to than the average in the index is single B and it's literally the center of gravity is is quite different we've been tracking the market prices for this book. This this book tends to have market prices.

As we've seen some some change in the market to be six seven points better than the typical.

Than the average.

Leverage loan index so.

It's performed well, so far and it's pretty well diversified there aren't any particularly unusual exposures, there's not much oil and gas in it. So we're yes, we think it'll it'll it'll.

I will operate well during this time periods, but I guess at the end of the day. It's it's a relatively high grade version of leverage lending and it's only $4 billion and so we think it's it'll it'll.

Oh performed well and I will just be a piece of the broader picture.

For the for the company.

Cool all right appreciate the perspective, one follow up on on just and I also off.

So keeping it down 10.

This is the thought process for the year, but.

But but deposit book as a lot more I'm just curious.

Lot of deposits come in and non in non interest bearing and so we'll see how long they sit there, but they can hang out a little while at least.

I'm just curious I know rate thing, but we know the rates, where you can see I'm curious why and I with a greater deposit base wouldn't be a little bit less bad.

[noise] laminate, it's Eric I think you you said it right I won't repeat the the.

The five fill it or where do you use but.

Prevailing interest rates at the Central Bank. If you think of Iowa, we are as a benchmark remarkably low right. There, they're a 10 basis points. So if you think about it whether we taken a deposit at zero or taken in deposit at one theres very little spread there and so the value of the deposits.

While there are there for.

There are there on our balance sheet and we can lend against them we could.

Use them to support our or other books. There there are transient buying large and the value is small relative to what it's been if you think back to the first quarter on average first quarter deposits were worth roughly 100 basis points, just think about the call.

Cost of funds versus the Io we are rate in the in the second quarter, we expect deposits crossed the.

The spectrum to be worth a fraction that closer to 10 basis points. So it's just been an order of magnitude difference and so while we will have we may have a surge or higher levels of deposits. The lumpy, particularly we are numerous live this time around.

Hi, guys I appreciate it.

For all the guidance thanks.

Your next question comes from Brennan Hawken with DBS. Your line is open.

Good morning, Thanks for taking my questions.

Just wanted to dig in a little bit on your expectation on trading revenue.

I know you referenced Eric that you expect it to subside.

Can you help us with magnitude.

You know.

How should we think about.

Hi, and the potential decline from what you did in one Q are you are you really just sort of expecting it to revert back to what we saw.

Kind of like last year run rate or you know how should we calibrate and what should we watch for as the year progresses.

Right and that's a really good question in a real hard one to answer with any conviction, but let me let me share with you how we're thinking about it from a forecasting standpoint and then.

Some of the.

Some of the possibilities.

From a forecasting standpoint, our view is by.

May and June.

Absent any other.

Dramatic changes to the environment.

The FX volumes will.

Normalize back to what they were pre pre crisis and then that.

Those those levels pre crisis will be what we should expect in third quarter in fourth quarter.

Saying all that assuming that we have stability in equity markets bond markets global markets and.

That's hard to predict and obviously any any further deterioration to help situation or the economic situations going to push us right back to where we were so.

We're not hoping for that were opened just for the opposite for though.

The quieting of the.

The.

Dormice disruption that we've seen.

All that said.

There is a range of outcomes here not just from the pandemic and its economic impact on markets like we saw in March we have a repeat of that in coming months and we could see some.

Higher volumes again, but there's also a set of if you think about the rest of the year a set of events right. We've got.

We've got Brexit continuing it in some ways we've got.

You asked elections, we've got a series of different.

Elements I think political economic global World trade is going to come back at some point. It will have we may have tensions there and so it's hard for me to really predict and so we tend to try to be careful with our.

With our forecasts in.

In FX in particular, knowing that there certainly could be some.

Some some upside, but I think we'll see it when it happens and can can probably factor that in.

Okay, Okay, great. Thanks for that.

And then.

Circling back as a follow up to one of Glens questions on the.

The loan book, Thanks for the additional disclosure there.

The two biggest pieces are the fund finance and overdraft.

[music].

Can you talk about any exposures that you might have in the fund finance book to mortgage rates.

What.

What's in that book makes you or your risk managers nervous.

When they go to sleep at night, and obviously, it's not.

Go into a market like this.

It's not necessarily the stuff you always think that you need to worry about sometimes you get get hit by surprise so well.

How can we.

He said that you think about that book how is it that you risk management and how do you ensure that we don't end up in a situation similar to what we had last cycle, where we thought was good like with the liquidity backstop for that asset backed commercial paper conduits, all the suddenly become.

That's the end up coming back on the balance sheet.

Big headache to deals.

Yes, Brendan it's Eric Let me, let me give you a little bit of texture, perhaps on what's included in the $13 billion, a fund finance and how we think about it.

And you can imagine over the last month.

Between finance and our risk organization and our business teams, we spend extra time.

And heightening our oversight and.

Monitoring, but let me let me describe for you what we have there and kind of how we think about the each of those books and maintaining the quality that we'd like so.

Within fund finance.

The largest pieces capital call financing, that's literally lines to some of the premier investors around the world and Thats done on a that's been allocated on a fund by fund basis, but the work that goes on behind the scenes is the that each of those funds as a set of investor is behind it and what we need to do it.

Maintaining diversified.

Roof of.

Of of of.

Leads to those investors and we want to avoid all concentrations. So theres a lot of work that gets done as we grow that both to make sure that there aren't any unknown concentrations of the concentrations are all within limits on a literally.

At Investor by Investor basis, because that's where we have recourse. So that's the primary approach on the capital call financing.

The next piece within fund Finance is the 40 Act like.

Liquidity liquidity.

Funds that these are the funds that can have a certain amount of leverage that very well.

Described I think in the 40 Act.

Rules and they have limits on the amount of leverage they can and there. The monitoring is what's the asset pool. It's effectively a version of margin lending you know, what's the underlying asset pool, what are the line sizes.

How do we.

Constrained those appropriately and have our limit structures and then there is literally the daily monitoring of that.

Of that leverage in that margining, but thats pretty straightforward in some sense, but just like you say you never say never and so there's extra oversight in these volatile times to to measure and to monitor.

Underlying collateral literally on a daily basis.

I'd expect and then the smallest piece within fund finance is the Bdcs that sits just over $1 billion it tends to be bdcs with.

Triple B, a pools of underlying loans and so there it's about diversification of the bdcs they tend to be from some of the most a premier alternative asset manager providers right. Some of our largest clients because that's what we're trying to support there and there it's about a set of size.

Limits and.

And ongoing monitoring.

So that's maybe a little bit a texture I think like I guess, the the frame of reference I give you as each of these will different and each of these has a different.

Level of monitoring and the process now I think like any bank, but ours is kind of simpler and more than 11, most banks is.

To see if there any.

If margin changes more than expected occasionally you get.

You get to.

Questions around the possibility of.

Adjusting covenants and that's a that quickly escalate so that we have to make sure that how we react to those proactively consciously and sometimes we grant those and sometimes we grant those and actually.

Task the borrower to reduce their leverage are there or our exposure to their exposure today, our exposure to them and so theres a I'd say, there's a theres a very natural set of.

Actions that we use both on an monitoring and intervention basis on ongoing basis, but let me pause there with at least that texture.

Yeah. Thanks, that's that's spread additional color appreciate it.

Comes from a can you spend with Jefferies. Your line is open.

Hey, Thanks, good morning.

Running Erik I was wondering if you could expand upon your comments you gave on C or D talking about that you know that may be though.

Hi goes a little bit slower there just in terms of your regular way servicing conversations that you're having with clients, giving the changes and how we're all working how are those conversations going our <unk>. Joseph you know how do you approach sales sales cycles, and and moving forward with engagements that you've already been in process Swift.

In sourcing new business. Thanks.

Ken.

The.

The level of engagement remains high and has continued to be high even during this.

This last month five weeks so Bob.

Almost everybody in the world working from home.

And in fact.

New very large.

Situation developed.

Right in the middle robust, but weve started to work through.

I would say that the the underlying themes remain the same.

With this idea of improving and lowering costs of.

Of the asset managers of the asset owners.

Our cost structure of improving their operations trying to do a.

Doug.

Outsource things that are not really critical too.

Their investment.

Oh to their investments, but a critical to achieving better outcomes both for their clients for themselves.

I think what's changed in what's been added to the the the consideration though is all of the operational stress that's been applied to these managers since then.

Many many managers were not prepared from work from home.

And they certainly weren't prepared for a global work from home. So we see that if anything providing another catalyst on to these kinds of.

What we consider fundamental enterprise outsourcing and you can see that it's playing through even in our and our new business.

But the line that we focus on his new business plus business to be installed and as you can see the business to be installed number remains quite high and that reflects the fact that the business increasingly is less about just a single product and much more about.

Multiple initiatives multiple kinds of offerings that we have underway for for our clients and we think see this continuing we see that.

The needed desire to outsource that the extreme you'll have clients but.

Just have antiquated systems or operations at the fundamental upgrading the other extreme and weve experiences to highly successful managers and and outfit owners that are saying, we can do this but it's not a good use of our time and we want to be able to scale and we want to work with a partner that could be there.

For us so we see this whole trend continuing and probably accelerating.

Okay understood all right just I'd just add that we're also.

Obviously these.

The revenues this year.

Based on the bookings and the wins from last year by and large where I think about the installation process.

And.

So far I think we've been pleased with the continued implementation our onboarding team has been active through the end of March Onboarding, some sizable clients on on on schedule.

April.

You know, we've we're halfway through April and have visibility the rest of month that are not seeing any unusual or.

Nature delays and so for the for the for the time being and I think if we can get through the we could get through March and April.

The that that will bode well, but the the previously.

One business tends to be installed on schedule because it needs to be right you've got the.

The the previous provider who needs to.

Come off you've got a lot of preparation that's been done and so.

So far we've we've actually seen good progress or good good continuity on the on the on boarding side, which is important because that's when the revenues tend to.

Again to be accrued.

Understood.

Thank you and the follow up just on on the buyback side you guys are part of the financial services form agreement to stock buybacks through the second quarter, but obviously.

Not being a credits as credit sensitive of an institution and just looking at the results. This quarter. It would seem that you guys would have capacity to continue a buyback regardless of what the credit environment turned into I'm. Just wondering just your thoughts on whether or not just in rest of the forum has to decides to continue to stock buybacks for longer than this.

Second quarter would you have to be a part of that or could you make start making your own decisions based on your own capacity to do so thanks.

Yes, Ken.

Should be clear, we make our own decisions on this.

We are.

We.

Or part of the form we talked to form and we consider it actually a very good.

Very good moved to make to instill confidence.

In the system into a remember this happened at a time, where people were questioning whether or not banks would be there.

And.

We I felt it was not going to be useful for us too.

Not be part of the to have more time spent on three where they are one or two outliers as opposed to banks are committed to being there during the crisis, but.

Make our own decisions you're right. We are very different than our results will play out differently than credit in terms of banks.

So the good news is.

That.

With the new.

With the new rules that are being implemented.

Capital planning can be much more dynamic than it has been in the past and we'll take advantage that as the.

Situation plays out I mean, the realities are that it's still highly uncertain you heard any environments highly uncertain you heard that reflected in.

In the assumptions upon which we based our guidance to you.

One could argue that we've been very conservative.

That one could argue also that the situation could get a lot worse than what our what are what we put out there was a point estimate that's exactly what we've done we've given the point estimate within or a wide range of potential outcomes.

The market level, one is the biggest one.

And.

There the assumption is that average markets will be what they were at period end barge I mean, that's we're already much.

Spot levels are higher than that so.

We really don't know here, which is why going back to your question on capital.

If this all plays out as is is we see we believe will be in a position to distribute capital but.

We think it's wise to be able to make that decision dynamically quarter to quarter.

Understood if I can attach a quick follow up Eric just on one of your prepared remarks, the tend to 40 of the potential fee waivers that's not on dissimilar to what happened prior cycle is that just like an aggregate number and.

What could happen on a full year basis as opposed to a quarterly basis.

Ken It's Erik Yes, thats for the rest of the year, primarily in the second quarter right. I gave you a large range plus a highly dependent on short rates right. If the overnight repo rates are at one or two basis points for six or seven or 10 or 11, you literally.

Could go from zero to the.

To what could be the upper upper into that range, but that would have been for the rest of the year and it would be.

Primarily in the second half.

Okay got it thank you.

[music].

Your next question comes from Becky Gresik with Morgan Stanley. Your line is open.

Hi, good morning.

Good morning Betsy.

HM wanted to dig in a little bit on the expense side I know you indicated that you're looking at everything and now we're anticipating that you're going to be able to bring expenses down 1% to 2% more than the prior commentary around you know down 1% and I just wanted to understand where you know in an environment where you're.

No not doing any redundancies, obviously this year could you speak to where there's some opportunity set to dig into that.

Yes, Betsy it's Eric.

The opportunity said is brought in and.

It's a set of initiatives that we had underway and.

In the spirit of.

When things are tougher you've got act more dramatically.

Yes, I think the theme that I share with you. So if you think about the different areas of our expense base.

You know the compensation benefits line.

Won't be as much of a tailwind as Weve I think I made a very conscious an appropriate choice on a.

On on protecting our people, but if you think about the expense base, it's only about half of the expense base.

And even within the compensation benefits launch for example, there are contractors are a significant amount of contractors that we employ and if you think about it if we're going to end up with.

Just a larger employee workforce than we expected right contractors could be an area.

That.

That we.

Where we where we adjust so it's it's that kind of action.

Occupancy is another natural one you know whoever thought that you could run a company ita.

80, or 90% work from home, but it does give us a real perspective is we have lease rollovers or where we might have been planning on taking additional leases and there's always a.

A rolling set of either potential exits or or adds that you're doing has your boat balance you could you can imagine we've got lease ads on a complete moratorium and where we had rollovers you can imagine we're now starting to move in the opposite directions, Hey, why can I let.

This space go when when when employees do come back I want all my employees back.

But we clearly have more flexibility than we ever woods. That's another example.

Third one might be around.

All the other expenses.

In a in technology their software, there's hardware purchases et cetera, while our teams are spending time on a supporting clients and literally Oh hourly daily.

Basis.

It's a it's also natural time for us to slow some of our purchases of capital equipment or a software doesn't say, we won't come back and.

And.

Naturally think about spending some of that in the future, but it does mean that we can slow some of those purchases because if we shifted some of our.

Some of our time and energy to more.

Immediate situations as opposed to.

Some of the medium term investments I think thats. The other one which is the kind of the re investment will will naturally slow to some extent in if you remember the chart. We did at the the fourth quarter earnings call in January we showed.

Expenses down 1% now, we're seeing down 1% to 2%, but within that there was.

Three or 4% increase in investments.

Expenses due to investments in 4% to 5% decrease.

Going in the other direction and so part of what we're doing is also I think being more disciplined about those reinvestment. So we're doing now and pacing them.

Got it and now it's interesting to you on the occupancy side, because well you might have.

People come back to work over time, you might not be as densely organized as you had been in the past. So that's one of the reasons why it was kind of interested in can you actually reduce occupancy or not.

Definitely makes sense on the lease rollovers and Additionally says.

Just for that.

Are you still yeah go ahead.

What I would add to Eric's comments or a couple.

We have had underway is as you would know.

A lot of work on process redesign and automation and that work is not stopping right. How we are how and when we realized the benefits of it may change and be delayed but the work is not stopping.

And.

So.

And if anything were redoubling our efforts there so.

I would just note that.

Yeah, We've got this moratorium and we absolutely think it's the right thing to do.

But our or work or both.

And and operations and then how we connect with our clients that remains.

We're working full speed on that the other point I'd make on the on the on the leases is that I agree with your point that we probably won't be has done for a long period of time weve until there's a vaccine.

But.

The.

The cuts surprised everybody.

Not just the states elsewhere.

One can be and work from home.

I would have to believe that over the medium and long term, but you'll see us having less space. So we do today.

Got it are you still going to be moving your headquarters.

We are and that that was always a.

Net natural benefit to us so.

Oh, we're but that's still underway for the end of.

22.

Got it okay. Thanks, so much.

Your next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Great. Thanks, Doug when it gets to extreme my question.

Maybe just focus on the average balance sheet in terms of.

The the non U.S. deposit rates of negative 20 basis points you could just go into that dynamic loop, what's driving that I think that there may be ethics swap expense against that.

And then also just the commentary on on the driver of the episodic or the net interest income that you described as a episodic in the quarter and then also.

You mentioned 10 basis points on deposits in a prior comment I Miss with that I was little was linked to.

Sure Let me probably let me let me take those an order so.

On the average balance sheet, you're right. The non U.S. deposit costs fell they were minus four basis points or minus 20 basis points. It's literally the effect of the FX swaps, which are.

Diagrammed out in the.

In.

In the footnote on on that page I think its page seven of the financial within them.

And as well as some.

A modest reductions and interest rates in foreign jurisdictions right some of the.

Some of the.

Yes.

European and Asian, Central banks drop rates, and so that'll that'll flow through that line as well.

In terms of the anti that we reported in first quarter. We did note that there was about $20 million of higher than usual.

And I separate from the deposits with deposits for four wells come in and so.

An attitude I put away from from deposits and.

Loans and investments.

The 20 million was really a split split into two about half of that was literally.

Hedging effect that goes through we we hedge either data or.

Or the the rate coupons on some of the loans and that creates a mark to market as you've got to changes in the debt markets. So it was worth about half of the 20 and the other half what's actually us some good positioning that we took in the quarter.

With the with the influx of deposits and in particular dollar deposits we were dollar rich.

Dollars were quite valuable and so.

Yeah.

The treasury team did quite well to invest those in either yen or euros, they're kind of one in today overnight basis swaps and that that was renewed motive to us and at the same time. It was helpful to either clients are counterparties and those foreign jurisdictions.

We're a dollar poor and needed some of the access the dollar. So we could provide so those were the those are the two components the 20 million.

Finally on the on the deposits I did say to one of the earlier questions is the value of deposits has changed significantly in PML terms I mean, the value of the possibilities high on our balance sheet basis, and you know not that we needed more deposit, but we were happy to accept them from.

Our clients.

The point that I made is that the level deposits.

In the first in the first quarter and then last year.

We're a big had a large impact and I because that kind of typical deposit let me kind of use that in very broad swath might have been worth 100 basis points think about the cost you would if we would have paid on average for the deposits seen in the U.S. versus the Iowa, we are rate at the fed.

Ed.

That's the kind of a simple approximation if you fast forward and say in April or in the second quarter, how valuable as that same.

Mix of U.S. deposit, it's much less it's closer to 10 basis points and why is that is because our cost of funds the cost those deposits to us could be zero or one basis points or two or three but we reinvest them.

We are rates of 10 basis points and so.

Actually had is.

As a very large change in the value of incremental deposits.

Between kind of the pre the fed moves and post fed moves that was the point that I was making so.

Also till matter a little bit too.

In the going forward, but not nearly as much as they would have mattered in a in the past.

Right, that's very clear okay that thank you and then just on the CRD commentary on the way, obviously that doesn't make sense given what.

Going on at work from home is can you comment on whether you think you're still on track for the 2021 revenue and expense synergies.

The net benefit of 75 to 80 suddenly you bid on the revenue.

Net of investments and because you've had 65 on the cost side, whether you think that sort of gets also pushed out would delay in implementations and then.

The timing of the one trillion ueps installing the servicing business is that also.

Delayed, but like other than anything.

Brian Let me, let me take those two.

The different but related questions on Controlfour, we're still quite confident in the revenue and expense synergies the expense ones or something we do as a matter of course and you can imagine will actually try to accelerate those a bit but those are those are on track and then on the revenue side a good bit of those synergies are actually.

Coming from some of our trading businesses as we plug in our FX and securities lending and.

Other markets activities into Charles River, and that's that's on schedule.

And moving along at pace. So we're currently confident in our delivering on the synergies for Charles River.

On the servicing aside as I mentioned the client on boarding has has stayed on track and.

In March and April.

And so as we think about the timeline of that a 1.1 trillion of to be installs for the servicing business. We think that will play out during the year. If you recall I've talked about those wins and some of those wins are faster install say something like capacity and others, where it's a mix of capacity in a calendar.

Being and perhaps some of the offshore cross border products, you know those tend to take longer when you add middle office, it takes even longer and.

But those are all part of the standard course of business and we don't at this point see a slowdown in the in the implementation onboarding rates and so far our clients are eager to move move forward because in some ways remember that business that we won came with some fee adjustments Uh huh.

There are a want to conclude on those and so they need to implement the service and so those have now because they are paired up.

I think.

Think will stay on track on both sides.

Okay. That's good that's great color, thanks, very much all the detail.

Your next question comes from Michael Carrier with Bank of America. Your line is open.

Hi, Thanks. Good morning, just two quick follow ups first on your knee just in terms of the.

Mid single digits first the double digits I just want to make sure from an understanding if we get to 2021, and let's say their medical treatments and in most people or back to work would you expect like a pretty significant acceleration or from like a.

A head count or what the people can actually accomplish.

Could you just go back to you know sort of the low double digits like would you get that acceleration or is it just not possible given the timing of the implementation how much.

People are that takes.

Yes, let me begin on that.

I think that.

As noted we stand by the 2021.

Synergies that we laid out there and I think what's happening here is that the pipeline that.

Charles River would have seen versus the pipeline that its seeing no is quite different.

It tends to be larger more complicated and sophisticated clients and it tends to be part of.

Multi product installation so what you're seeing is it's just.

Just taking longer to install and therefore for the.

Part of the deal that gets credited to.

Charles River, just taking longer for that to happen and in fact, you're seeing now in the current in solution installations, two very large.

Installations underway, one of which has been out there since before we.

Acquired the firm and that's changed overtime and that's delayed the revenue recognition. So over the long term over the medium and long term do we believe that this business.

Grow faster under us than it was prior to US yes, we do.

Okay, and then just on FX. The comments that you need makes sense given some of the investments that you guys had made in the platform when you've seen the uptick in volatility has there been any kind of increases and like clients they've been number products that could be sustainable.

If we continue to get some level volatility obviously, we'll get a moderation, but you may have you seen anything in terms of traction that bought new level, you know could you could be at a higher pace.

Yeah.

We are.

Market share as a hard thing to measure in this business because nobody use is just one or one provider, but weve invested heavily over the past.

Couple of years in the error low volatility to build market share through our to show and demonstrate declines capabilities that we have and that really helped when it came time and and the team to improve urban transactions occurred really difficult roles period enrolls that we're going to be hard to exit.

Okay got dawn and.

Clients remember that so we think this this is.

This market share that we've built will last for us.

As there are noted.

What we saw.

Was just immense volatility in immense kind of.

From risk onto risk off assets, including moves.

Out of certain based currencies, others and all crisis, driven so if we see that again, then there's lots of bad news elsewhere.

Well, we likely see or could we likely see is maybe a better way to describe it volumes higher than what we've seen in the you know the 18 19 timeframe, possibly right because I think we'll be in a pair of almost any forecast.

One would have to believe has some level of heightened risk.

The other thing too is I mean, we saw or giant rotation out.

Particularly of emerging markets I mean at some point there'll be a rotation back and that tends to be also beneficial to us too so.

Again, we we gave you an estimate we tried to be conservative you're recognizing that the.

Range.

Or the amount of uncertainty and therefore, the Iranian true possible assumptions, but.

Theres certainly is a case, where one could expect to see not sustain levels at least in our forecast that we saw on Q1, but levels above what we've seen in the prior.

Four to eight quarters.

Thanks.

Your next question comes from Brian claims hands on with KBW. Your line is open.

Good morning, just one question real maybe or kind of an update on were and April if you look at the balance sheet you had the overdraft that came in at the end of the quarter. You also had the 27 billion.

The investment securities from the MLS, but we're on the balance sheet and then maybe could you just give an update on where those stand to those just roll back off now that things have kind of stabilized and also saying with the money market Fund flows woman what what are you seeing thus far in April thanks.

Brian It's Eric the the end appeared balance sheets, good starting point for Oh.

To follow up on that question.

And here's how I'd to.

Frame it I think the MLS balances.

We're at about 27 billion at the end of the reporting period on March 31st and they've been in that range I mean, plus minus a few billion dollars.

Uh huh, so we've been in that range for the first two weeks of April and then deposits, which had a spike to just over 250 billion or probably closer to 200 to 210 billion. So it's really the deposit the reduction in deposits.

That are that are adjusting the balance sheet down by call it $50 billion into period relative to what we saw there'll be a few other smaller movements you know overdrafts have continued to.

To float back down to more traditional levels or the the bar come the forwards in the FX folks have started to.

Referred so there's no theres a few billion here or there in a couple other areas, but the the biggest one is the guidance I gave on deposits coming down by about 50 billion from the end of period levels will be the biggest change so far that we've seen.

Your next question comes from the Mike Mayo with Wells Fargo. Your line is open.

Hi, Hey, Ron can you talk about the trade off of.

Basically all fence versus defense the tone that you're sending to the company. When I think of authentic think of long term market share helping out the government being part of the solution like you doing with somebody market.

Maybe more help as the fed expands its balance sheet, gaining share versus smaller competitors by doing a little bit extra when I think a defense I think a short term hunker down live to fight another day like what you're doing more per employees, you're not buying back stock and then maybe even for clients that they're not making that much money still kinda.

Even with that so how do you think about that tradeoff and this unusual world.

Well it's a.

Mike you can't be one or the other but I would say that particularly since we feel like over the last.

Your your and a half we've gotten a very good handle on our expenses.

Not just from an expense level, but how we manage those expense levels are we managed for productivity.

Thank you will find that our tone and our act or actions are mostly around orphans.

Certainly as it relates to clients.

We have had unparalleled levels of client communication and client engagement.

And if anything the time and working from home cause people to redouble in re tripled their efforts to.

The there to support clients and that will pay off for for years to come so.

We think that.

In the short term, we have to be protecting our employees both are.

Physically and mentally and we think we've taken the appropriate actions there, but we don't think we've taken them at the expense of any kind of long term.

For 200 creation for ourselves and our shareholders.

And as it relates to clients are you mentioned the rotation out of emerging markets historically in emerging markets equity fund would generate higher custody fees at a plain vanilla bond portfolio. So as people move out of high risk into lower risk wouldn't that hurt fees to assets under custody and.

When maybe you're doing a little bit extra for clients, even though you're not getting paid as much.

Yeah, well my reference to emerging markets I mean that rotation was happening and just if anything.

Has played itself out even further over the last month.

I don't believe that that's.

Make sense over certainly those makes sense over the long term it won't make sense over the medium term and we would expect to see as the situation as the situation stabilizes and investors start looking at role to valuations around the world.

Bill see the just the value opportunities and emerging markets. So I wasn't suggesting even a greater rotation, though rotations largely happen all the questions when will the rotation back occur.

I just said in terms or if there's risk off does that mean clients go to more plain vanilla portfolios, where you get less fee.

Yes, well certainly in the short term that's what they're doing right. I mean, it's are you seeing a giant push into cash but at the at the levels but.

Investors are getting paid.

And the amount of stimulus.

Our first monetary and increasingly fiscal that's going to be put in.

One person's opinion I think that the more likely long term trend as for our risk assets, particularly equities to continue to provide superior returns.

In a period of uncertainty like this which is not only uncertain, but previously unknown you you're not going to see as much or in the short term and told her is more certainty, but all of the ingredients are in place a low lots of modest.

Lots of cash in the system low interest rates.

To see a return to risk on at the appropriate time.

And then one more follow up Eric we're Ron just like you anything you can glean from what's happening in Asia or outside the U.S. that gives you extra insight to the U.S., especially like what percentage of your workforce is the office in Asia at this point versus the U.S. or any other trends are like us.

Insight since you are more than one country obviously.

Yep, so and probably.

China, Our home show Operation is it's a great example of what we could expect worldwide.

Well, we started we were given the go ahead to start returning employees there back in the.

In the middle of March.

And.

We're now back up to about 75 between 75, an 80% back to work and we've actually metered that we is that's.

Noted earlier.

We have not densify the office as much.

We've put a we've got testing facilities on the way and initially people were wearing mouse.

And and now you're seeing a much more of a much more normal.

Working environment, and I think that will stay for as long as there's not another oprah what we're seeing elsewhere in Asia.

Not quite as fast to return to work, but if you're also seeing guidelines kind of ebb and flow.

As you see periodic outbreaks and I think that's probably what we're going to live with around the world I don't think this will be a.

A straight line recovery in terms of of whether it's back to work or back to.

Gatherings, I think that there will be periodic outbreaks.

Businesses and governments will need to respond to those they're not going to respond in the same way.

If the lessons from Singapore, and Hong Kong or anything there will be very targeted guidelines for example in Singapore. They just recently limited restaurants again, but they didn't send their body home from work. So I think thats, which can expect to see a a.

A few Willy.

Steady recovery back over time, but with some bumpiness along the way of thorough bricks and until we get to a Uh huh.

Until we get first the testing and to a widespread availability of vaccines.

That's great, but like how many employees Yum, China, because that's a fascinating statistics, 75% to 80% are back to work in China.

3000, 3000 in in China, the vast majority of them 2800 and in our hydro facility.

Great. Thank you.

Your next question comes from Steven Chubak with Wolfe Research Your line is open.

Hi, good morning.

So Eric I wanted to ask a question on the securities portfolio, just given your heavier mix towards fixed versus floating or no I think in the 10-K, you cited a longer duration of around 2.7 years for your book relative to where some of your peers are managing it.

I'm just wondering what causes the eni to stabilize by year end, just given some of the reinvestment headwinds to persist and maybe if you could frame what reinvestment yields are level, you're assuming that versus the 200 basis points at the securities bookings are today.

Stephen It's Eric.

Number of factors that that you've got to.

Assemble to really.

Predict the.

The path of Eni and in our 10-K, we tend to assemble them all together and the securities portfolio is just one of them. If you think about the the average duration of our balance sheet.

You are right. The securities portfolio has an average duration of 2.62 0.7 years.

But the rest of the asset side of the balance sheets actually much more floating rate and remember the securities portfolio is.

Ex the M. MLS.

To keep it simple is.

Call. It just shy of 100 billion out of a 250 billion dollar typical balance sheet. So it took its an important piece, but it's not the only piece.

The effect because that is that the average duration on the asset side of the balance sheet that we have it's about 1.3 years. So about half of the duration of the securities portfolio, and it's that that and that shorter net asset.

Or that the the lower duration of the total asset side of the balance sheet is what creates a repricing that tends to be a little faster than you would have expected by just thinking about the investment portfolio. So wed actually played that through our models and obviously in our models are a lot of deal.

From factors, but those those two are important ones.

You see a step down from a.

First quarter to second quarter, that's a significant I gave an indication of that we see another step down but not as large in percentage terms from second quarter to third quarter and then starting in fourth quarter, you see a fair amount of stability between fourth quarter and then our guesstimates of what we might see in the first.

And second quarter of 2021.

And part of that is that you've got the interest rate effects playing out.

Then you've got some natural balance sheet growth, which creates a bit of a tailwind and so once we get through the bulk of the interest rate effect, which happens in the first couple of quarters, the headwinds and Tailwinds tend to.

Roughly even out which is why we we think we'll see some stability for the fourth quarter onwards.

Okay. Thanks for that Eric really helpful color.

The one piece you I was hoping you could clarify is what reinvestment yield or level are you assuming on the securities book.

Yeah, the I'm trying to think about it that way to describe that to you. So our investment portfolio yield right now.

It's about just over 2%.

And that'll that's been that that floated down just marginally, but that's because rates fell quickly.

Towards the very end of the quarter, if I think about reinvestment levels in the.

In the portfolio.

I guess, we could talk about.

New investments, what's rolling off there's theres, a lot of ins and outs of that maybe the better way to describe it is that the average yield on the portfolio is about 2% on average for first quarter. If we start to think about what's the average yield.

In second quarter, and maybe in the third and fourth quarter were closer to about a 1.5%.

Roughly if by eyeball, what the average is a look like and that'll be driven by.

The new roles being added in the old rules coming off but.

That's probably a good good rough amount a good rough estimate for you.

Thanks for that Eric and just one more follow up if I may lots of helpful detail on the loan mix and composition. There were provision that you reported was admittedly a bit lighter than peers. If we compare your reserve levels versus the fast losses on on that screener on that basis you.

Look a bit under reserves, but if you look at your company run stress tests. It looks like your bank in line with the rest of the peer groups and so just given that a lot investors are using the stress test and that you fast as a framework for forecasting provisions and I was hoping you could clarify or speak to some of the differences and what does that assumes versus.

You guys assuming for your company run that and why you're comfortable modeling a lower losses relative to that.

Steve It's Eric So a couple of perspective, Theres, some which you touched on and others, which will add I think first we added to our reserve about a $35 million. So the the reserve was up about a third and I think when I scanned. The cross peers, you saw reserve increases if anywhere between 30 and 50% on corporate.

Books, I think were we made the right upward adjustment just given what we do at the time and what our forecast for US at March 30 Onest.

In terms of comparing the reserves to.

Say the C car losses, either the fed model our own model.

Or two loans I think that's where it's a mix of the loan book I think.

That all those ratios it incredibly sensitive to the mix the loan book, if you think about it.

Our fun finance loans and one could go back to the the last prices for 2008 crisis performed particularly well.

And so you know we've got a factor that into our reserving and what I would say is that the reason the fed both does its mass on estimated losses are there see color and then asks us to do our map is not just to say hey, there'll be a natural bid ask but it is to reflect the dip.

For nature of the books, if you think about it I think the fed spent an enormous amount of time as as you would expect on what is the typical midmarket corporate lending book.

On a resulted in terms of losses or what's the typical credit card book that its and how will it perform under stress I would think that while they have extensive model there as they probably spent a little less time on a fun finance.

Two.

Capital call lines book, just because it's small and it's not widespread around the industry. So I would I would at least say that in our particular circumstances. The company run stress test that you've been referencing our.

In our minds that good indicator of the of credit under stress and may, but I'll be sensitive to it because.

All models are informative, maybe a bit more indicative than some of the fed models, just because they tend to be much more averaged across more kind of a non custodial set of a thanks.

Hey, Thanks, so much really helpful color I appreciate it.

Your next question comes from Rob well talk with none of US Research. Your line is open.

Morning, guys in the slide deck, you called out some pricing headwinds contributing to both sequential and year over year declines in the servicing fee line can you just extend them what you're seeing there and then more broadly you know what are your thoughts on pricing from here given the shifts in the macro thank you.

You are one of my job.

When I start Eric.

The in terms of I'll start with your second question second part of your question Eric.

So the first.

We have spent a lot of time with our clients remember we've got a fairly concentrated book of business or our hundred largest clients constitute a big portion of the total and.

We're.

Through 80 plus percent of that we've gotten term out of a lot of them, but more importantly, we've just werent how to do this better than we'd have in the past.

So well for sure.

Our clients will be under their own sets of stress as a result.

We we're not anticipating.

He a heightened level of price compression.

And part of it is that.

You know given if you think about the way that that were remunerated.

In a client relationship a part of that as I don't know and they can see of both weaken the that as a source of return is going away. So.

We think it's reasonable to assume that.

The pricing as we've said for will pricing pressure.

Is abating.

It will.

Continue to abate.

Level loaded a normal level, which is what would go away, but it will be a normal level as opposed to what it's been over the past couple of years and nothing that we've seen this year. So just anything different on that.

Yes, Rob it's Eric I'd, just add that pricing.

It's been a natural part of this custody business for decades, and what we're doing in the disclosure on the slide deck is literally given you for servicing fees what's the.

Transparent roll forward and net new business.

Flows and client activity, which were up this quarter actually was a tailwind.

Market appreciation or depreciation and then a pricing going the other way. So it's just part of their natural disclosure now.

On a going forward basis, but as Ron said.

We we expected a certain amount of.

Pricing to come through during during this year at that kind of 3% levels. So down from the 4% headwinds we saw last year and where everything we're seeing suggests that we're on track for that.

Currently and it'll be.

Moderate from from last years levels and inline with what we currently expect.

Got it thank you guys.

Your next question comes from Gerard Cassidy Your line is open.

Thank you good morning, Ron Kumar Eric.

Morning.

Good.

Eric Thank you for the detail on the loan portfolio very.

As another question on that leverage loan portion of the portfolio.

Are you primarily a participant in those loans the syndicated type loans or are you. The lead and then second they all subject to the shared national credit exam process.

Gerard its Eric I think the answer is.

An easy yes to both of those so we tend to be a participant in a set of syndicates with the other large banks and work closely with them will occasionally Lee, but we tend to be a participant.

At the at the table and we tend to operate within syndicates of.

Sister banks that we feel when they lead are very.

Thoughtful about credit and credit appetite, because it's not just a particular alone but it's the covenants, it's the terms and conditions that matter and so the choice, we make of which syndicates to join and which which lead banks to partner up it with.

Is it is important so but that but that tends to be our position to participate.

And then a absolutely we participate in the distinct reviews, and and Snick test and so that's the way for US too I think it for the industry and for our supervisors to make sure that we evaluate credit consistently I think what's what's helpful about leverage loans as are also traded in the marketplace.

So there is less than external market benchmark and that's.

They are external ratings.

And often times their prices, but there's also the snick review process, we participate in that and so we feel like we've got a very good we eat into the the quality and health and of our bulk and as I mentioned it so it tends to be.

Doubling the be average book with actually some.

Some triple fees and higher and.

Just a very few under.

Under that that will be level.

Great and then just a quick follow up again.

Give us good information on deposit flow and what you saw the ended the quarter and what's happened since that can you share with us well what was the customers or who the customers that were the primary drivers of that.

Parts of the inflow and then are they the same customers that have withdrawing now.

Or is it a different group that are actually withdrawing the deposits.

Sure sure Art, let me give you a little bit of texture, because if you think about our client base its asset managers asset owners alternative providers insurance a wide a breath.

I think what we.

What we saw is that while they all tended to become more liquid and go to cash and so we had some increase in deposits from.

Across.

All those segments. The single largest area came from our asset managers and sometimes it was the asset managers, who were running money funds and they were de risking those funds and then leaving the deposits with us and sometimes it was just the asset managers running a various funds that we can.

The for equity funds bond funds, U.S. international et cetera, where they were de risking within those funds and shifting to cash in so those are probably the two different factors within asset management.

Mantra complexes and it's that cash that's come back and sits on our balance sheet and so I think part of what we're watching for is.

How quickly does that cash get reinvested.

Versus how liquid or do those oh managers want to stay whether it's the kind of money market complex as they Ron and so sometimes they stay in cash as opposed to even buying.

Short and medium term treasuries.

Or how.

How how risk off some of the long players or even the alternative providers want to be but those are the those are the factors and it was primarily around asset managers and as I said in my prepared remarks, we're delighted to make our balance sheet available to them. Both on the as they had these flight to quality deposits.

Or even operationally as we supported them with the overdrafts because that's a both of those are important parts of our business.

In addition, even to some of the off balance sheet activity, the sponsored rebuild and other facilitation that we provided was yet another source of liquidity as well.

Great. Thank you.

That concludes the questions at this time, we'll turn the call back over to Ron Henley for closing remarks.

Thank you operator, and thanks to open the call thanks for joining us.

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

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