Q3 2020 State Street Corp Earnings Call

Earnings Conference call and webcast.

Today's discussion is being broadcast live on state Street's website at Investor <unk> State Street Dot com.

This conference call is also being recorded for replay.

State Street's conference call is copyrighted and all rights are reserved this call may not be recorded for rebroadcast or distribution.

Or in part without the expressed written authorization from State Street Corporation.

The only authorized rebroadcast of this call will be housed on the state Street website.

Now I would like to introduce I mean, south dealer global head of Investor Relations at State Street.

Good morning, and thank you all for joining us on.

On our call today, our CEO Bano Hamling will speak for.

And Eric top off our CFO will take you through our third quarter 2020 earnings slide presentation, which is available for download in the Investor Relations section of our website investors that green Dot com.

Afterwards, well be happy to take questions during <unk>.

During the <unk>, please limit yourself to two questions and then re queue.

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

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

In addition, today's presentation will contain forward looking statements.

Actual results may differ materially from those statements due to a variety of important factors such as those factors referenced in our discussion today and in our filings, including the risk factor not form 10-K.

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

If our views change now let me turn it over to Ron.

Thank you Arleen and good morning, everyone earlier today, we released our third quarter and year to date financial results Mike.

Ill start by saying how proud I am of our team members worldwide will continue to put our clients first and deliver strong results for our shareholders and these extraordinary times.

Turning to page three our bid.

Our vision is clear and remains that are becoming the leading services and data insight provider to the owners and managers of the world's capital despite.

Despite the challenges of the current operating environment, we continue our strategic pivot in investment services from being primarily a fun servicer to being an enterprise outsource provider further enabled by our differentiated state Street Alpha platform.

We're fortunate had with the implementation of our strategy developing new business opportunities and continuing to drive productivity improvements.

As we successfully navigate the COVID-19 environment, we're operating incomes for priority.

One delivering growth through deeper client engagement.

To improving our product performance and innovating.

Three driving efficiencies through improved productivity and optimization.

And for supporting the financial system and planning ahead for our team members I hope.

I will provide you a short update on each of these areas before moving onto our results.

First our clients are at the center of everything we do.

This year, we have proven that as a result of our strong operational capabilities, we are able to effectively and efficiently onboard new clients and install new assets and even the most volatile market environment and we continue to see proof points of our operational excellence.

Example, this quarter, we successfully installed approximately 800 billion of investment servicing assets.

This was accomplished while also driving sales and expanding the pipeline is demonstrated by the strong level of new investment servicing wins, this quarter, which amounted to 249 billion.

Our front to back Alpha platform drove approximately one third of these wins.

Of note, including included in these wins was a front to back CRD Middle office and core custody mandate with a large European asset manager that was not a pre existing client relationship.

Also despite the challenges we continue to expand in critical growth markets with the opening of a new office in Saudi Arabia to support our growing opportunities in the middle East last.

Lastly, we continue to win new business and maintain a strong pipeline its yardi, where this quarter, we more than doubled new bookings, both year over year and quarter over quarter.

The institutional investor market is experiencing significant disruption our clients are facing increased pressures to effectively employed data to achieve better investment outcomes and drive efficiencies within their operating models.

We are positioning ourselves strategically to meet our clients' needs and help them with their own strategic pivot.

Second product differentiation and innovation are critical elements of how we are driving revenue growth across the franchise.

Clients continue to turn to state Street for a comprehensive and differentiated servicing capabilities.

For example, we recently launched our new Nab insights product for our hedge fund clients.

Where the open architecture and interoperability of our platform will enable us to expand our capabilities and attract new clients by partnering with other service providers such as our recently announced partnership with Sim Corp for the insurance segment in EMEA.

A global advisors, where assets under management reached a record level of 3.1 trillion. This quarter, we continued to expand our product offerings, including expanding our range of fixed income area.

Third we remain highly focused on driving productivity improvements and automation benefits as we strengthen our operating model and cost efficiencies even during this challenging period.

Company wide productivity and efficiency efforts in just the first nine months of 2020 have so far achieved gross savings of 5% or 2019 year to date total expense base. Excluding notable items as we continued to gain efficiencies through I T optimization as well as other measures.

The efficiencies we gain from the optimization of our business model to date are enabling both margin expansion and further investments to support our operations client needs and technology innovation, including our ongoing investments in CRD and our alpha platform.

Last throughout this crisis State Street has supported the financial markets and our employees.

Our human capital is critically important to our success, we have safely reopened most of our office locations across the world and have brought back critical functions that operate more effectively for part time in office.

Most of our workforce remains work from home.

At the same time, we are planning for the post pandemic work place of the future.

We believe that enabling better productivity innovation and fostering cultural attributes that set us apart are critical to our success.

As many of you know global advisors has long been a leader in its stewardship efforts and it's focused on diversity and good governance with portfolio companies.

We're also addressing racial and social injustice by improving the diversity inclusion with our own within our own organization and advocating for the same in our industry. This is critically important to our leadership team and we are taking a number of concrete actions and are reducing these injustices include.

Including 10 specific actions, we have committed to executing well try encourage you to review on our website.

Turning to slide four we present, our third quarter and year to date financial performance highlights you will.

You will see that as we continue to implement our strategy and improve our productivity.

Actions are bearing fruit.

First looking at our third quarter results relative to the prior year period total revenue decreased 4% largely driven by the impact of interest rate headwinds on our Eni results.

However, the revenue increased 2% demonstrating the progress we are making as we work to reignite the revenue growth as well as the year over year contribution from CRT D.

Turning to expenses here again, I am pleased to report that as a result of our continued productivity improvements we have reduced both third quarter and year to date expenses by 2% excluding notable items pro.

Productivity management is not a way of life for us and we will continue to build on the strong culture of expense management, we have successfully established.

On a year to date basis and excluding notable items, we have driven three percentage points of positive operating leverage improved our pre tax margin by 1.3 percentage points and generated 19% of it.

EPS growth relative to the year ago period.

We have achieved these improved results in a very challenging operating environment, particularly the low interest rate environment that I just mentioned.

Lastly, reflective of our belt of our business model, our balance sheet and capital position are strong and we continue to operate with capital levels well in excess of our regulatory requirements.

As we await the outcome of the latest federal reserve stress test in the fourth quarter.

Given our strong capital levels and unique business model, we are considering a full range of capital return actions in line with the federal reserve instructions and market conditions.

To conclude despite the challenges of the current operating environment. We are navigating it well we are implementing our differentiated front to back office strategy, developing new business opportunities and continuing to improve our operating model, thereby driving productivity improvements I am.

Im pleased that our third quarter and year to date performance demonstrate this and how we are making measurable progress in improving state Street's financial performance.

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 begin my review of our Threeq you 20 results I'll start on slide five.

As you can see on the top left panel during the third quarter, we recorded a good growth in both servicing and management fees.

Our expense discipline continues to bear fruit to total expenses down 4% year on year and 2% X notable.

On the right hand side of the slide you can see two notable items, including a small legal release this quarter.

Separately in for comparison purposes, only we have also called out some of the noteworthy impact within Eni, which I will discuss more in more detail shortly.

Turning to slide six period, and you see a increased 11% year on year and 9% quarter on quarter to a record 36.6 trillion dollars.

The year on year change was driven by higher period end market levels Klein inflows and net new business.

Quarter on quarter, and you say also increased as a result of higher equity market levels and net new business installations.

Hey, you I'm increased 7% year on year, and 3% quarter on quarter to 3.1 trillion also a record.

Relative to the year ago period, the increase was primarily driven by higher period end market levels, coupled with net ETF inflows offset by some institutional net outflows.

Our Spider Gold DTF continued to perform strongly generating 6 billion in net inflows this quarter and taking in a record 23 billion year to date.

Quarter on quarter, Hey, you I'm increased mainly due to higher period end market levels, partially offset by cash net outflows as very strong inflows during the first half of the year reverse with the recent risk on sentiment.

Oh.

Turning to slide seven third quarter servicing fees increased 2% year on year, including FX, reflecting higher average market levels increased amounts of client activity and net new business, only partially offset by pricing headwinds, which continue to moderate.

Servicing fees were also up 2% relative to the second quarter, including the effects of FX driven by higher average market levels, partially offset by sequential normalization of previously elevated client activity.

Actual results for our commitment to clients and our strong operational capabilities. We have continued to close deals and successfully onboard new client business throughout this pandemic on the bottom left of the slide we summarize the statistics.

On the bottom right panel, we summarize the actions we're taking to further ignite growth.

In 2019, you may recall that we saw servicing fees declined 6% year over year, partly as a result of elevated pricing pressure, which has now moderating.

We quickly intervene by rolling out a client coverage model to our top 50 clients instilling pricing governance launching the new alpha front to back offering and working more closely with our clients.

The result was to not only stabilized servicing fees, but also begin and drive growth in servicing fee revenues, which are now up 2% year on year and year to date.

The next phase is to extend our enhanced sales coverage model to another 150 clients leveraging both country and regionally focused segment teams to further develop our pipeline.

We think this is worth another couple percentage points of servicing fee growth over time as we saw across our top 50 clients.

Turning to slide eight let me discuss the other important fee revenue lines in more detail Bill.

Beginning with global Advisors third quarter management fees increased 2% year on year, and 7% quarter on quarter with a year on year performance, largely driven by higher average market level as well as network T.F. and cash inflows, partially offset by institutional outflows.

For a complete view of our investment management segment revenues. We've included a page in the attendance, which also includes fees, we earn as a marketing agent as we do for our Spider Gold DTF, which are both in other GAAP lines.

All in total investment management segment fee revenues increased 5% year on year, and 7% quarter on quarter and the business segment margin reached 29% this quarter.

With the third quarter complete we anticipate that the likely impact of money market fee waivers net of distribution expense will be within the previously announced $10 million to $15 million range for full year 2020.

Turning to FX trading services third quarter results were up 4% year on year, but were down 15% quarter on quarter as we saw the second quarter bump proceed.

Securities Finance revenue decreased 28% year on year, primarily driven by lower client balances and lower agency reinvestment yields affecting the industry six.

Securities Finance revenue was down 9% quarter on quarter, mainly as a result of those lower yields.

Finally, third quarter software and processing fees increased 21% year on year, but were 30% lower quarter on quarter, largely driven by CRD, which I'll turn to next as well as market related adjustments.

Moving to slide nine we.

We showed you a crts business performance and revenue growth.

As you can see we have separated CRD revenues into three categories on premise professional services and software enabled revenues.

This slide illustrates the lumpy revenue pattern inherent in the six so sakes revenue recognition accounting standards for on Prem and more importantly, it demonstrates the consistent growth in the more predictable streams of software as a service and professional services revenues.

As a reminder, second quarter CRD Standalone revenue of 145 million was primarily driven by a large wealth on premise.

Implementation and several large asset managed to renewals.

This quarter, our CRD Standalone revenue was a more normalized $99 million.

Looking over a broader time horizon, you can see that total revenue as well as the fast and professional fee revenue growth, our strong up 16, and 20% respectively.

As we continue to invest in and expand the CRT platform. We are seeing good momentum in the business and we now expect full year CRD standalone revenue growth to be in the low double digits.

Turning to slide 10, third quarter, and I declined 26% year on year, and 14% quarter on quarter exclude.

Excluding the impact of episodic and true ups, and I was down 20% year on year and 11% quarter on quarter.

As a reminder of the year ago period included approximately $20 million of episodic market related benefits related to the FX swap mark to market and hedge effectiveness.

This quarter is an I included a negative true up as we recognize approximately $20 million from OCI to net interest expense related to the prior period transfers of securities from a fast HTM.

Year on year the change in Eni was primarily driven by the impact of lower market rates. The impact of these two items, partially offset by larger investment portfolio and loan balances.

Relative to the second quarter the decline in Eni was primarily driven by the impact of lower market rates. The roll off of and then my last balances and this quarter is true up.

Partially offset by a $5 billion expansion of the core investment portfolio, which was worth about $10 million of additional revenues.

On the right hand side of the slide we show our end of period, an average balance sheet trends we current.

We currently expect to operate at around $190 billion of average deposits. So that may actually increase given the fed's continued expansion of the money supply.

As a result, this puts us in a position to continue to consciously expand the investment portfolio in the coming quarters to mitigate the effect of the low rate environment.

On slide 11, we've again provided a view of the expense base. This quarter X. Notable so that the underlying trends are readily visible.

Threeq you 20 expenses were down 2% year on year, but up 1% quarter on quarter, excluding notable items, but including the impact of FX.

As we continue to concentrate on driving productivity improvements and cost management in a challenging environment, we reduce expenses across four of five cap line comp and benefits transaction processing occupancy and other relative to the year ago period.

Infosys costs remain lumpy, but we continue to focus on technology optimization and are making good progress.

On a year to date basis total expenses are down 2% ex notables relative to the year ago period, demonstrating the solid progress we are making in improving our operating model as we reduce gross expenses by about five percentage points, which is partially offset by natural growth and reinvestment of approximately three points.

Moving to slide 12 in the left panel, we show the growth and evolution of our investment portfolio in.

The investment portfolio increased to 112 billion as we thoughtfully put more client deposits to work, even as M.L.F. securities continue to run off as anticipated.

You will see that we continue to maintain a high percentage of H.L.A. assets and as the short dated MLS Securities matured the average duration of the portfolio extended its almost three years at period end.

And the right panel, we show the evolution of our CPT, one and tier one leverage ratios.

As you can see we continue navigate this challenging operating environment with strong in elevated capital levels.

As of quarter end, our standardized CET, one ratio increased by 10 basis points quarter on quarter to 12.4% driven by solid retained earnings only partially offset by modestly higher risk weighted assets tier one leverage ratio has improved by 50 basis points to 6.6% as a result of our higher retained earnings and lower average.

Assets.

Consistent with the restrictions imposed in large banks by the Federal Reserve, we made no common share repurchases in the third quarter and cannot do any in the fourth.

As Ron noted we are confident in our strong and elevated capital position and we will consider a full range of capital actions, including the resumption of share repurchases in upcoming quarters on regulatory and market conditions allow.

Turning to slide 13, we've again provided a summary of our Threeq, you 20 and year to date performance.

Our third quarter results reflect our focus on not only stabilizing but also reigniting fee growth as well as the obvious headwinds from the low interest rate environment.

Both our third quarter and our year to date results show clear evidence of how we are successfully executing on our strategy to improve state Street's financial performance and create shareholder value all the while temporarily holding elevated capital well above our regulatory requirements.

Turning to the rest of the year outlook throughout the pandemic I've discussed our outlook under a certain set of assumptions.

Now with three quarters the year behind US, let me share with you our current thinking but with the caveat that the macroeconomic could continue environment could continue to change.

We expect global Central banks will keep short rates at current levels and long end rates will stay at current spot rates through year end.

We also assume that average global equity market levels for the remainder of 2020 will be flat to current levels.

With that backdrop, we now expect that full year 2020 fee revenue will be up approximately 2.5% to 3%.

Servicing fees expected to be up approximately 2% for full year.

Both of which are up from our previous guide.

Regarding eni given the impact of continued lower long end rates, we still expect full year and I are to be down approximately 15% in line with our previous guidance.

Turning to expenses, we have successfully transform the expense base and remain laser focused on driving sustainable productivity improvements and operational efficiencies we there.

We therefore still expect that full year expenses will be down 2% year on year. Excluding notable items as we continue to find ways to reduce expenses.

In regards to our provision for credit losses, we continue to see a range of outcomes based on evolving economic conditions in any credit quality changes.

On taxes, we continue to expect our full our tax rate for the full year to be at the low end of our 11% to 19% range.

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

Thank you Eric operator, let's open it up to questions.

Thank you to ask a question you need to press star one on your telephone to withdraw your question press the pound or hash key please standby we compiled the kuni roster.

Your first question comes from the line of Glenn Schorr from Evercore ISI. Your line is open.

Hi, Glenn Hi, Thank you.

Hello, there so it's good to see that consistent and good new business growth.

And I know that we get that on a gross basis, all the time, but it looks good enough to be.

The positive on a net basis I don't know if I can get you to comment on that but the follow on question that I have is it's also good to see the pricing moderation over the last couple of quarters in your conversation. The question I have is how do you know how durable that is meaning how much of the book has gone through it.

The confidence in what the pricing Committee is doing the next hundred 50 clients and then compliance just sticking up next year or two I, just I'd love to get your just the overall feeling of confidence that we can keep this trend going in the right direction.

Thanks Glenn.

Glenn It's Eric let me start on pricing and then we can cover the the broader topics of pipes.

Pipeline and momentum I think on pricing, we continue to feel that the actions we took right literally.

Centralizing and.

Turning pricing into it a very senior conversation internally here and management process for a while.

For Juan have made a real difference.

In a practical way and so while yes.

You turn back the clock and you see that historically this industry has always had some pricing compression literally because theres always appreciation in our fees due to markets right. So theres always the natural balance that we play out with our clients know that history was in the <unk> in a range of 2%.

Per year, we saw that we saw.

We saw that expand to.

Three and 4% headwind last year, which obviously was not something that we want to or expect to repeat this year, we thought it would be down to 3% and we updated our view that it will be down at around 2.5% for the year and.

I think that the.

The perspective that we have is that that is largely due to a more heightened set of actions governance education to be honest both of our our.

Our our.

Our team and clients I think what happens next I will.

Time will tell but I think there is not only the continuation of our high intensity and actions here, but I think the other feature is that as our value proposition offering that top front to back offering which connects the Charles River or the middle office the cost per unit.

Counting becomes a bigger part of what we offer.

Those those contracts tend to be longer they tend to be more integrated they tend to be stickier and we think that's going to continue to provide some.

Some support to the the pricing benefit so we've accrued and you know at least key.

At least keep us at this level, if we can do better let me tell you, we'll we'll lean hard into that but we're I think we're confident in where we got into and.

And.

Operating.

In this area.

Okay. So I couldn't get you on the net new business that's cool.

Maybe Ron.

Last one from me is you invention, considering the full range of capital return options, which is cool you got a lot of capital to consider options on.

You, particularly have had a good long history and consolidation on the asset management side I'm just curious your take.

Our observation of what's going on in the screen and if there's room for a state Street.

State Street should participate not that you're not already huge player. Thanks.

Thanks.

Yeah, I mean, you're you're your observation is accurate there is there's a heightened amount of consolidation going on.

We think about it from two dimensions, not just as an asset manager, but also as a servicer to manage.

So it's something that we're looking at carefully we were.

We're always.

Looking at our two businesses investment services and investment management and.

Trying to determine how we best optimize them and we like what we have but to the extent to which we could add to it through some kind of a of a talk and we'll consider that also.

Okay. Thanks for all that thanks.

Thanks.

Your next question comes from the line of Alex Blostein from Goldman Sachs. Your line is open.

Great. Thanks for the question good morning, everybody.

Sure Ron just maybe building on that last point around a pick up in asset management industry, M&A, obviously with Eaton Vance and Morgan Stanley and there has been speculation that there could be others. How do you think about that from a service provider perspective, obviously on the one hand I could see how they could be in that positive. Given you guys are kind of in the sweet spot.

Sort of large global kind of Giants as you described them in the past, so perhaps maybe more volume, but pricing could come under pressure given kind of the benefits of a larger platforms.

So help me think about that is that positive or net negative for state Street, and we see more consolidation in the asset management space and then specifically with respect to in dance and Morgan Stanley any risks or opportunities from a revenue side you guys see for yourself I don't know to what extent you provide services to either.

Yes, so we're not going to I'm not going to comment on those.

Specific client situations.

No. It's that we serve both of them, but I'm not going to comment on that Alex but in terms of the impact on us theres. Some theres some negatives, but there's also a fair number of positives. The negatives obviously would be if we lost the client or if we consolidated but ended up at a different.

Spot on the on the aggregate fee schedule.

The the positives are that in.

Both of these situations.

We often are involved in some way right from the beginning.

Because of.

Of our knowledge of asset managers, our ability to.

To help with operating model in fact, we now have this.

Want to back Alpha platform. So there were.

We're often there at the table or certainly brought to the table are quickly thereafter. The other thing that we believe we can stimulate with all this is if you're going to go through all the integration you might as well go through a platform upgrade.

And so we think that in some ways. This is actually going to spur activity because oftentimes the synergies that are being promised or look for have to do with the back office and operations and you're going to get even more synergies if you actually.

Take the opportunity to overhaul the operation have a true front to back kind of Oh implementation done so.

Positives and negatives, but we think over time, probably more conference Ross.

Great. Thanks, and the follow up question for.

For Eric around and IR, So just to clarify the down 15% and I are for the full year again in line with prior does that include the $20 million true up in the quarter. So sorry, youre talking about this on a reported basis, which I think implies about $480 million for on air for Q4. So just double check that and then more importantly, how do you guys think about that run redevelop.

Going into into 21.

Alex It's Eric Yeah, we didnt do it on a reported basis that the 15%. So I think your your estimate of what we're looking at for fourth quarter.

As you know is.

It's in the right to is in the right area.

I think the way I'd describe this is first to describe this year and then maybe talk little bit about next year, we've clearly fit in this.

Fit in this interesting.

Interesting environment that fell sharply and what we're.

Finding is that at this point, we're we're starting to really slow the decline or the pace of.

Of decline of Eni quarter on quarter on quarter and so.

You saw.

In our results this quarter adjusted for the true up will come back that if necessary were down 11% sequentially. If you actually just open up the lens and say you know how much was eni down first quarter to second quarter. It was down 16% right. So we started at 16% one Q2 Q.

This quarter, we're at down 11%.

On a on a kind of underlying basis from Twoq to Threeq, you and to your point, if you take our full year guidance and Youve done the math like many others. We're looking down at around four maybe five percentage points from Threeq to Fourq. So you can see that pattern concern.

Consistently slowing and that's really the effect of the kind of grind through the portfolio coming through.

Which slows over time.

Offset by our actions to expand the the asset side, whether it's loans the investment portfolio, which I said was up 5 billion on average for the quarter actually up 9 billion on an end of period basis.

And then you know some expansion of what we're doing in that sponsored repo program. So those are the those are the puts and the takes as we look at next year. It's a little early but our view is that that pace of reduction continues to slow and so we're probably looking at a couple percentage points from for Q.

Until one Q4 to Q and then we see some stabilization at that level and so I think you've seen us now really intervene and slow the decline we will see stabilization in one cure to Q and then I think at that point, we can offset the the grime.

On down.

From the from the portfolio.

Very well thanks very much.

Your next question comes from the line of Brennan Hawkins from <unk>. Your line is open.

Good morning, Thanks for taking my questions just wanted to follow up on that actually.

Eric the.

Couple of percentage points from Fourq levels.

Is that utilize the same underlying assumptions.

That you laid out initially spot basically keeping spot rates are unchanged and then also given the level of importance mortgage backed securities have on your portfolio.

What assumptions are you, making for prepayment rates or you just holding those steady are you assuming that they use a little bit.

What are what's embedded just so we can calibrate as we move forward.

Yes, Fred and thanks for the question because each of those assumptions are very important right. We're looking for this.

Working looking for and and driving towards the towards an inflection here.

So first on rates I think where we're looking at current short rates, which have become a little more normalized remember we had an inversion between repo and.

And treasuries, which now its normalized so that's that's that's slightly beneficial we're hoping that continues that stays that way and long end rates in the 70 to 80 basis point range they've been bouncing a good bid over the last.

Week or so so that's the broad assumption.

I think as you think about the the Asus.

The assumption on on MBS premium amortization prepayments speeds, we are assuming that.

Third quarter and fourth quarter, how are at a more elevated level of prepayments and then we do expect some amount of burn out into first quarter second quarter.

And.

And going forward and so that is an underlying assumption, we think thats a fair assumption given a look at the models and we obviously get models from the three or four.

Providers.

And have our own assessment as well, but it is driven by that and then finally you know it will be a performance will be depended on the pieces that we can control you've seen us expand our loan book our loan book, which is exceedingly high quality for our clients is up about 10% year on year, you see our investor.

Portfolio is also up about 10% year on year and you know our sponsor repo program, we've started to see a.

Bill the balances now that we've had a little more of a normalization and what you're seeing US do there is effectively put more deposits to work deposits are up call. It 20% from the kind of pre cobot era, the fed balance sheet is.

Continues to expand and so our view is that we have more of those deposits can be put to work whether it's in the loan book in the investment portfolio over the course of a couple of quarters and you could see even this quarter I gave you a sense for the difference. It makes it makes a real difference and it lets us.

Kind of lean in and and drive this stabilization.

Excellent. Thank you for all that color, Eric Thats, Great and then when we shifting gears to the servicing revenue.

You you referenced some new business installations.

We know we saw all saw the sort of hit any of the of the equity market rally.

And in the past sometimes that has resulted in some the way the street calculates you're servicing fee rate to compress just because of the mix you know not all of your your servicing.

Mandates and contracts are purely based on asset levels. So could you maybe help us unpack a little bit how much of the.

The lag how much of the servicing fee not going up as much as the CA was.

Bags from new business installations, where the revenue has not yet come on and how much of it might be from the.

From the.

Market rally, which naturally would only be partially captured due to some of those contract dynamics.

Yes, let me, let me add a bread and take that from a couple of different angles right equity markets are clearly a tailwind for our business.

And there's always a little bit of timing billets.

That's that's kind of the timing is really rounding what's important really here is the average equity markets and the average equity markets across the globe right. So if you if you step back S&P is up you know.

12, 13% year on year.

But the emerging markets are up to the international EMEA markets are actually.

Down as much year over year. So it's a it's the mix of those that matters and that not only the ERP matters, but the average matters and so.

On average year to date.

We've got equity markets at up around 6%, which is beneficial right. We've always talked about equity markets up 10 feet.

Fees up three fixed income markets up 10 fees up to and so we do have a tailwind of a point maybe a point half of fees that are coming through on a on a on on on a quarterly basis or year to date basis, and we'll we'll take that.

Over and above that I think we've also got some net new business and so to the question that came earlier in that folks are always asking about our our business wins are outpacing some of the.

Some of the bit of turn that you always get in the portfolio.

And then.

We've been able to charge more and whether its client activities are flows have been a little more positive. This year and those are those are coming through and offsetting some of the.

Some of the.

The fee headwind. So I think there is a good mix in general if equity markets stay at this level you know that'll help us with the compares on a year on year basis, but remember.

Third quarter to fourth quarter of 19 equity markets were up as well right and so the the that'll help us on a sequential basis from Threeq to Fourq, you, but year on year. We're also going to have a tougher comparison.

There as well for Q4 Q anyway, there's a lot there which is partly why I gave the overall fee guide for the year on servicing fees up 2%, because we think thats a good indication of a bit of tailwind in.

In equity markets around the globe, but also driven.

Driven by our ability to drive new business growth manage pricing and then.

Take advantage of some of the flows and activities that we're seeing.

Yeah, I appreciate that but just the.

The lag in new business billing versus the you see coming on that just.

Well is there a lag with with some of that you sometimes there is and so I just wanted to confirm appreciate all that that's a great color on the market dynamics in the beta just to.

There was a bit of a lag, but I think the ERP in the averages were relatively consistent for the quarter and so we're not expecting.

A large lag adjustment into the fourth quarter at this point there'll be a little bit, but because of the end the period and the quarterly average was was pretty consistent I think I think I'll just play through more up more naturally.

Okay. Thanks for clarifying that.

Your next question comes from the line of Ken Huston from Jefferies. Your line is open.

Hi, good morning.

And guys Hey.

Eric one I could just come back to the capital return question.

Do you have an 8% GT one minute I was just wondering if you could just level set us again now that SCB is totally done with this stress test ahead of us and the.

Limitation through Fourq, what do you guys see as you're limiting capital ratio and when you are able to get back into buybacks do you go back to 100% capital return and how do you think about like what the actual excesses over just getting.

Getting back to a more normal buyback plan.

Yes, Ken it's off.

Obviously important.

Important topic, we've been working through in a way we've gotten been forced to defer any of those.

Those those decisions, but I'd tell you it's one that we're anticipate.

Anticipating and eager to act upon given how strongly capitalized we are I used the word elevated capital purposely in my prepared remarks, just because that's what we're running at right. We've got significant headroom.

I think theres a couple.

Kind of parts to the question you asked I think first in terms our capital ratios binding constraint is now CE T. One so.

Core risk weighted assets.

Divided by a common equity tier one capital at this point the leverage ratio is not really any more the binding constraint and you've seen us take advantage of that as weve reduced some of the stack of preferred.

On our book.

And then as you think about the CE tier one ratio, we'd like to get that down I mean, there's there's there's very little reason that we should run above 12%. There is little reason, we should run.

Of 11% and so you know there is at least you know coined the half if not more we are working through what's appropriate right. Because we've done a lot of data over the last couple of quarters, and we want to factor in but Theres a solid bill.

Filling a half of capital there.

It needs to go back to shareholders over and above what would go back to shareholders just.

Just from the earnings that we create each quarter right.

And so we obviously want to see the results I think as the fed and market participants do have the the new C. CCAR test. We we went through all the assumptions as I think you guys did too and we think we'll show well.

We're very comfortable that our SCB.

I think what we'll do is you know.

Kind of market dependent and.

Also based on.

Any any fed guidance for the industry, we'd like to restart capped.

Capital return and if we can do that in the first quarter. The pace of that you know it needs to be a little bake pace that got to be careful in this environment and we're careful bankers after all but our view is that you know we need to start and then we need to accelerate that pace of return so that we return more.

Then what we earn each quarter and start putting that back into our shareholders' hands.

Great Yep, Okay, great color, Thanks, and just a follow up on.

Unexpected expense question, you've been talking for a good while now that you think that the company should be able to take expenses down annually and I know, we'll hear more about this when you get to your formal outlook for the year you did a very good job this year still being at about down 2% with the anti I still being a headwind but fees looking better yes.

How do you start to just think about that calibration and where are you in terms of just the ability to continue to net down the expense base. Thanks.

Yes, Ken and I appreciate your your your letting US answer that now and then as you say in in January we'll give.

Our our our our annual guidance I think I've been clear I think we've all been clear here from a from the management team that that that that down in expenses is the right direction of travel and the direction and the volatility we've seen in market interest rates just re reaffirm that.

That you know down as the new Wap and that that's the kind of way we should operate in.

In this environment and.

I think what you've seen is.

US being able to do that now for effectively two years in a row right. We did that last year. If you adjust for the acquisition costs of CRD, we're doing that again this year and I tell you we have a lot of confidence in that momentum partly because.

That frame of mind I think has really.

Kind of organically expanded through not only our management team, but our one downs in two down so we've got hundreds of people.

Hundreds of senior folks working on probably.

Productivity in expenses, all the while driving revenue growth and.

Fees and so forth as as as you noted but were.

What we're finding ways to do that across the across the line item thrive you saw four out of five of our expense line items down year over year, and many of them were down quarter on quarter.

As well and I tell you.

You know in our core operations area. You know, we continue to find ways to automate and reduce manual touches and we think that has.

Years of opportunity for us in technology were.

Driving a transformation and we've been clear there.

And I think more broadly across our corporate functions our businesses the notion of a productivity.

More outcomes per person is something we're actually adding measurement tools on so that we can in a more incisive way find.

Find the opportunities and I think thats, why youve seen even with a pandemic our comp and benefit costs are down.

2% year on year.

Even more for you just for the currency swing.

Our occupancy costs are down in every one of those is a result of those pretty broad based and deep actions.

Great. Thanks, Eric Yes.

Yes.

Your next question comes from line of Betsy Graseck from Morgan Stanley. Your line is open.

Hi, good morning.

You bet.

I wanted to just dig in a little bit on the.

Wins that you've been announcing recently, there's been several press releases on servicing wins for semi transparent ETF and I just wanted to understand how you think about the market opportunity there and how we should be expecting that's going to be impacting fee rates.

As they come in and what kind of timeframe. It takes from announcement to fully load.

Fully loaded and in the plant. Thanks.

Yeah. So.

I think it's fair to say, but see that virtually every active managers is thinking about these.

And there's a lot of work underway many asset management firms. There's basically five firms have come out next week launched them and I'm not sure.

Not sure what the total is.

Most firms launch multiple funds.

Okay.

Five firms that have come out were servicing for them.

And I think that you will find.

You will find that may.

Many others is that sort of looking at this.

And also many you're looking at what's the experience of those that have gone first so.

So.

I think many men.

Many from view this as a potential new revenue opportunity in that case.

And to the extent accruals will be an opportunity for us we have from a servicing and her.

Servicing innovation.

Perspective.

We've been on this now for a while we're familiar with all the different.

Ways of doing it in an effect or surface and most of the ways if not all the ways of doing it but.

But I think it's too early to tell whether or not this will be a game changer.

But it's certainly something that we felt like was there weren't enough that we need to put.

Some innovation against that we have we've got great market share at this point, but on market small and growing.

And then just thinking about you know how are you.

Yeah, the fee rate associated with it is that something that's going to impact the overall fee rate is it like lower than traditional.

Fieri type of product or or not I am not sure how it's a price and then the other question is just how long does it take from it announcement to be loading up into the plant is it like a two three quarter load or it's just growing with the product itself, which is Nathan.

Yes, so I mean that the fee rate is higher.

But you know its rate times volume and I would say so far the volumes are.

They are growing but okay.

We have a very low base. So I think it's just too early to tell whether or not this will be a game changer for us but.

Again, our view was that.

It wasn't something we should ignore we really we because we spent time on a regular beginning we'd actually worked on some of the rule making around it.

The.

With the FCC.

We felt like it was something we should step into and we'll just see where to follow ups not being a base. We just don't know.

[music].

Right, Okay and since the investments been made it would be relatively high margin as these wins coming onto your yeah, I mean, certainly to the extent to which.

The existing funds grow yes high margin, we understand all the different models. So.

Art.

What it takes for us to install them I mean, we understand that now so it's not like a lot of new.

Incremental cost.

Okay. Thank you I appreciate that thanks.

Okay.

And our next question comes from the line of Brian.

Please go ahead your line is open.

Great. Thanks, Good morning, just one clarification before I ask the tax rate Eric that you mentioned.

That should be 17% to 19% for 2020 at the low end do I have those numbers right.

Yes, Thats correct, 17% to 19% was the guidance and lease Weve reaffirmed that were coming in at the low end.

Yes, that's a good answer than ever okay. Good good and then.

His question is on C or D.

The low double digit revenue guidance for 2020, if you can provide a little over 100 million for for you just wanted to make sure that thinking about that correctly and then as we move into 21, given the new wins that you're seeing at the moment you see on the Apple platform.

I guess, maybe an early look of what you're thinking for core CRD in.

In 21 in terms of that growth rate potentially even accelerating from from that low double digit were.

We're on the same or lower.

Yes, Brian on on C.R.D. I want to get out ahead of myself for 2021 were sold through on the you know the.

The the pipeline assessment growth and so forth. It I'd tell you is that we're quite pleased with the growth that we've seen here.

In.

We bought a business that had top line growth of 7% a year last year, we notched up to 8% that was our first year of ownership in this year, we're looking at low double digits.

With the with some with some upside.

Relative to where we were couple.

Couple couple of months back and you saw some I think some impressive wins in the second quarter.

You know with the web.

On the wealth space and some some major renewals that kind of give you a sense for the the kind of the effect of the.

State Street backing us software.

You know offering.

Has on the market and our ability to convert that into some significant.

Ads to revenue now we'll have to lap ourselves next year. So that's that's obviously going to be the hard part quarter by quarter by quarter and so you know the.

We're we're doing all the things you'd expect us to do we're expanding the salesforce, we're expanding the technical base, we're expanding the implementation engineers, but.

But I think we're we're real pleased with that trajectory and just Oh, a double digit Roe.

Revenue performance two years into an acquisition.

You know I think gives us the confidence that not only did we buy the.

The the premier.

Property in this space, but under our ownership.

It's it's very strong.

And.

And.

And.

On a top line basis.

And that's just CRD itself right.

He is really part of that front to back alpha offering and you've seen us expand that with partnerships when business in custody and accounting and Middle office with Charles River, and so I think that that broader effect on our on our offering and are crying.

Our client.

Discussions is.

Is.

This is shaping up nicely as well.

Brian I want to underscore that last point that that Eric made because we've been talking to you all right from when we acquired Charles.

Both of them.

In October 2018, we started talking about how the pipeline was developing or not.

Not just.

We.

Charles River, but also for.

Broader front to back kinds of offerings.

You will note that in our new business wins this year of this call.

This quarter, a third of those wins were outflow related.

So remember that means that it's not just.

C or D. When we're getting out of that some form of the middle office and the back office and we said that we were seeing it develop.

Not only would we drive.

We drive C or D wins off of our existing capacity platform saw C or D and the alpha platform as is.

Actually driving back office wins, and we're starting to see that.

I noted the.

One of the wins.

Large European asset manager that we had no existing relationship before so we've grown will go from zero to having.

Andy the Middle Office and fund services. So that's how you should you should think about VR the boat.

In of itself as a software provider, but also as part of the cell platform and our pivot to being an enterprise outsourcing.

No that's great color and then maybe just from a well have your.

On growth initiatives Iasci, obviously, you guys are very strong.

So it was that.

Dedicated you and maybe.

Maybe if you can talk about the plan.

The plan might be to launch more products that.

Sustainably focused product, maybe especially on the EPS side. It obviously, we see black rock really advance in the space and then also on the servicing side to what extent within you.

Within your data data analytic offerings.

Are you able to integrate.

Yes, Gi data and analytic services for your client.

Yes, I mean, youve outlined it well in terms of how we think about it most.

Most of the much of the.

Visible SG activity to date has been in SSG.

And in addition to all the stewardship work that they do.

Theres been much new product and more new product on the.

On the.

On the drawing board.

Which as exciting for US though is that is.

These managers are now integrating SJI into their overall investment risk framework and overall portfolio construction.

Thats driving more and more needs for measurement data analysis et cetera. So we've got a series of products that we're working on now that will help support that.

So stay tuned on this it's something that's very important to us we're actually.

We've been thinking about it in terms of how we are we.

We put our resources together across the firm on this go out on a United front. So you'll see more of this in the next few quarters.

Great Great that's great color. Thank you.

Your next question comes from the line of Mike Carrier from Bank of America. Your line is open.

Good morning, Thanks for taking the question just a quick one on the 100 to decline you mentioned reviewing and working on is there any difference.

This group versus the prior 50 that could create a different outcome.

No I think I think whats the way, we think about it Mike is that we pulled out of a more sophisticated adding an engaged and kind of action oriented coverage structure on the top 50.

Starting at the at the end.

End of <unk>.

2018, and Thats really took effect this year and thats about folks with a kind of a sales orientation with a deep relationship kind of building orientation.

Sophistication to leverage the whole organization bring it to bear to our clients and what I'd tell you is that that actually has created.

At least several points of additional fee growth for that group over and above what we're seeing for the rest of our CLI.

Client base right and so as we step back we're saying Wow given that that has created differential amounts of revenue growth and we track it right. We track the top 50, we track the rest the client base and then we further sub segment below what we've decided to do is take the learnings that you don't.

Some kind of.

Pound for pound because there's a there's a cost to a coverage organization there is no.

Productivity and loading that you want to think about where the coverage organization with different size clients, but the client base. The next hundred 50 clients are not dissimilar from the largest or just tend to be maybe in one or two investment areas. If they are servicing clients as opposed to three four or five.

They may be you know 50 or $100 billion clients. Instead of you know trillion or two trillion dollars declines, but these are our clients you know.

In the next hundred 50, our our our large their scale there.

They they can take advantage of our cost the accounting Middle Office front office services, and so I think they're they're they're similar in a lot of ways and that's why we think that in a more intense and orchestrated coverage organization, which really then has the ability to.

At least another.

Another several points of revenue growth. There can then help lift the the overall revenue growth the franchise in a way that we've already seen for the top 50.

Got it all right. Thanks a lot.

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

Hi, good morning.

So Eric wanted to start with a question on the securities portfolio.

No the duration increased sequentially and now sits at about 2.9 years, and maybe a little bit of a surprising development just given the accelerating prepayment activity and some investors and admittedly not all but some are speculating we could see some steepening of the curve in the event of a blue wave and various inflationary programs are launched.

And I know that outcomes not contemplated in your NII Guide I was hoping you could just speak to how you're handicapping extension in AOCI I risk, maybe you could just frame the capital and duration sensitivity. If we do see 50 or 100 bips of Steepening.

Yes, Steve it's it's Eric it's those are those are exactly the kind of the the balancing.

The the balancing drivers that were quite careful of.

To your point, we you know we model out all the operate scenarios 5100 150 200.

And what you've seen US do is is both be I think considered in how much predict.

Maturity in duration, we put on we've historically run at this two and a half to three year range of duration. So I think we're within that that that band we added a little more to offset some of the shortening that came on.

Yes, prepayments. So we did that consciously but you also didn't see us take that up to four or five year duration and.

Run long on 10 year, and 30 year bonds. So I think it's it's calibrated.

One of the one of the tools, we use here, though is not only to think about where we play on the curve right or this is really the middle part of the curve. This is five and six year.

Maturity paper on average with some a little longer but you know we're careful but we also use the the HTM accounting designation because a lot of what we hold we'd like to hold for.

To maturity and you've seen us.

Put a.

40, $45 billion of securities in held to maturity, which insulated from the OCI pressure and we do that very very consciously and we also are quite purposeful and what we put in held to maturity because we think thats got to be pristine its government pay.

Birds government guaranteed paper and so that's how we balance the upgrade scenarios is through a mix of kind of just carefulness on duration and then the the HTM accounting and I think in a lot of ways that lets us feel comfortable that.

We always need to have volatility buffer in capital, but we don't want to have one that's inordinate lead large because then we couldn't return capital to shareholders and that's why earlier in the in some of my remarks, I describe that theres, a solid amount of capital to give back we need to keep some for the OCI volatility, but we think we.

Can manage that too.

To reasonable.

Levels, given given the portfolio.

Design and some of the accounting designation.

Great. Thanks for that color, Eric and maybe just as my follow up just wanted to ask on the investment management strategy segment did see a nice lift in pre tax margin this quarter, but the profitability has consistently lagged some of the traditional asset management peers and just with the latest wave of consolidation and how are you thinking about scale adequacy of the platform.

Especially on the active side and just given more subdued profitability as well as the significant capital cushion Eric that you cited just how might you look to reposition the segment to compete more effectively and I guess more specifically how does inorganic growth fitting sets strategy.

Yes.

Thanks, Ron.

These are exactly the questions that are very much on our mind and that were working through.

Quite actively.

We like the French choice, Scott some terrific assets to it.

Particularly the.

The franchise.

Seeing more and more of that Thats a.

That's an area, where the bigger getting bigger and it's just hard if you're not in.

In a top three or four position there.

But it also has its challenges right it's.

It's a fairly narrow platform from a.

From a product perspective, so operates really of the.

The the beta.

Active beta.

One.

[music].

And his role.

Relatively small and.

Things like alternative so we're thinking about a product perspective, both organic and inorganic and then obviously from a distribution perspective.

So.

The only distribution, we have is or institutional distribution. So.

Well, probably talk more about this with some of the.

Coming conferences as we finish through our work, but it's something that we're actively considering.

In evaluating.

Great look forward to hearing more about it thanks, so much Ron.

Your next question comes from the line of Jeff Harte from Piper Your line is.

Okay.

Hi, good morning.

Can you talk about the value of kind of deposits to state Street, and I guess I'm thinking about it from the angle of with deposits up a lot, 20% some year over year and as low as I can ever having remember seeing it at your holding a bunch of capital Thats. The balance you just kind of small and what these deposits at some point in time just because.

Economically advantageous to kind of turn deposits away say through pricing and de lever the balance sheet return more capital to shareholders, assuming the fed much buy stuff back.

Jeff It's Derek those are all the right questions that we have that.

That said I think we as bankers have to navigate through.

I think what's changed and is is is particularly important for us as a bank is that the binding constraint for us has actually shifted.

234 years ago, it was around leverage.

And partly around tier one leverage probably around supplementary.

Leverage ratios right, which have been expanded kind of view of the balance sheet.

And those rules, though were effectively adjusted over the last year I think in such a way that they became more rational and didn't put us in this position where we needed to.

Any longer push awake client deposits, which is something we did do I remember in 2017 that was one of the actions that we took in it it wasn't very pleasing to us or nor to our clients, but we're no longer in that position. What's really changed now is that it's the common equity tier one the risk weighted asset ratio is that really matter.

Both the spot ratios have been under C car in the FCB and because of that shift we are effectively in this position, where we're open for business on deposits and while it in a kind of up in a way it.

It's a larger balance sheet, it's 20% larger that's not constraining for us and what that does put us in a position to do is to carefully expand the investment portfolio you've seen us do that this year continuing to lend more to our clients and you've seen us do that as well and so that's the path we're taking.

Which I think actually supports our you know the the financial system in the right way you know as we land and expand the investment portfolio. It supports our clients and to be honest that'll come back as earnings and and returns to.

Our shareholders.

Jeff what I'd add to that is.

Many of these deposits.

To the extent to which we push them away, we create operational complexity for our clients because most of these deposits that we get are associated with our three activities. So when you start to separate those you're creating some operational complexity.

And.

Eric noted that we.

So did some of this mostly girls.

2016 2017.

And.

Yes.

It would be hard pressed to get booked back if we do that too so.

If you believe that these are going to be useless forever.

It might be something that you'd be.

Willing to do but given the lack of constrained given the fact that it creates operational complexity for our clients and our.

Given.

And to retain that Optionality if.

If and when in fact, you do see a steepening of the curve or even.

Increase in rates.

We like our approach.

Yes, the current approach.

Drives.

85 basis points of spread income effectively in those deposits because many of those are actually priced at zero or one one basis point thoughtful as much as we'd like but to be honest that's that's.

Renewed rating to a to the income line and to our shareholders and over time I know will be some normalization of rates, we could see that expand again.

Okay, and just a quick kind of figure.

Bigger picture follow up it's probably too soon to tell but heavy.

You seen or do you expect to see any impact kind of versus the pretty cold environment and servicing as far as kind of the trend of industry consolidation a baby either pricing pressure to do you see anything changing because.

The whole work at home and just everything we're kinda facing now versus a year ago.

I think the.

The trend that is most visible to us at this point is that.

Investment managers, even even ethanol.

Even asset owners and sovereign wealth funds plan sponsors are really taking a hard look at the operating model.

They were before if anything.

This is put more spotlight on those operating models.

I mean, we had instances where.

We had.

Clients. If your example, I'm thinking it was enough and owner.

Roughly 1700 employees and have the ability to 70 of them working from home from a technology perspective, So theres a broad based look at operating models, which we think will be beneficial to us.

Ultimately.

As long as you believe that investment markets are going to continue to function and grow what we do we will still be there.

What we're possess.

Positioning ourselves strategically for is that.

In.

As these operating model needs to be overhauled, we want to be enterprise outsource doing afford them taking on.

As much as we kind of the front middle and back office.

Okay. Thank you.

Thanks.

Your next question comes from the line of Vic.

Jay from Jpmorgan Your line is open.

Hi, Eric.

Couple of questions for you folks.

Firstly can you give an update on the unit had a good run with CRD until the revenue.

Because you mentioned can you give an update on where you stand on the synergies that you achieved on the accretion dilution.

Yes. The fact, we we continue to run run well along those lines I think we we had said that.

Accretion would turn.

Positive by the end of the second year.

We we.

We we effect clearly gotten to that point given that the synergies have have come in in the.

Both on the revenue and the expense side I think the expense synergies came in actually live.

Little faster than expected I think we've always historically been good at at expenses as a as a company and the revenue synergies have come in quite nicely. They moved around a little bit you know we had some center.

Synergies from some of our sponsored repo activity sold into the CRD base, which came in a little lighter because of the compression in rates, but some of the fee activity that we have in the sales activity that came from the state Street franchise. That's come in stronger you saw the very significant.

Well.

When.

And.

Some of the other activity. So I think we're really we're really pleased with where we are in.

Have hit our milestones.

Okay. Thanks, a lot a couple of different one.

Eric for you the reverse repo business you know, it's been shrinking yourself quite a bit last couple of quarters us spread so Jim.

Diminished.

Do you see it shrinking further or is it stabilizing or what are you seeing in spreads any color on that.

Yes, the the sponsor repo business is something that we've done.

It started small it got the 50 75 100 billion of assets it got north of that sometimes it's a bit spiky.

We had months or.

Where we are at 150 billion, we're back now in the.

Kind of $80 billion to $90 billion range.

And the biggest driver has been the.

The the changes in front end rates right.

Repo rates and.

Kind of.

One month T bills.

Tend to create movements in.

Movements in in positions of.

Of asset managers, who are very focused on overnight out through one month of paper and because.

Because.

T bills were suddenly more attractive.

During really the spring and part of the early summer we saw that that sponsored repo balances.

Come back down we've now seen some I think normalization those rates I think theyre back to being you know 510 basis points. Apart, we think that gives us some.

Some opportunity and we've seen a bit of growth here over the last month or two and I think we're.

You know notwithstanding the the flood of cash from the central banks.

See see some amount of upside there and that's what we're working towards that comes through our NII line and that could be you know a.

That is factored into some of our forecast, but that's the kind of areas that were.

We're pushing on.

Yes.

Thanks for that if I may sneak in one more Eric what types of Securities are you at all.

On the most recent purchases and what you've done.

The Vac I think you mean on the investment portfolio, sorry, yes investments I forgot I shifted gears on you.

All right.

I'm I'm, okay with the off balance sheet client sponsor of program questions or the on balance sheet investment portfolio questions. They're both they're both good ones.

On the investment portfolio itself.

What we've done is we've we've continued to add.

A couple of things I think first weve gently expanded our.

MBS portfolios. So we were up 9 billion and in Securities.

End of period 10 appeared this quarter I'd say, you know five 6 billion of that would be in the NBS space, but we have rotated the types of mortgage backed securities you will see a bench and the regulatory filings that we expanded.

A little more in Cmos in commercial MBS, all government guaranteed because part of what we're doing is trying to put on.

Uh huh.

Some some cleaner duration paper as opposed to take up.

Premium pre.

Premium at risk and we've also continued to haunt in the specified pools and not just the current coupon. So that's been some of the rotations there and then we supplemented that with a little bit of expansion in.

In the international areas around.

Some foreign sovereigns and then some of the.

Some of the the AAA.

Agencies that have also been an area of.

Expansion.

Great.

Thank you Eric.

Thank you.

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

Hi, I guess, one kind of easy question, one tougher question, but first.

So end of period loans were up is that right and why is that.

Why is that not seemed to be a little different.

Mike and appeared loans were up.

Well they were up slightly we like lending to be up in this in this environment given that.

Where there for our clients yet two offsetting factors you had number one the continued growth in our.

In our client lending capital call financing in particular continues to be a real important part of our growth.

To the alts managers and that was just offset by some amount of reduction the overdraft balances on an end of period basis, but the net was up a up slightly and I think more more indicative is total loans were up about nine or 10% year over year.

Okay and have you said anything about.

Cutting cost in 2021, how should we think about costs next year.

I guess you continue to ask the easy question. So we.

We have not given.

Outright guidance for next year, Mike yet, we'll we'll do that in January but we've been clear that.

We we reduce cost this year, 2% last year adjusted for the acquisition, we were down 2% and we continue to like the.

The approach given the the economic environment to drive costs down.

And we think that's a that's a that's appropriate so those those are in our plans and and what we're working through is is whats the magnitude of that next year, because what we do need to do is continue to drive.

For gross cost savings, but we also need to reinvest in our business and especially as we add new business and you saw some of the wins. This year, we're going to have to implement that some of that take some some fee.

Some funding and then we want to continue to invest and expand into products features and so forth for the platform.

And that front to back platform in particular, which is going to take some resources, but net net.

We expect cost to continue to be down not only this year, but also next year Mike.

Mike what I would add to that is we've been very clear that.

This was not a one in done kind of thing.

Sure Theres, some tactical things that we.

That if they're there low hanging fruit you grab out at you realize that but we've been.

We're on a sustained program to transform our business much of it is around productivity improvement and much of that is driven by the ongoing or.

Automating of prophecies reduction of manual processes et cetera. So.

This is.

This you should expect us to be thinking about this and implementing this on an ongoing basis.

Okay, and that's a good segue to my my harder question, which is I mean, maybe phrase like a jet.

And maybe phrase like a jeopardy question. So the answer I think and correct me if I'm wrong is what you're doing is you're improving efficiency productivity automation, you're expanding your revenue streams. As you said it start Ron and you're now you're expanding the total addressable market with more focus not just on the top 50, but the next 100.

50, and I guess the question is why and.

As part of the Y because assets under custody were up 11% year over year and the servicing fees were only up 2% on another words.

I don't see the revenues keeping up with the business volume and therefore, you have to go to these alternative streams and I guess really the question is what are you seeing on pricing pressure. You said it was easing said some business has been coming on at a higher margin but.

We're not seeing it in the final results that release to us. Thanks.

Mike Let me start here the I would add a fourth element to what we're doing which is also up.

Basically expanding our addressable market, beating that.

Moving from the.

The typical traditional custodian role of being a fun servicer to also be an.

Enterprise Outsourcer and to work.

Management companies or the the the plan sponsors on their own operating model and that's just that's an incremental revenue stream that is available to us.

Why are we doing it.

The I mean, it's it's no secret that the traditional.

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Business of its series of challenges not price compression although no.

On a good about it I mean, just think about it go back 10 15 years ago. It was all about new funds being created.

Somebody would have wanted to domestic upon them a creative.

It might go move into other asset classes, they move might move into.

It's neutral restrictions new countries now its if anything you are seeing the number of funds go down as distribution platforms were saying one we don't want as many phones and two were more interested in estimates anyway. So.

This it's just east trends that are underlying our strategic pivot here no as we've also said.

It takes a while for this revenue to be realized and you're kind of seeing that even in the way. We started talking to about this expanded pipeline at the beginning of 19 now were talking to about.

Front to back out wins, and so you should expect to see that some of the things that we talked about in the past and 19 in early 20, we will start to be showing up in future quarters as as.

As our wins that just these things take longer because going back to what I said earlier, you're actually working with the management company overhauling the way they work the way they invest the way they employ data the actual tools that they are going to be using the actual tools are not going to be using so.

I hope thats the Y in terms of what we're doing here.

And then last follow up just as the size that so going from eight.

I'm, sorry, custodian to an enterprise outsource or at what point.

Like what percentage of the firm or revenues would be enterprise outsourcing today, where was it a few years ago, where do you hope that to get to and when do I transfer my coverage to our firm's fintech analyst that's enough because that's the direction I think youre going.

I mean, it's it's a little early to talk about that.

And we will talk about our strategy more some of the upcoming conferences.

And.

Maybe we'll get into that really thought about that but I think your point.

I would agree with your point that you should expect to see it.

Be a higher and higher percentage of what we do.

And your.

You're also accurate about the technology content in here and this is very much.

Technology, and a software driven strategy.

Thank you.

Thanks, Mike.

Your next question comes from the line of Gerard Cassidy from RBC. Your line is open.

Thank you good morning run good morning, Eric.

Morning, Dr. Rick.

Can you share with US you mentioned that the CE tier one ratios your binding constraint.

Yes.

It's obviously too high is 12.4% even to i. above 11.

How low do you think you could conceivably bring that down to and then simultaneously.

What's your thoughts about redeeming more preferred stock and 21 or 22.

Yes, Gerard it's Eric maybe to tackle those in reverse order.

A little early to think through the preferred question, we really want to see what what happens with.

The.

This this this next round of kind of intermediate.

Car Tas and just see if there's anything different.

Or or not there so we're keeping an eye on it we like the fact that we've we've already called the couple perhaps we we certainly.

We certainly be happy to do more if we can so I think that one is.

Is is certainly always in mind and we'll we'll give that some more thought I think on the broader topic of capital ratios were doing a lot of work here and maybe just to frame out the clearly we have too much capital given the.

Given the limitations of that's fine we'll get it back to shareholders as soon as we can.

The bridge that we need to do is we clearly need to run above the 8% the FCB requirement, let's assume and we have confidence that that will stay in that.

In that at that 8%.

B, obviously subject to the fed indications, but the work. We're doing is how much you know CE tier one capital volatility do you have for OCI, and that's where we're kind of working through well how much can we should we put in to held to maturity versus you know available for sale. So we have some ability to influence that.

And then we have some amount of volatility to be honest and RW ways right in the risk weighted asset denominator, just because you know you get volatility he gets a little bit of RW expansion in the FX books. So.

Is that it's a you know is do you need volatility cushion of of at least.

You know 100 200 basis points, probably we as bankers want to run conservatively I think what we're wrestling through is.

Where in the range of.

You know, 11% is too high I've said, no, 10% kind of one of those kind of.

Areas that you want to think really seriously about crossing below because there is some volatility in our business and so somewhere in that.

10, 11% range, there's got to be somewhere that we.

That we'd like to run and we're doing a little work to fine tune that but I think if you do the math that way you get to a view that theres really a substantial amount of capital to release from a based on where we're running because we're running at 12.5% and 12.5% down to somewhere in the 10 11.

Range is a is a real return a sizable return for our shareholders.

No.

Uhhuh.

The.

It would be very positive.

Moving a good back into the investment securities portfolio.

Clearly, we're all focused on the rate environment.

I think everybody is on one side of the boat so to speak.

The rate environment into the stay low for an extended period of time.

Also brings out.

Industry risk for a securities portfolio should reach grew up surprisingly.

20, 122, one indicators to you guys keep an eye on you.

You could name.

Two or three that really would make you change the way you look at your innocence feature duration.

Where there could be a risk of a mark to market situation. If these.

Got out of line in rates started to go up which.

Nobody's really planning for the forward curves certainly doesn't call to that's alone. So just curious how you.

Do you guys manage and keep an eye on this so that you don't get caught offside should something change unexpectedly.

Yes to 12 months from now.

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Sure I think there are a number of indicators, but part of what we do is we manage for the for the for the concerning outcomes to the downside tried so well we are careful in the portfolio. As you know you don't want a barbell between one month paper and 30 year paper, because you get a big move in rates the 30 year hurts.

Same thing with three month paper and 10 year paper. So we're quite careful about where we operate on the curve and it's not just an average duration that we run at but we have a series of limits across the curve and will position.

To your point to be quite quite careful and.

Circumspect. So that's one there's kind of an outright management process and sort of of.

Places that we'll operate I think in terms of indications.

Yes, Theres clearly a set of a fed indications and then market indications you know the fed been quite clear about their policy around lifting rates they've been quite clear about how long they've been quite clear about.

Inflation targets and kind of general monetary policy planning and I think that's actually you know you've got to ascribe a fair amount of reliability to that.

And then there are all the market indicators, whether it's the front end of the curve the steepening.

The volatility inherent in some of the curve structure is another indicator that we're very conscious of.

And then I've got to say there is no substitute for doing a running a battery of tests a battery of stress test because you're always worried about what you don't know what you're not seeing in the marketplaces and the good thing about rates markets as we've got.

Well.

50 years plus of solid history, and we'll we'll do all those tests and then we'll do the theoretical one so anyway. It's a it's a it's something we're very.

Our full on I think is the is the is the bottom line.

Thank you appreciate it.

Sure. Your next question comes from the line of Brian Kleinhanzl from KBW. Your line is open.

Great. Thanks, Mike just a real quick question a clarification question. So Eric when you were talking about the Eni of kind of the go forward past the fourth quarter. I think you said a couple of percentage points down first quarter second quarter, but did you mean, a couple of percentage points down in the first quarter and then another couple of percentage points down in the second quarter and then stabilize from there. Thanks.

Good good good question, Bryan I said, a couple of percentage points down either in first quarter or second quarter, we think Theres us.

A small step down from Fourq, you to one or the other it's just really hard because you're always working through what are the what.

What are the headwinds and tailwinds at an inflection point to at the call the trough, but we think it's sometime in the first half and we think it's or.

Or we think given what we know today and kind of the market indicators in the assumptions we've shared.

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We think it's one of those two quarters.

Okay.

Yes.

Thank you that was our last question I will now turn it over to Ron.

Well, thanks to you all on the call for joining us.

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