Q4 2020 State Street Corp Earnings Call
Good morning, and welcome to State Street Corporation's fourth quarter 2020, earning conference call and webcast. Today's discussion is being broadcasted live on state Street's website.
Investors not state Street Dot Com this call on.
And from call. It is also being recorded for replay speech.
State Street's conference call is copyrighted and all rights reserved.
And may not be recorded for rebroadcast or distribution in whole or in part without expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be hinged on the state Street website now I would like to introduce Eileen fees albumin and global head of Investor Relations at State Street.
Good morning, and thank you all for joining us on our call today, our CEO Ronald Hanley will speak first and then Eric Outwork, our CFO will take you through our fourth quarter 2020, earning slide presentation.
And is available for download and the Investor Relations section of our website Investor update Street Dot com.
Afterwards, we'll be happy to take questions. During the Q&A. 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 on the appendix to our slide presentation.
In addition, today's presentation will contain forward looking statements.
Actual results may differ materially from those state months 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-K.
Our forward looking statements speak only as of today and we disclaim any obligation to update them, even if our views change now let me turn it over to Ron.
Thank you Eileen and good morning, everyone.
Earlier. This morning, we released our fourth quarter and full year, 'twenty and 'twenty financial results.
Before I review our results I would like to reflect on how state Street successfully adapted to the unique operating environment in 2020, supporting our clients communities and the financial system, all while advancing and positioning the business for future success.
<unk> 20th year like no other in recent memory as we entered the year Pugh could've predicted how volatile the operating market.
Operating environment would be as the health crisis precipitated by the COVID-19 pandemic resulted in a global economic recession, which the world is still dealing with.
Against that backdrop governments central banks and financial institutions like State Street and needed to act quickly to assist and limiting the impact of this crisis from a financial market fee on the global economy.
2020 also highlighted a number of ratio and social and junk foods that we must act to address.
When faced with these economic and social challenges I am proud of how state Street team members around the world looped our values of being stronger together and a trusted and essential partner to our clients and communities all while generating solid earnings growth for our shareholders and 2020.
As the pandemic worsens last year, our global operating capabilities allowed us to adapt quickly and deliver product services and results for our clients when they needed us most and.
In addition to the client focused product and service and service enhancements. We've made in 2020, we continued to transform our operating model by simplifying our operations, increasing automation and driving productivity and efficiencies, while continuing to invest and our business.
State Street has been on a journey to transform its operating model from the last two years and we expect that we will be able to deliver further improvements during 2021 to drive costs lower.
Fund investments for the future and transform how we compete and operate in the years ahead.
At the same time, the volatility and markets demonstrated the strength of our global FX franchise, where we retained the number one market share position with asset managers and achieved and approximately 30% uptick and revenue.
We continued our intense efforts to innovate throughout 2020 with the further development and delivery of the State Street Alpha front to back platform, which has gained traction with clients through.
Through the open market open architecture nature of the platform, we have been able to rapidly increase functionality through a number of partnerships with leading data and analytics providers.
Unlocking new sources of revenue.
We signed six alpha clients and 2020, we're early adoption has helped us accelerate our development the alpha pipeline remained strong.
While the Alpha platform remains an integral part of our future strategy. We also remained laser focused on improving the financial performance within investment servicing which is the core engine of our business. We recently enhanced our institutional services client facing strategy and during 19 and during 2021.
And we will leverage improvements and client coverage segments and regions to broaden and drive investment servicing revenue growth over time.
As a result, our strategic moves and the strength of our capabilities and operating model and the commitment of our team members enabled successful navigation of 'twenty and 'twenty and improved year over year financial performance, which I will now discuss further.
Turning to slide three fourth quarter, EPS was $1 39 or $1 69, excluding notable items.
Relative to the year ago period fourth quarter total revenue declined 4% largely driven by the impact of interest rate headwinds on our NII results.
However fee revenue increased 2% reversing recent trends and demonstrating and improved servicing and management fee performance as well as strong FX trading results.
Despite an increase and transaction processing total expenses were flat year over year, excluding notable items.
At the end of the fourth quarter, AUC and AUM, both increased to record levels supported by higher period and markets.
At Global Advisors, we had another strong performance and Etfs and cash these results and both businesses provide good step off points for 2021.
Turning to our full year 'twenty and 'twenty results, we made solid financial progress relative to 2019, as we work to drive fee revenue growth higher and total expenses lower.
Full year EPS was $6 32.
For $6 70, excluding notable items.
<unk> results were up 17% and 9% excluding notable items, despite the dramatic rate environment.
Supported by year over year improvements and servicing and management fees very strong FX trading results and a higher revenue contribution from CRD, which continues to perform well total fee revenue increased 4%.
However, total revenue was roughly flat year over year as a result of the impact of interest rate headwinds on NII. Our team drove total expenses down one 5% year over year. Excluding notable items and we continued to build on the strong culture of expense reduction that we successfully established in 2019 opt.
<unk> leverage was positive and margin was up and one of the most challenging years and history.
To conclude my opening remarks State Street faced a number of unprecedented challenges during 2020 as a result of our operational capabilities and innovation, we were able to successfully navigate those challenges all the while acting as a trusted and essential partner to our clients and communities and generating solid year over year earnings.
For our shareholders.
As we look ahead for the first quarter of 2021, our board has authorized up to 475 million of common stock repurchases, which is in effect the limits set by the fed we are well positioned for and looking forward to returning significantly more capital to shareholders and the future.
In addition, the board has also authorized the partial redemption of our series F preferred stock, which will further benefit our common shareholders. Following its partial redemption and the first quarter.
And with that let me turn it over to Eric to take you through the quarter and more detail and then I will return to update you on our medium term targets.
Thank you Ron and good morning, everyone.
Turning to slide four and before I begin my review of our fourth quarter and full year 2020 results. Let me briefly outline $145 million and notable items, we recognized and the fourth quarter, which totaled 30 cents of EPS that will collectively help us deliver another year of declining expenses and 2021.
First we took and employee severance charge of $82 million to eliminate approximately 200 positions, mostly and middle management, which will be partially offset by in sourcing and critical hires during the year.
This complements the senior management reductions, we made two years ago and the ongoing reduction of junior roles for automation that were deferred during the COVID-19 pandemic.
We expect this to generate savings of approximately $120 million in 2021 and about twice that and the following year.
Second we took a 51 million occupancy charged from real estate to reduce our total office space across 20 sites by about 1 million square feet or approximately 13% of our total square footage and this is the start of our process of Reconfiguring, Our office space for a post COVID-19 environment.
And we expect this action to generate savings of roughly $30 million and 2021.
We try to minimize repositioning charges, but we have delivered two years in a row of underlying expense reduction, while investing and our business and want to do so again in 2021.
Turning to slide five I will begin my review of both our <unk> 'twenty and full year 2020 results.
As you can see on the top left of the table, we finished fourth quarter with strong revenues.
Total fee revenue increased 2% year on year and was up 5% quarter on quarter.
And while interest rate environment continues to be a headwind the absence of 20 million and third quarter true up combined with a stronger than expected balance sheet growth led to a 4% quarter on quarter improvement and NII.
Total expenses ex notables were flat year on year, but increased 2% quarter on quarter, including currency translation and higher variable costs.
On the right side of the slide we show our full year 2020 performance and despite the challenging operating environment dramatically lower interest rates and a suspension of buybacks. We delivered full year positive operating leverage of one four percentage points or 50 basis point improvement and pre tax margin and EPS growth rate of 9%.
Excluding notable items, our GAAP results were even better across the board.
Turning to slide six period, and AUC, a increased 13% year on year, and 6% quarter on quarter to a record $38 eight trillion.
The year on year change was driven by higher period and market levels client flows and net new business installations.
On quarter, AUC and increase a result of higher period and market levels and better client flows.
And that global advisors, AUM increased 11% year on year, and 10% quarter on quarter to $3 five trillion.
The year on year and sequential quarter increases were both primarily driven by higher period and market levels, coupled with net ETF and cash inflows, but offset by continued institutional outflows and the equity index product line.
Our Spider ETF business recorded its second highest quarter of net inflows driven by strong U S and European flows.
Total net ETF and close to over 43 billion for the full year, almost 30% higher than last year.
Now onto slide seven.
And fourth quarter servicing fees increased 1% year on year, including currency translation.
The increase reflects higher average market levels softer than expected sales and 2020 as well as lower levels of client activity and normal pricing headwinds.
Servicing fees were flat quarter on quarter, including currency translation has higher average market levels were partially offset by a continued normalization of client activity.
On the bottom left of the slide we summarize some of the key performance indicators of our servicing business.
Wins total to 205 billion, while AUC, a yet to be installed amounted to 436 billion and the fourth quarter.
As we look ahead, we are focused on generating the level of gross sales volume needed to offset the typical client attrition and normal pricing headwinds, which we think is about $1 five trillion or more of net a UCA each year.
The amount of gross wins needs needed to offset these factors will vary year to year and be impacted by a number of factors including product mix.
Would include Alpha mandates, which were over 25% of our second half HCA wins, though as I have mentioned before the sales cycle and installation of these more complex solution focused services take some time.
In 2020, we've had some strong success and growth across our top 50 asset manager clients as well as within our insurance and asset owner client segments.
We have been disappointed however, with our sales to a mid size asset managers and North America EMEA and are implementing a plan to address these areas of opportunity.
On the bottom right panel, we highlight some of these tactical enhancements to our institutional services strategy, which involves expanding coverage to a total of our top 350 clients and diversifying our pipeline across segments and geographies.
Turning to slide eight let.
Let me discuss the other important fee revenue lines and more detail.
Before I begin you will notice that for the current and prior periods. We have reclassified the AUM base fees that global adviser receives for acting as the marketing agent and for the Spider Gold ETF from FX trading services into the management fee line.
Going forward, we think this re class better reflects the management fee performance at global advisors.
Inclusive of this re class fourth quarter management fees reached $493 million up 3%, both year on year and quarter on quarter, including the impact of currency translation.
Year on year management fees benefited from higher average market rates and a strong ETF inflows I mentioned earlier, partially offset by money market fee waivers of about $3 million net institutional outflows and the timing of cash outflows.
Our fourth quarter investment management pre tax margin reached 32%, which you can see and our segment reporting and our financial agenda, and we generated significant positive operating leverage.
Regarding money market fee waivers. We currently expect they will continue at the current rate of $5 million to $10 million per quarter companywide in 2021, which is included in our outlook that I will discuss further shortly.
FX trading services had another strong quarter fourth quarter FX revenue increased 25 per cent year on year and was up 20% quarter on quarter, demonstrating the strength of our top ranked FX franchise for asset managers year.
Year on year and sequentially FX revenue benefited from substantially higher indirect FX volumes as well as stronger market, making revenue on elevated volatility as we help clients rebalanced their global portfolios and the light of ever changing economic and political conditions.
The full year 2020, FX revenue surge of approximately 30% will obviously make the 'twenty and 'twenty one year on year comparisons more difficult.
Fourth quarter Securities Finance revenue fell 21% year on year, primarily driven by lower enhanced custody balances and agency spreads.
Securities Finance revenue increased 5% quarter on quarter, However, mainly as a result of both higher agency lending assets and higher enhanced custody balances as we saw demand for some leverage re emerge.
Finally fourth quarter software and processing fees were down 7% year on year due to lower on Prem CRD revenue.
Software and processing fees increased 19% quarter on quarter as a result of sequentially stronger CRD revenue and positive market related adjustments.
Yes.
Moving to slide nine we show CRD revenue growth and business performance metrics we.
We have again separated CRD revenues and two it's three categories given the lumpy revenue pattern inherent and the ASC 606 revenue recognition accounting standard for on Prem revenues in particular.
Fourth quarter CRD revenues fell 9% year on year, largely as a result of the timing of revenue recognition and the fourth quarter of 2019, but was up strongly at 16% quarter on quarter on higher renewals.
CRD demonstrated very strong revenue growth for the full year driven in part by the success of the CRD wealth strategy earlier in the year, but total standalone CRD revenues up 14% year on year and.
And with a more durable SaaS and professional services revenues growing 18% relative to full year 2019.
On the bottom right of the slide we show some of the highlights the state Street Alpha front to back platform sales during 2020.
In total we signed six alpha clients during the year, including three and for Q, which included one new client and two clients converted from existing relationships.
And the Alpha pipeline remains promising as clients begin to realize a transformation or potential of the platform for their technology and portfolio management needs.
Turning to slide 10 fourth quarter, NII declined 22% year on year, but was up 4% quarter on quarter.
Quarter on quarter increase and NII was driven by the absence of the 20 million true up and the third quarter.
Not including that true up the significant investment portfolio balance growth and higher average loans.
Coupled with a $17 billion of higher average deposits, which were worth about $10 million and.
And approximately $5 million of episodic FX mark to market swap benefits over a quarter and were enough to offset the ongoing headwinds of the low interest rate environment on investment portfolio yields.
Each quarter, we try to offset the persistent effect of low rates on our portfolio by taking these sorts of tactical actions and some quarters will be able to fully offset the headwind like we did here as we put the 17 billion and if the deposit surge to work, but that won't be the case every time.
On the right side of the slide we show, our and appeared and average balance sheet highlights last quarter. I noted, how we expect operating around 190 billion of average deposits, but that our deposit levels might increase given the fed's continued expansion on the money supply and.
And as it turns out we begin begun to see the tailwind and now expect to operate and even higher levels of client deposit and more in line with our fourth quarter average or even higher.
We will be opportunistic from here regarding the deployment of cash and the expansion of our investment portfolio, but we also need to be mindful currently tight credit spreads and the potential for OCI risk from interest rate changes.
On slide 11, we've again provided a view of the expense base this quarter ex notables so that the underlying trends are readily visible.
<unk> 'twenty expenses were held flat year on year, but increased 2% quarter on quarter, excluding notable items and including the impact of currency translation, which was worth about a point and the fourth quarter.
Relative to the third quarter and ex notables, we achieved the decline and the largest expense segment of comp and benefits, while occupancy and information systems costs were held flat.
However, this was more than offset by higher transactional processing and other expenses and a fourth quarter.
Transaction processing increased 10% quarter on quarter as a result of variable cost tied to higher market data volumes sub custody balances.
And brokerage volumes.
Other expenses rose, 8% quarter on quarter, as a result of higher marketing and professional fees.
For the full year total expenses were down approximately one 5% ex notables relative to 2019, demonstrating the solid progress we are making and improving our operating model as we continue to reduce expenses self fund investments and our business and more than offset natural expense growth.
We want to be down again in 2021, which I will detail shortly.
Moving to slide 12 on the left of the slide we show the growth and evolution of our investment portfolio and 2020 as we supported clients with the M. L F and we thoughtfully put higher levels of client deposits to work to support NII.
On the right of the slide we show the evolution of our set one and tier one leverage ratios as you can see we continue to navigate this challenging operating environment with extremely strong and elevated capital levels relative to our regulatory requirements.
As Ron noted we are excited that our board authorized a new common share repurchase program for the first quarter up to $475 million and which is in line with the new fed limits. We're.
We're also optimizing the capital stack by redeeming $500 million of prep.
Stock, which will have a benefit to our common stockholders starting into Q.
Turning to slide 13, you could see a summary of our four Q 'twenty and full year 2020 results.
I've already covered fourth quarter and detail. So let me say a few words about our full year results given that we've been on a journey to turn around growth and improve margins and returns.
Following a 3% decline and total fee revenues and full year 2019, we successfully drove a 4% increase and total fee revenue growth and full year 'twenty and 'twenty.
Many initiatives came together to successfully make this happen on.
On a 6% decline and servicing fees and full year 2019, leaner being to moderate pricing pressure, we revamped our coverage of our top 50 clients and we executed on our alpha strategy, leading to an increase and servicing fees by 2% year on year, which made for a real turnaround.
At global advisors, despite a challenging year on our long term institutional index product line, our ETF business had a very strong year with total flows up 30% year on year, and our cash business performing quite well.
Our FX trading services business had a remarkable year and 2020 as a result of higher market volatility and record client volumes and we reap the benefit of our prior investments and our number one position with asset managers.
On expenses for the full year, we continue to demonstrate our ability to drive cost out of the business recording our second consecutive year of total net expense reduction excluding notable items and adjusting for the acquisition and CRD, all the while investing and our products and capabilities. All told excluding notable items State Street delivered full year operating leverage of one <unk>.
One four percentage points or 50 basis point improvement and pre tax margin and EPS growth of 9% notwithstanding some of the interest rate headwinds.
And GAAP results were even stronger across the board.
All that said, we have more to do and 2021, So let me get into it.
Yes.
Turning to slide 14, let me cover our full year 2020 outlook as well as provide some thoughts on the first quarter of 2021.
As I, usually do let me first share some of the assumptions underlying our current views for the full year at.
At a macro level our rate outlook assumes that short end rates remained relatively flat and there is some modest steepening of the yield curve in line with the current forwards and anticipates modestly slowing prepayment speeds.
We're also assuming around seven to eight percentage point to point growth from equity markets and 2021, as well as normalized market volatility, which impacts our trading businesses.
So beginning with revenue. We currently expect that fee revenue will be flat to up 2% for 2021.
And fee revenue ex trading will be up 3% to 5%.
This includes servicing fees growing towards the top end of the 3% to 5% range.
Regarding the first quarter of 2021, we expect fee revenue to be down year over year by low single digits, perhaps down 2% to 4% given headwinds such as the outsized FX trading revenues, we saw last year due to volatility and the early days the pandemic and March.
Regarding NII, we expect full year 2021, NII to be down 14% to 17% on a year over year basis as investment portfolio yields continue to grind lower from prepayments and Reinvestments.
Regarding first quarter of 2021, we expect NII to be down about 68 per cent.
Sequentially, driven by the continued impact of low rates and day count and.
And should stabilize there and be somewhat range bound.
Assuming that our rate assumptions do not change significantly.
Turning to expenses as you can see and the work we expect expenses ex notables will be flat to down 1% on a nominal basis and 2021 due to our continued focus on resource and infrastructure optimization and currently assume that currency translation will be a 1% headwind and this estimate.
This net expense reduction includes approximately 45% of variable costs and ongoing business investments and areas like CRD Alpha and tech infrastructure and automation.
Regarding the first quarter of 2021, we expect expenses to be largely in line with this guide year over year and consistent with the seasonal expenses, usually occurring and the first quarter.
We also expect releases of provisions for credit losses during 2021 of at least a third of what was built in 2020.
Taxes should be and the 17% to 19% range for 2021.
And with that let me hand, the call back to Ron.
Thank you Eric.
Turning to slide 15, I would like to update you on the current thinking on our medium term targets, which we now aim to achieve by the end of 2020 free on a run rate basis for 2024.
At this time, we still consider these target levels to be the right ones for our business and our shareholders. As a result, they remain unchanged as you can see from the slide however.
However, we now expect these targets may take longer to achieve than we had initially anticipated largely as a result of exogenous factors.
We set these medium term targets and early December 2018. Soon thereafter interest rates fell as the fed tried to stimulate a slowing economy and 2019, and then again as Covid hit and 2020.
The market went from expecting and 2018, the fed to approach, 3% by late 2019 to ending 2000 2025 basis points with no rate hikes expect with no rate hikes expected until at least 2023.
Meanwhile, long end rates also fell from about two 9% level at the time, we gave the targets to just to average just 90 basis points during 2020.
All told we estimate that the sharply lower rate environments. Since <unk> has impacted our <unk> 'twenty pretax margin by about.
Five percentage points and ROE by around two five percentage points.
We also witnessed a large down dropped and global equity markets and late 2018, followed by a steady rebound and U S equity markets, but international equity market averages over the last two years were down.
While we are clearly operating and a dramatically different environment relative to when we set our targets. We've made real progress. We went from a 3% decline and fee revenue and 2019 to a 4% growth and fee revenue by reversing the trajectory of our servicing fees and delivering and our global markets business.
We are evolving our business model to become and enterprise outsource provider, while at the same time, enhancing our investment servicing capabilities and client coverage distinguishing us from our competitors.
We are also systematically reduced net expenses ex notable items, which has helped to help us begin to close the margin gap to our peers by about two percentage points, we remain confident and our ability to deliver ongoing strong expense results.
In summary, low interest rates have impacted the timing of our medium term targets I'm confident and the direction of our business and we will continue to innovate to meet our clients' needs and drive business growth, while also focusing on improving productivity and to achieve our goals.
And with that operator, we can now open the call for questions.
And ladies and gentlemen, and to ask a question. Please press Star then the number one on your telephone keypad to withdraw your question press the pound key.
Your first question comes from Alex from Goldman Sachs. Your line is open.
Great. Thank you and good morning, everybody.
So first Eric for you and maybe just to clarify some other comments you made around servicing fees.
You talked about a one five trillion dollars and set our annual client attrition.
Is that a that's about 4% I think of your AUC is that sort of what will be.
We should be thinking about as kind of like a gross impact on revenues as well and.
Qualitatively, how does that compare to prior periods has anything changed that sort of drives this turn higher.
Alex It's Eric Thanks for the question.
And we're trying to be real clear about our sales expectations for our business because at the end of the day you know that is part of what we do every day and we do it across segments across regions and.
Across client groups and I think to kind of give you. Some perspective on that we wanted to be clear that to actually have to demonstrate net new business right so to be able to offset.
The nominal amount of attrition that we always GAAP, which is a few percentage points.
And actually overcome that plus deliver some amount of net new business growth, we need about 1.5 trillion of gross.
New sales a year.
To to accomplish that and.
And we think Thats, what would really contribute to the rebound of growth that we'd like to see now and truth, we've not gotten there. This year. This year net new business was flat and you saw our AUC a wins at about 800 billion and so it's just.
Obviously and area of.
On.
A pretty intense focus, but I think it's the kind of <unk>.
Area that we feel like we can make a dent on if you step back we've made really good progress on our top 50 clients, where our where we rolled out on coverage.
Process and.
Set of executives about two years ago, and we've seen the growth there we've seen it and a couple of segments and now we need to broaden that and deepen value.
And kind of coverage intensity across across the rest of the franchise.
Yes.
I'd like to just add to that I would not want to leave you with the impression that there was a loser.
Client retention problem here if anything.
Client retention has gone up but if you think about things like the.
And what the market is facing and to include reduction and funds for example, or if you think about M&A.
Oftentimes that presents an opportunity for us. So there is a small amount of.
Attrition and broadly defined as much asset attrition as it is client attrition and what we're trying to be here is very clear on how we think about our what we need to do from a sales perspective of what we're doing about it.
Great. Thank you that clear that clears it up a bit.
Speaking of M&A, Ron and wanted to ask you a question around SGA.
Obviously theres been several headlines on around potential strategic actions.
<unk> Street could make around adjusted management business and in the past you also talked about the drive for scale and that business just like what you are trying to provide to your clients.
And so maybe if you can update us on your latest kind of strategic thinking for SGA and when it comes to either acquisitions or divestitures. Obviously, there was a JV headline and out there as well and as you think about sort of these various avenues what is the ultimate kind of financial and strategic goal you're trying to achieve force featured as a whole when it comes to <unk>.
Thank you.
Yes, Alex I'm, not going to comment on market rumors.
But what I'm kind of sales what I've said before we are.
We have a very strong franchise and a first Jay.
Its particularly strong and the <unk>.
Space and the cash space indexing space.
Good day.
Increasingly strong position in the industry.
Having said that as we've said before.
We see the world evolving.
And therefore, we need to think about how to add capabilities, both product and distribution capabilities.
And our distribution access and so we are.
New maybe.
And maybe term you ask us about this I think I answered more or less the same way that we're constantly thinking about this.
We've made some steps over the past several years in terms of organically adding.
Really important product capability.
Fixed income for example, and fixed income ETF ESG capabilities, we've launched the low cost range of funds.
Created that distribution arrangement total proposals and low cost funds. So we will continue to look at those things and we'll continue to look at inorganic activities. If we think.
It's the best outcome and to answer the last part of your question. We're looking to do is to bear.
<unk> position as SGA for.
It's a remarkable effort.
It's got a lot of potential and we will do we need to do to best position for growth.
Yes for sure great. Thank you very much.
Your next question comes from Ken I'm from Jefferies. Your line is open.
Thanks, Good morning, everyone.
Hey, Eric just a follow on on on the NII side I was just wondering if you could help us understand and you talk about some type of step off from fourth to first in terms of NII and then stabilization and I'm. Just wondering if you can walk us through the pieces of what are still moving through other than day, count and the first quarter and.
How much premium am was in the quarter and is that part of our rate of change that you can see any type of state help that stabilization or benefit thereafter. Thanks.
Ken It's Erik share let me, let me describe first maybe third quarter to fourth quarter to give you. Some context, and then fourth quarter on our first quarter and then kind of fee.
And what we've seen from there.
Going into the fourth quarter.
We have the usual headwinds from investment from the investment portfolio and actually higher premium amortization and then we've had previously and that would cost us sequentially about $35 million, that's kind of the headwind that will come back to that headwind is attenuating each quarter, but that was a headwind against that headwind.
And the fourth quarter, we had some unusual benefits we had the.
The FX swap mark to market, which was it was about five box.
We had a surge in deposits both in developed markets and in emerging markets remember, there theyre valuable and emerging markets worth about 10 Bucks as a tailwind and then we built our investment portfolio and added quite a bit of loans.
At the tune of about $20 million and that was a larger build than usual.
But our renew and Murdo Kuan and so those are the kind of features that held us flat.
And effect from <unk> to <unk>.
I think if we go into first quarter, you kind of take each of those.
And pieces.
Investment portfolio headwind.
And that's probably going to be about $25 million instead of 35 million and so you see it attenuate and part of that is that the prepayment speeds are neutral.
And we think from <unk>.
We have some tail winds of.
Deposits and loans and investments, but that's probably worth about 10 Bucks.
And then we still have a couple headwinds we have the unwind of the of that swap mark to market, which sequentially. It's worth 10, because you've got a double up the positive turns negative and then you have day count worth another 10, as a headwind and so that's kind of what gets us to.
The other.
And the guide that we gave once we get through the first quarter I think what we expect to see.
Is that stabilization and what we're.
Effectively expecting is that the investment portfolio headwind, which was $35 million, but coming $25 million is going to start to trend down to $10 million a quarter and.
Why is that partly rates have been kind of work on through the <unk>.
On the yield side, and partly because prepayments speeds, we expect to start to attenuate as we see higher rates and so we do expect some.
Some some lesser headwinds and against that we think that the actions that we take on a on a more traditional basis will be worth about plus 10, and so will be roughly neutral and stable.
From <unk> and <unk> and so forth, obviously, it'll be range bound and obviously it'll be theres always a little bit of lumpiness that we get into but that's our that's our best estimate of what we're what we're seeing today based on the curves the expectations of rates and so forth.
So Eric sorry, if I can speak that back at you is that mean kind of a 50 something million dollars declined for the first if I got all your AD ups, they're 10, and 25 and three <unk> and 10 and 10 and 10.
Just trying to understand what that all gets too yes.
Yes, I think I said, 6% to 8%. So I think we're looking at okay.
And whatever $35 million decline and the and the first quarter and then stable from there Okay, sorry got it understood all right great. Thank you and then just one follow up on a.
Big picture, if unfortunate and other news item and ask you about yes were going on.
No I guess nine months since the Blackrock ETF headline news was out there as well and I know, it's a specific client, but there is a way of just helping us understand just what needs to happen for that to either be.
Codified as youre, keeping it or going away just any commentary would be would be helpful. Thank you.
Yes.
Process is still underway, we are working very closely with them they have not.
<unk> made any decisions at this but we are.
We're feeling reasonably on.
Positive and both of them.
And Ken It's Erik I'd also just remind you though that is growing.
It's a growing business to grow and asset at quite a high pace right and so I think the last time, we had one of these it took three years from start to finish to kind of work out from.
Discussion to RFP to response, and so forth and so I think I think there is.
And you just have to factor that into the on.
And these scenarios that you're wrong.
Yes understood. Thank you.
Your next question comes from Brennan Hawken with UBS. Your line is open.
Alright, Thank you and good morning, this is Adam Beatty and for Brennan.
Just wanted to focus on a little bit on some of the softness you mentioned and the U S and EMEA mid.
Mid market space and wondering if you could help us maybe size that a little bit recognizing your efforts to broaden and diversify the business just in terms of the core of what <unk> got right now either maybe size it or talk about the impact that had on your 'twenty. One guide and also interested in any interaction with.
The activities of the pricing committee there in terms of.
Either structuring pricing or what have you and in order to better retain and win business. Thank you.
Sure Adam It's Eric Let me, let me start.
I think the way, we think about our business on the servicing side as our cross segments right. We have asset managers, we have asked at all and orders we have insurers and.
Our business is more geared to to asset managers and the other segments and.
And so we.
<unk>.
Historically and built our franchise, there, but we've actually quite a bit of success and and other and those other segments as well.
Within asset managers and what we're starting to find is over the last year last two years. The last year in particular, we've actually secured more growth and the largest of the asset managers are obviously, you know winning when you look at the external data and.
And either less growth or in some cases decline and the midsize and smaller asset managers.
And so what.
And that that GAAP can be that can tap and a particular quarter or year could be a two percentage point growth GAAP it could be a three or four percentage point growth GAAP it bounces around.
And so what we're finding is that we.
We really feel like we have the right coverage and intensity and kind of seniority and focused on the largest of our clients, but our mid price clients, earning are really and important part of our franchise and we built our franchise on them. We provide really I think outstanding products and capabilities and we're finding we need to spend both senior.
On the mid size clients as well as you know.
The time of our relationship managers and client executives and so this is really about intensifying our coverage of those groups and.
And.
Helping them see the strength and the opportunities and the products and services that we can offer and make sure of where we're top of mind that we're building on share of wallet and I've got share of wallet statistics for our top 250 clients and that includes the midsized players and really.
<unk> in that area day.
Day and day out product one product two products 30 product 50, it's literally down at that level of granularity, we're where we're at.
And we're focused on.
Excellent that's helpful and other dynamics. Thank you and then just a quick follow up on MBS Prepays, you know and I appreciate the detail from before on that recognizing of course that the <unk>.
Interest rates will be the main driver there do you feel as though this past year 2020, there was any type of pull forward.
In and prepayments and refinancing such that you know.
A reversal and downward tick and rates might not.
Generate the same level of Prepays as previously or is it very much still linked to rates. Thank you.
Adam It's Eric.
Always.
On.
I always like to hope that prepayments are <unk>.
Burning through that Theres been a onetime pop and then they're going to they're going to attenuate, but I've learned that.
<unk> is and our strategy right. We just have to operate through the the environment I think what we've seen is certainly a surge of prepayments.
Starting in the end of two Q right once people figure out how to do the paperwork during COVID-19 and <unk> and for Q and.
And our best estimate is informed by the the various modeling.
Providers, we subscribe to three or four of them, because we need that diversity of opinion.
Just that.
Prepayment speeds should probably continue into the.
First quarter, and then ill begin to edge down from there.
And the second quarter and the third quarter.
And with some some stepwise improvement.
That said, we've got out and we've got I think we've got to live through time here and just see how it plays out and and we'll know more what we're trying to do though is make sure that we're always taking the actions that we can on investment portfolio on deposit reinvestment on loans, because that's something we can control.
And we need to stay focused on those those actions.
Fair enough. Thank you Eric.
Your next question comes from Betsy <unk> with Morgan Stanley. Your line is open.
Hi, This is Brian Kenney on behalf of Betsy and good morning.
Good morning.
The other OCC stable quaint approval come through earlier. This month, just wondering if that has any impact on state Street, and how youre thinking about your blockchain strategy going forward.
Yeah.
And this is Ron.
In terms of direct impact.
First you'll see.
C.
Regulators and secondly, it directly impacts or if you will pose on the most.
Challenge.
To the payments thanks.
For us in general.
It's probably neutral to positive because anything that.
Stimulates.
Interest and.
And blockchain, and particularly more interest and more interest and digital currency is going to create a custody opportunity for us and we've been on.
Investing fairly significantly.
And that space.
As we've said in the past.
Blockchain itself is actually quite an important part of lots of things that we're doing.
And custody and asset servicing and increasingly we see digital coin.
Currency.
As part of fee pool.
Holdings or.
Within our client base, and we will continue to invest from that.
But the Occ's work and so I would say.
Not directly relevant to us at this time.
Thanks.
And then one quick.
Other question wondering how we should think about the impact from money market fee waivers and 2021 is it and the run rate now where should we expect any uptick from here. Thanks.
Brian It's Eric.
A good part of it is in the runway run rate I think we said about $3 million and for Q1, we do expect it to tick up.
One more step and we fix we're now expecting about $5 million to $10 million a quarter.
And the coming year, So I think we're.
We're much less exposed than others, we don't have retail money market funds and we don't have high net worth and funds with higher fees.
And so.
But those are the figures.
And.
Thank you.
Your next question comes from Brian Bedell with Deutsche Bank. Your line is open.
Great Good morning folks.
Eric maybe just to continue on the net interest income guide for 'twenty one.
You can just talk about your earning asset assumptions for the year and deposit growth strategy, realizing and obviously, they spiked up and for Q.
But as you are.
And you're building your servicing business and.
You are trying to and.
Enhanced some of the deposit strategy, maybe if you could talk about that and your assumptions for 'twenty, one and then and back also on the premium amortization.
I think to 35 million from three Q4 Q2 is that about a $170 million a robo just wanted to check.
Sure Sir.
Brian It's Eric Let me, let me do those in reverse order I think fee, but what are the 35 million was the headwind we're seeing on a quarterly basis from <unk> to from <unk> to <unk> and the investment portfolio and that was a combination of the investment yield grind down and actually higher premium amortization and because we're still.
Living through that that way.
I, then said is that <unk> and we thought the combination on the investment portfolio headwind, including premium App program amortization would be about a $25 million headwind and then I said, starting in second quarter, and we thought it would trend down even further to closer to 10 and $15 million.
And $10 million and those out quarters each quarter. So I think what we're starting to see it and attenuation or have that expectation, which partly as the kind of tractor of the investment portfolio playing through and partly.
Lower levels of premium amortization.
Expected as speeds.
Begin to.
Edge downwards.
In terms of the.
On the.
<unk>.
The deposit forecast on the earning asset strategy on deposits, it's really hard to gauge the fed continues to expand the the.
The money supply by what about $120 billion.
A month.
We're one or two per cent of the deposit so we pick up deposits just just by being here every month. So there's some amount of tailwind and it's just really hard to read.
And lots of talk about stimulus bills.
Asset allocation and reallocation from risk.
Risk on to risk off the bar Belling. So I think right now we're assuming that we're going on at least stay at these fourth quarter level of average deposits with probably a little bit of edging up.
And so we're not yet we're not at this point are expecting a yet another surge, but you just don't know and I think we will.
Well, we'll obviously respond as it happens in terms of asset strategy.
One I think it's tough for us and for every other bank because we can certainly.
Take some some risk on the curve, but you don't get paid very much for it and so I think there's a balance that we're making which is how much dry powder do you want to keep and so that and when you do see a spike of interest rates and.
You can edge or leg into that.
At a higher and better return versus forsaking. Some some income and the short term and where are our investors are always kind of carefully thinking about that and trying to be opportunistic and we will come and go and we'll do that and treasuries around the curve.
MBS, you've seen us build up our MBS book over the last year by a solid $10 billion I think we want to just be careful there we want to we prefer some of the prepayment protected sub segments, we've done a little bit of credit and we want to be careful there too because.
And our credit isn't.
Is impacted during the CCAR and SCB process. So it's a pretty diversified approach I think is the is the core of our strategy looking for opportunities.
And I think as we see some of those will act and we'll certainly report on them too to all of you.
Okay. That's great color. Thank you and then on the just back to the one point fractionally and that you mentioned of growth servicing Wednesday.
And that some of the headwinds just talk about the cross so a portion of that to Miss it.
Yes.
Adding different new services to existing clients.
Maybe how that sort of tracking within that that outlook and and then also the <unk>.
Importance of of SSG AIDS indexing business and the cross sell to asset servicing clients.
Brian It's Ron.
Cross selling.
<unk> is a very big piece of this I mean, if you think about what Eric said earlier.
You look at 2020 performance.
It was largely the same and 2019.
The fastest growing segment or the segment that accounted for the most growth was in fact, our global climate Division, which is our largest client so by definition.
We werent, adding meta.
Many Tibet if any.
But what we were doing was growing substantially and there and that will be a key part of our growth going forward for both traditional assets servicing products.
As some of these providers continue to consolidate and some of these institutions continue to consolidate providers, but also for a fee.
Front to back Alpha activities, as we install either fully installed and wealth or even put Charles River and and a situation, where we have the middle and the back office, but not the front. So that's a key part of it.
As we think about the numbers certainly.
On the.
The ability to have common clients, where we're both the servicer and the index from subtracted, we always look for those opportunities that's not in the consumption that eric's describing there. So what we really were trying to do here and re.
Response to.
Any questions we've gotten is.
More or less dimension.
What we need to do to grow revenues, obviously that number.
It's based on averages so to the extent to which and.
And and given year or given quarter were bringing in higher fee.
<unk>.
Assets.
And then obviously the.
And five goes down.
So.
That's the way to think about it.
You could never at the end of any particular quarter, so well if youre not a quarter of the way there are you.
Making it or not make you Gotta go one click down and see what was the nature of the kind of underlying equivalents, which.
Youll be able to understand from us.
Okay, Great. That's helpful. Thank you.
Thanks, Brian.
Your next question comes from Rob <unk>.
With total.
And on this research your line is open.
Good morning, guys.
And Rob.
You you called out some reduced client activity is pressuring servicing fees and the fourth quarter and I'm just wondering how that played out with respect to expectations and then.
More qualitatively the level of client activity Youre thinking about the outlook for next year. This year 2021.
Yes, Rob it's Eric.
And there are a number of features and and.
How we how we.
Quantify.
The.
The.
The growth kind of headwinds tailwind of our.
Our servicing business client activity is one of those that fluctuate.
And really represents.
Some of the trading volumes of our clients because theres some tolling that we do for that.
And particular cash and derivative trades tend to have more likely have told that others just because there are more complicated.
F creation redeem that kind of stuff. So it's a part of our fee schedules that we try to quantify but it has a.
It has a long list of kind of volumetric elements I think on a year on year basis, <unk> 20 versus a year ago.
And that those some of the <unk>.
Client activity.
Volumes actually trended down so.
On the servicing fees that was worth about.
Percentage point of servicing fee headwinds.
And that's an example of.
On the time it hits against Us.
For full year 2020, it was actually a positive on.
Almost two percentage points. So we saw that as a tailwind and obviously you know the all the activity and and.
First quarter second quarter in particular was helpful next.
Next year, we're gonna have to lap ourselves on that total probably be a 1% headwind. So it's got that kind of.
Effect.
And.
What it does is it reminds us that everything matters and our business to drive growth right. If there's an equity market tailwind or headwind that matters. This client activity matters.
Well net new business, right and particular I referenced kind of the importance of gross growth.
New sales matters and then there's always the the.
Normalized fee headwinds and the good news on that last one is that those close of normalized back to something pretty close to historical levels.
Okay. Thanks, and I wanted to also ask about the business that you're forming with Microsoft IHS and <unk> and others.
Can you give us some more detail on the structure, there what products and services youll be contributing and how.
And the potential offering there will compare to your standalone offerings today.
Rob It's early days and.
And you're referring to hub and.
It's early days there in terms of.
Of what's going to happen and.
Our view was given.
And the role that we play.
On a custodian.
And as well as our own outflow.
Product that this was a good.
Initiative to hang around if you will we also have clients.
And that are part of it but it's just very early days in terms of how that's going to.
On to develop its initial focus is on is on data and data usage and <unk>.
And helping firms kind of manage and employee and.
On data and a more efficient way.
But.
And again.
Early on and there's really not much to report.
Okay no problem. Thank you.
Okay.
There are no further questions at this time I would like to turn the call back over to Erik and Paul for closing.
Mark.
Its Ron I'll take it. Thank you everybody for your time and attention and we look forward to following up with you.
This concludes today's conference call you may now disconnect.
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