Q1 2021 State Street Corp Earnings Call
Good morning, and welcome to State Street Corporation's first quarter 'twenty 'twenty, One earnings conference call and webcast. Today's discussion is being broadcasted live on state Street's website at investors thought State Street Dot Com. This conference call is also being record.
For replay state Street's conference call is copyrighted and all rights are reserved this call may not be recorded for rebroadcast or distribution in whole or in part without the expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the state Street.
Right now.
Now I would like to introduce Eileen fits all bieler global head of Investor Relations at State Street.
Thank you good morning, everyone and thank you for joining us on.
On our call today, our CEO, Ron <unk> will speak first then Eric <unk>, our CFO will take you through our first quarter 2021, earning slide presentation, which is available for download in the Investor Relations section of our web site investors that state 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 statements due to a variety of important factors such as those factors referenced in our discussion today and in our SEC filings, including the risk factors in our form 10-K on.
On a 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 first quarter financial results before I review our results I would like to briefly reflect on the environment. We're operating income today as compared to this time last year and then highlight some of the data that evidence the progress we're making towards enhancing it.
Improving our operating model and innovating across our franchise, all the well being an essential partner for our clients.
Relative to the first quarter of 2020, the first three months of 2021 could probably be more different.
Economic activity has sharply rebounding unemployment is declining and equity markets have recovered strongly from the crisis levels experienced in 2020.
Although short end rates remain at historically low levels long and U S bond yields are rebounding.
While COVID-19 infection and death rates remains stubbornly high in many parts of the world. There is clearly light at the end of this pandemic tunnel.
The owners and managers of the world's capital are also looking to the future into the next stage of growth.
As the economy and financial markets continue to recover and investment inflows continue to grow we remain focused on delivering for our clients across segments and regions.
As demonstrated by our first quarter financial results State Street continues to successfully navigate the improving operating environment.
Though as I noted short term interest rates, which compressed further during the first quarter men are critical headwind for our industry.
While we cannot control interest rates, we are resolutely focused on implementing our strategy and pivoting our business to being more of an enterprise outsource solutions provider.
Underpinning by the ongoing development and delivery of course State Street Alpha from <unk> clubs.
And we look forward with confidence for a number of reasons first we further built upon our reputation for high volume during the crisis and our clients know that from Honda.
Mhm services and market solutions, they need in good times and in bad.
Second throughout the crisis, we continued to invest in further strengthening and distinguishing our global operating model client service and operational resiliency.
<unk> has been apparent to and noted by our clients.
Third many clients are reassessing their own operating models and as a result, we have the opportunity to take on more of their operations on data activities, allowing them to focus on creating better investment outcomes from their clients.
Fourth our employees continue to perform at very high levels. Despite a year of largely remote work and district and disrupted routines I am grateful for their extraordinary dedication and service.
Last both our alpha and non alpha institutional servicing value propositions continue to resonate and enjoy take up as demonstrated by some recent announcements.
For example, we reported on additional three state Street Alpha clients during the first quarter and separately. This morning, we announced a pull from Quebec Alpha relationship with Invesco, adding front and Middle office services to our existing back office mandates.
Through the open architecture nature of our operating platform, we have been able to rapidly increase functionality from a number of partnerships on market new sources of revenue and strengthening the interoperability element of our alpha volume value proposition, which is appealing to clients.
After quarter end, we announced that LNG is appointed us to provide outsourced Middle office services. In addition to our existing fund accounting custody services State Street will administer the middle office services on Aladdin exemplifying, how we offer clients the benefit of choice regarding their front end and middle office cyst.
<unk>.
These deals highlight how we are uniquely positioned to win from Tabak mandates and flow is to win new business as a result of interoperable nature of our operating platform.
While the Alpha platform remains an integral part of our strategy. We also continue to innovate across our franchise for example.
On demand access for ESG solutions that will provide the necessary data risk analytics and reporting capabilities at scale.
To that end during the first quarter, we introduced enhancements to our ESG solutions and can now provide clients with the ability to address new global ESG regulatory requirements requirements.
Requirements for <unk>.
Single properties.
Global Advisors, New U S corporate ESG ETF launched in EMEA in late 2020 and grew to $5 4 billion of AUM by the end of the first quarter, making it the largest corporate bond ESG funds in the use of space.
We also continued to develop our digital assets strategy as we prepared to deploy our capabilities in servicing costs from.
We recently announced our attention to service demand expect coin Trust ETF.
Subject to regulatory approval, we will work with <unk> to provide services, including ETF basket operations custody of the ETF shares on the accounting order, taking a transfer agency in multiple jurisdictions.
Next I will review, our first quarter highlights before handing the call over to Eric who will take you through the quarter in more detail.
Turning to slide three first quarter EPS was $1 37, or $1 47, excluding notable items relative to the year ago period first quarter total revenue declined 4% driven by the impact of interest rate headwinds on our NII results.
However, total fee revenue increased 4% driven by servicing and management fee growth, which increased 7% and 6% year over year, respectively, as well as an improved software and processing fees performance collectively.
Collectively these more than offset the year over year headwind from FX trading as compared to the exceptionally strong first quarter of trading last year.
While our FX trading revenues are down year over year first quarter revenue remains well above the street.
Pandemic levels as a result of higher client volumes and the investment we have made on our platforms on talent and reach.
Even with rising total fee revenue first quarter total expenses were essentially flat year over year, excluding notable items and currency translation as productivity improvements are paying off.
Furthermore, we have successfully reduced high cost location head count relative to the period one year ago.
As a result, we remain confident in our ability to control operating expenses over the remainder of 2021.
At the end of the first quarter AUC and AUM, both increased to record levels supported by higher period end markets.
<unk> increased to 43 trillion, new asset servicing wins were a solid 343 billion, while servicing assets remaining to be installed in future periods amounted to 463 billion at quarter end.
At Global Advisors, AUM increased to $3 six trillion and also benefited from a very strong flow performance at Etfs and a solid performance in the cash business.
At CRD annual recurring revenue increased 14% to $225 million and we remain pleased with how the business is performing while also enabling our alpha strategy.
Overall, we had a strong start to the year and remain confident that we have a clear path for our medium term targets discussed in January.
To conclude we continue to successfully navigate and distinguish ourselves in a fluid moving operating environment.
Demonstrated by our first quarter results, we remain focused on further developing and growing our alpha offering and are pleased with the recent client activities. Meanwhile, we also continued to innovate across and grow many areas of our franchise.
During the first quarter, we returned $659 million of capital to our shareholders through a combination of common share repurchases and common dividends.
For the second quarter of 2021, our board has authorized up to $425 million of common stock repurchases consistent with the limits set by the fed.
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 on.
I'll begin my review of our first quarter results on slide four.
We reported EPS of $1 37, or $1 47, excluding the impact from notable items, which amounted to 10 cents in the first quarter as detailed on the panel on the Reits out of the slide.
On the left of the slide you can see that we had yet another solid quarter of total fee revenue growth, while expenses were well controlled despite higher market values and client volumes.
As a result of the depreciating dollar relative to the year ago period. We also show our first quarter results, excluding the impact of currency translation in the column to the right.
Total fee revenue was up almost 4% year over year or up 2%, excluding the impact of currency translation. Despite the significantly year on year headwind from the exceptional FX trading services results. We had in the first quarter of last year due to the pandemic.
For context total fee revenue, excluding FX trading services was up 9% year on year or 7%, excluding the impact of currency translation with strong mid single digit growth in servicing fees management fees and securities Finance.
Expenses were roughly flat year on year, excluding notable items in the headwinds from currency translation, which you can see at the bottom of the slide.
So in total this was a solid quarter demonstrating the progress we are making improving our operating model as we drive towards growth.
Turning to slide five Youll see strong business volume growth across the franchise per.
Period end day, UCA increased 26% year on year, and 4% quarter on quarter to a record 40 trillion.
The year on year change was driven by higher period end market levels client flows and net new business growth.
Quarter on quarter AUC, a increase a result of higher period end equity market levels, better client flows and net new business, which more than offset the impact of lower bond markets.
We're seeing that both retail and institutional investors have moved off the sidelines and we're seeing inflows globally across most product types that we know custody.
At Global Advisors, AUM increased 34% year on year on 4% quarter on quarter to $3 six trillion also a record.
The year on year on a sequential quarter increases were both primarily driven by higher period end market levels, coupled with net ETF and cash inflows.
Our ETF franchise had a strong flow performance again as the U S ETF industry experienced record flows.
Spider net inflows amounted to over 23 billion in the first quarter with both sectors and industries and low cost doing particularly well.
Turning to slide six first quarter servicing fees increased 7% year on year, including currency translation, which was worth approximately three percentage points year on year.
The increase reflects higher average market levels and normal pricing headwinds.
Servicing fees were also up 5% quarter on quarter as a result of the higher average market levels and stronger client activity.
This quarter, we saw good growth in asset managers alternatives and official institutions.
I am pleased with how 2021 it started as the first quarter, a UCA wins totaled a solid 343 billion, which is up from recent quarters and for context last quarter. You heard me outline that we need approximately $1 5 billion of annual gross sales volumes in order to drive net underlying growth, which means offsetting typical client.
Tricia and normal pricing headwinds in our servicing business.
I'm also pleased to report that our first quarter wins spanned a good mix of clients segments and deal sizes with an attractive overall fee rate as we continue to work on generating broad based growth across our client segments and regions.
As an example, you may have also seen that earlier in the quarter, we announced that we have assumed the depository bank and fund administrative activities of a subsidiary of <unk>. So Paolo in Europe.
And you see a one but yet to be installed amounted to 463 billion at quarter end.
Positively both our reported wins and to be installed numbers exclude the two recently announced mandates, which Rob mentioned just a moment ago. As these deals were signed after the end of the first quarter.
Turning to slide seven let me discuss several other.
Art and fee revenue lines in more detail first quarter management fees were $493 million up 6% year on year, including a 2% impact from currency translation, but were flat quarter on quarter.
Both our year on year on quarter on quarter management fee performance has benefited from higher average equity market levels and strong flow performance within our ETF and cash businesses, partially offset by an idiosyncratic client asset reallocation from higher fee products as well as money market fee waivers.
Regarding money market fee waivers, we had about $15 million this quarter and we expect that they will increase given the significant downward move in short end rates in March if they persist we expect company wide impact could be around 50% to $55 million per quarter for the rest of the year beginning in <unk> and a distribution fees, though higher balance should be worth roughly 10 to 15.
<unk> million dollars per quarter, leaving the net impact closer to $40 million per quarter.
Yeah.
FX trading services had yet another strong quarter relative to the exceptional first quarter of 2020, FX trading revenue fell 22% year on year, but it was up 7% quarter on quarter with higher volumes across both developed and emerging market currency pairs.
While FX market volatility declined relative to the fourth quarter, we continue to see higher client volumes as our FX business continued to benefit from many years of investment across six venues and now 47 markets three of which we added and two of which we expanded in the last year alone.
Our Securities Finance business recorded its second consecutive quarter of good revenue growth, increasing 8% year on year, and 13% quarter on quarter, mainly as a result of higher at enhanced custody balances driven by new mandates from alternative clients and increased in fixed income assets on loan within our agency lending program.
Finally, our first quarter software and processing fees were up 55% year on year on down 15% quarter on quarter, largely due to changes in mark to market adjustments.
Moving to slide eight we have here Crd's stand alone revenue growth in business performance metrics, we have again separated CRD revenues into three categories to help see through the lumpy revenue pattern inherent in the revenue recognition accounting rules for on premise revenue.
Total CRD revenues increased 4% year on year, primarily as a result of higher software enabled revenue and was 10% lower quarter on quarter, largely due to seasonally higher on premise revenues in the fourth quarter.
As shown on the slide the more durable SaaS and professional services revenues increased by a strong 21% combined growth rate relative to the year ago period.
On the bottom right of the slide we show some of the first quarter highlights of State Street Alpha we reported on an additional three alpha clients during the first quarter as the value proposition continues to resonate with our client base.
On this doesn't include this morning's first quarter and quarter end announcement.
The Alpha pipeline continues to remain promising is the economic disruption on the last year has helped clients realize the transformational potential of the alpha platform for their technology and operations infrastructure.
Turning to slide on first quarter NII declined 30% year on year, mainly as a result of the effects of the low interest rate environment on our investment portfolio and the absence of a $20 million market related benefits on the first quarter of 2020.
Quarter on quarter, NII declined 6% as expected.
Around three per cent of the sequential quarter decline was due to the impact of lower long end rates on our investment portfolio. Despite a sequential improvement in premium amortization approximately.
Approximately a percentage point of the sequential decline was due to just a half quarters down draft in short end rates on our sponsored member repo activity.
And the rest was due to the lumpier items, including day count.
These impacts were partially offset by higher deposit balances as you can see on the right of the slide total average deposits increased by 20 billion in the first quarter or an increase of 10% quarter on quarter, reflecting the impact of the federal Reserve's expansionary monetary policy.
We remain mindful of OCI risk to our capital so as the U S treasuries sold off dramatically during the first quarter, we gently trimmed the investment portfolio and may selectively reinvest a bit over the coming months at higher rates.
Turning to slide 10, we've again provided a view of the expense base. This quarter ex notables so that the underlying trends are clearly evident <unk>.
Excluding notable items first quarter expenses increased 2% year on year, which is all driven by the weaker dollar which means we effectively held underlying expenses flat year on year.
On a line item basis compensation employee benefits was up only 1% excluding the impact of currency translation as higher seasonal expenses were partially offset by a reduction in head count and higher cost locations.
Information systems, and communication expenses were up 3%, excluding the impact of currency translation due to higher software costs and continued investment in our technology a state.
Transaction processing expenses were up just 1% ex FX as our savings initiatives offset significant volume based growth and sub custody and market data costs.
Occupancy and other expenses were both down several points.
Relative to the fourth quarter expenses were primarily impacted by higher seasonal on deferred compensation.
Overall I'm pleased with the underlying expense performance in the first quarter as we absorbed approximately 15 million of variable revenue related costs.
We continue to demonstrate operating model improvements as we drive increased productivity through automation reengineering and scale.
Moving to slide 11, we show the evolution of our CET, one and tier one leverage ratios.
As you can see we continue to navigate the improving operating environment with strong capital levels.
As of quarter end, our standard is CET, one ratio was up slightly year on year, but felt one five percentage points quarter on quarter to 10, 8%.
Relative to the fourth quarter, our capital base was impacted by lower a OCI as a result of a significant run up in long in U S treasury yields as well as by an increase in intangibles related to the recently announced slipped out deal we completed within peso Sao Paolo.
We also saw 6 billion increase in episodic RW, a primarily related to FX trading and overdraft activity.
This R. W. A headwind what's transient in nature and has already declined by $5 billion.
So at the end of the second quarter of our CET, one ratio will be over 11% all else being equal.
Tier one leverage was down year over year and fell by one percentage point quarter on quarter to five 4%, primarily as a result of higher average assets driven by the increase in quarterly average deposit balances as well as the Ace a OCI change and a 500 million partial call for series F preferred Securities announced in January.
Hey.
As you can see on this slide and as I mentioned previously we continue to consider a CET one target range of 10% to 11% at appropriate level of capital for our business.
Further we consider that a tier one leverage ratio of between five and a quarter and five and three quarters as also being appropriate for our business model and can comfortably operate in this quarter. This year, even with the recent growth in deposits.
Last as we look ahead and as Ron noted for the second quarter of 2020, our board has authorized up to $425 million of common stock repurchases consistent with the limits set by the fed.
Yeah.
Turning to slide 12, we provide a summary of our first quarter results.
Despite the continued headwind from historically low interest rates I am pleased with our quarterly performance, which demonstrates solid underlying trends within our business as well as the progress we are making within our institutional services franchise.
Total fee revenue was up almost 4% year on year, including the significant year on year headwind from the exceptional FX trading services result, we had in the first quarter of last year.
And excluding FX trading services total fee revenue was up 9% year over year or 7%, excluding the impact of currency translation with solid mid single digit growth across servicing fees management fees in SEC lending.
And with that strong topline fee growth expenses were well controlled and were held roughly flat year over year, excluding notable items and the headwind from foreign currency translation, demonstrating the progress we are making improving our operating model.
Next I would like to update our full year economic outlook and provide our current thinking regarding the second quarter.
At a macro level, our full year interest rate outlook assumes that short end rates remained pressured and there was some modest steepening of the yield curve in line with the current forwards, which suggest modestly improving premium amortization, though the pace of improvement remains uncertain.
We're also now assuming global equity markets will be flattish to the current levels for the rest of the year are up around 10% point to point from the beginning of 2021.
As well as continued normalization of FX market volatility.
In terms of the second quarter of 2021. Our guide includes about two percentage points of currency tailwind for fee revenue and two percentage points of headwinds for expenses.
So we expect the overall fee revenue to be up 2% to 3% year over year, depending on equity market levels with servicing and management fees up 7% to 8% as we anniversary a strong to Q.
2020 in FX trading and CRD.
Regarding NII given the impact of historically low short end rates as well as the impact of long end rates on our investment portfolio. We now expect NII to run around $460 million to $465 million per quarter from here in 2021, assuming premium amortization continues to attenuate.
Turning to expenses, we remain laser focused on driving sustainable productivity improvements and controlling costs. We expect that second quarter expenses ex notable items will be up around two 5% year over year or relatively flat ex currency translation with some potential for variability due to the revenue related costs.
On taxes, we expect that the <unk> 21 tax rate will be towards the upper end of our full year range of 17% to 19%.
While it is still early in the year, we're taking up our full year fee revenue guide again, and now expect full year fee revenue to be up 2.5% to 4%.
We also expect that slightly higher revenue related variable costs will add about 50 basis points to our prior full year expense guide of flat to down 1% ex notable items.
Just remember Theres, a solid point of FX translation in these full year fee and full year expense guidance.
And with that let me hand, the call back to Ron.
Thanks, Eric and operator, we can now open the call for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
With Jay Your question press the pound key please standby, while we compile the Q&A roster.
Your first question comes from Alex <unk> with Goldman Sachs. Your line is open.
Greg Good morning, Ron and Eric.
For taking the question. So maybe we could start with servicing fees I was hoping first wicket unpack sort.
Q1 dynamics a bit more so ex currency translation servicing fees were up about 4% sequentially. Maybe you can just kind of walk us through how much was the market versus sort of high end on higher volumes versus more kind of organic trends in the quarter and then taking a step back it really sounds like momentum in front to back is progressing pretty nice.
<unk>.
So I was hoping you could bridge these data points you highlighted on the call.
Sort of back to the servicing fee algorithm that Eric you talked about in the past kind of between markets pricing new business I mean collectively.
That added up to like maybe a low single digit growth over time.
How does that feel to you guys now given some of the changes you've seen in the business.
Alex It's Eric let me start on the on the quarter and then we'll talk little more about the the momentum from the business.
I think we felt like we had a solid quarter here as you saw servicing fees were up seven.
<unk>, 7% year over year in aggregate I mentioned about three percentage points of that was just currency translation. So the underlying growth was a was around 4%.
If we were to decompose the 4% and you know there's always a mix of items here.
The largest positive driver was equity market appreciation so equity market appreciation you know across the globe equity markets were up.
North of 20% on average that trend translated to about a 6% tailwind in servicing fees for the quarter.
And then against that we had the normalized amount of the normal amount of fee headwinds of about 2%, which brought us down to the net four so it was a it was a good quarter I think what we continue to too tough.
To focus on is there tends to be some.
Tailwind in our model from flows and client activity.
This quarter, we had some of that but we also had it a year ago.
And in a in a good amount so that was relatively neutral on a year on year.
Our basis and then the other component is net new business and as I've said, I think pretty pretty clearly.
We have had a lighter sales quarters in the over the last.
Four to six quarters, we need to take that up and as that happens we'll be in a position to have net new business growth for the time being net new business as relatively neutral, which is okay, but not enough and not at the levels that we'd like to be and that's I think partly what.
We have been real clear around.
The amount of net new business, we need to win.
And we've been actioning that on a on a on a segment basis or regional basis.
Heard about our coverage model expansion all of those are components.
Of that of that acceleration, which I think are are well along and starting to show some some some positive.
Our result is as I highlighted at NASA managers for example that on in alternatives and.
That I think will will will will.
Will be to our advantage in the coming.
Coming time periods.
Alex.
Just add to that second part of your question I think what you're basically asking how does it fit in all of this and how does it change those numbers.
Clearly, we're pleased with the progress with the Alpha three reported wins in the first quarter on.
Oh it is.
We noted.
On that we reported already from the second quarter.
About a third of our business to be installed the 463 billion to be installed as alpha related.
And we would expect that to grow just given some other things that we've talked about what that means though is these are these are longer installations right.
Remember in effect, we're becoming the enterprise outsourcer to these clients flow.
It will be nice revenue impact, but we're talking about 2022 and 2023 revenue impact.
Relatively little of that.
Certainly on the things that we reported for the first quarter.
Will we see in 2021.
Got it understood and then maybe a quick one on capital obviously ratios came down sequentially for the reasons that you described not particularly surprising I guess.
Maybe talk to us a little bit about the willingness to dip below five and a quarter tier one leverage if the balance sheet remains elevated or maybe even growth from here for one reason or another and if you guys are willing to sort of continue to execute on your capital return plan on.
Much flexibility do you have.
Go on below the low end I guess from your target and staying there.
Yes, Alex this is <unk>.
It's a good question where on the on the on the capital return plan that said, that's largely driven by our common equity tier one ratios, which had some volatility this quarter, but.
Or still.
Solidly above I think or we'll return solidly above.
Where we are.
The the range so yes.
We've got confidence in what we can do there on tier one leverage there are probably a couple of different.
Aspects of that that matter I think first we.
We'd like to operate in this quarter this quarter of five on a quarter to five and three quarters and we have some a little more room on the balance sheet too.
You know if we if we if we get pushed on on deposits, but as you remember we also have some.
Some some.
Some.
Some ability to to adjust that if you recall, we added some discretionary deposits over the last.
Two year time period in those those are on the.
10, 15 $20 billion range. So there's there's some tactical ways, we can accommodate clients and then continue.
Continue to to manage the.
The size of the overall balance sheet.
I think we certainly have an ability you know occasionally to move outside.
Below the range on on the five on a quarter if for the right way around there right now.
That's a it's right way risk so to speak because it's a it's a it's a it's a clients or others coming to us because of the strength of our brand.
That's that's that's pushing that ratio and so we can always do that for a quarter or two if necessary and so part of what we're very mindful of is how do we continue to support our clients. During this time of the fed the fed fed easing.
And so there is there are there ways to navigate through that.
And during the year and we kind of see that as a just just part of our normal business activity.
Understood Thanks very much.
Yes.
And your next question comes from Glenn Schorr with Evercore ISI. Your line is open.
Hi, Thanks very much.
So.
There's some good things going on in the quarter, but.
I think the.
The ROE and the pre tax margin are still pretty far below targets.
I think the margin one is an overtime given the headwinds.
On on rates on fee waivers that you just described but on the ROE side do you view that as simply a function of capital.
<unk> built and getting down to year.
Uh huh.
Yes closer to your targets because.
No.
Felt like better than an 8% Roe quarter.
The momentum in the business feels better than that but that's a low Roe considering.
All the growth that you felt so just curious on how you think about that.
Glenn Let me, let me start a couple of things just to keep in mind first the first quarter every year is always our low point on margin and ROE because of the seasonal deferred incentive compensation expenses. So those those are.
Come through and then we've got to take a full year look so I'll just just be a low PLO cautious on that.
I think more broadly in terms of ROE is absolutely a focus I think you've seen in our.
Proxy over the last few years ROE as a management.
Has the management.
<unk>.
He added margin to that and now fee revenue. So we're incredibly focused on those three major leverage points that I've got to tell you I've got I've got.
Entire management team who is.
Who's a who's who is thinking about those.
Every month on every every quarter I think the way I think about ROE is probably from a couple perspectives in terms of.
Its trajectory I think first.
Continued work on margin and this year, we're just trying to hold margins steady notwithstanding.
Given the falling interest rates, but you've seen us actually hold expenses flat and fee revenues up.
That is going to over time expand margin and then and filter back into ROE and every two points of expansion in margin as a point of ROE. So there's real I think flow through there.
I think the second one is <unk>.
You hinted is around capital return, we're very pleased.
Return on 100% of earnings this year in line with this year this quarter.
On the first quarter in line with the.
The fed limits, we've done that again in second quarter, and we're committed to a pattern of capital return as a way to return capital to investors and to drive a borrower and so I think there's a there's a there's a path on that that way as well.
I appreciate that maybe one quick follow up on the fee waivers I heard your comments on 15 grow on a $50 40 net on.
Just as a sequential number that's a big step up.
And I know, how it works generically, but I'd love to hear how you think about like was a yield wire obviously trip so to speak in the quarter and then more importantly.
How much and which part of the cash.
Or.
Or which reference points need to go up over what level to get us back to.
Sure.
More breathable level.
<unk> per 50 is a big step.
<unk>.
Yes, Glenn it's Eric I think the.
The good news here is while we have some fee.
Money market fee waivers, we don't have the size of money market fee waivers that others are seeing around the industry just because of the more institutional nature of our money market complex. So I take some.
Some.
I think that's a that's a.
Some context to help with the.
The money market fee waivers are effectively driven by short end rates it could be.
From overnight repo.
Two one month and three months treasuries.
And effectively as as one in three months treasuries fell from eight nine basis points down too.
Three four and five basis points in March you are starting to get to the point where the.
The other reinvestment rate.
Against the on drill against.
Against the.
The management fee against the management fee rate starts to.
It starts to be inflected and.
And as a result, we are at that pressure point and literally four or five basis point move at the front end does have the impact is U S.
As you've seen.
I think the good news here is we've continued to see cash inflows into our complex part of that comes from the the easing in the monetary policy that we're seeing part of that is I think we have an attractive set of offerings.
And.
I'll tell you that that's that's all been factored into into our guide and part of what we're what we're what we're managing through.
Thanks, a lot Eric.
Sure.
Your next question comes from Brian Bedell with Deutsche Bank. Your line is open.
Great. Thanks, good morning folks.
Maybe one more on rates, maybe just focus on the net interest revenue outlook to 464 65 on a quarterly basis.
Given.
The view of the.
Both the forward curve and premium amortization likely easing down over the course of the year.
Even if short rates are sort of stable, where they are now what would prohibit debt 465 from improving.
In the second half is there a mix shift assumptions.
The next day I would've thought it would improve as we get to the later part of the year.
Bryan it's good it's a good question.
The way I think the best way to understand it is the short rates had an impact on the first quarter and then will now have three months worth of that in the second quarter. So that's what drives the the additional nudged down from what we would have.
Preferred to have seen.
On long end rates.
Long end rates have been a headwind all through last.
Last year as they they came down and now even at this current level or a headwind for the for the portfolio. They were a headwind in.
In the portfolio for example from <unk> to <unk>.
By about five points of NII, but has started to work against the long end rate.
The impact is.
Is premium amortization, which has started to come down and that was actually a tad.
<unk> sequentially of about two points of NII and so you're kind of having this continued headwind from long end rates, which will.
Which just has to play through and remember the average duration of the portfolio is about three years think about when long rates are.
There were.
When the rate cycle start it was a year ago. So theres another year of long end rates.
Being a headwind.
We're now looking for is the premium amortization to slow down now we need to be careful about the pace of that slowing down but that that is expected to slow based on the various models and that starts to create a partial offset to those long end rate headwinds.
And what we're looking for is the crossover point and we think sometime in the second half of this year long end rates will still be a.
Headwind from premium amortization should begin to offset that and thus the.
On the collection of those two will be roughly neutral.
And that's effectively why we don't see an uptick because that long end rate headwind just continues on effectively for the.
Of that two to three year time period debt.
That has to flow through the books.
And what we need to see over time is for premium amortization to fall substantially enough. So that there is some some uplift. We just we just don't see that happening this year and I think the question is.
How and when that that begins to turn and.
What I'm trying to do is avoid.
Getting out ahead of us because we just need to see it play out and I think we'll know more on the coming coming a couple of quarters.
Yes.
It makes sense good color and then on the on the <unk>.
So just to maybe talk about the calibration of revenue and expense you typically when you have these installments theres a little bit of expense ahead of time before the revenue comes in maybe if you could just characterize if that's the case, where do you actually.
Or are you actually able to build revenue sort of immediately after so too.
Set that and then.
I think you were doing the correct me if I'm wrong, but I think you were doing most of the kind of see from accounting for invesco to this optically it would be an add on in revenue, but you are.
Custody base wouldn't change too much. So therefore it would be.
Appear to be here.
On a price improvement given it to you.
You're getting more revenue from the same customer and if you could just talk about that a little bit.
Brian Let me let me just.
Step back a little bit because we're on.
We're not in we've never really talked about individual clients individual client wins.
How how.
We on board revenues expenses Youre getting at a level, if I think specificity.
That's not something we typically go into and we don't because we want to be respectful of our clients were respectful of.
Of.
Various.
Positions I think what I would tell you is and you've seen us with other.
Wins describe them, we we often say that there is a range of.
Products that come over from a client as part of the win some some come more quickly in some take more time than I think I've been on record, saying custody tends to come more quickly often but not always.
The.
Accounting Middle Office Charles River. It takes takes time and the larger the installation the more time it takes.
And you are right that says that in your view that some of those expenses, we built a bit in advance because we've got on board from Gotta do some of the professional development and technology.
Connectivity for that so I think you have the right outline.
And I think what we're going to try to do in general is help everyone understand the momentum of our business part of the reason I give the quarterly guidance is to give you a little bit of a.
Insight to what we expect and Thats all of our client activity all of our wins are to be install business factors in.
Okay fair enough. Thank you.
Your next question comes from Betsy <unk> with Morgan Stanley. Your line is open.
Hi, good morning.
Good morning Betsy.
Ron I had a question just around how youre thinking about strategy and S. S. G. I mean, there's been some headlines.
Around.
You know the fact that.
Perception that you've been looking at opportunities over in Europe and wanted to understand how important it is for you to gain share in Europe, and maybe you could broaden out the answer of course to just generally the strategy in S. S. Jay could you give us a sense as to what Youre looking to do and capability adds that you're trying to accomplish.
Yeah, So I mean I'll start buying.
Just reminding everybody that asset management is a very important business for us.
Its more than investment servicing, but we have.
Quite a good business, there and as we've said oftentimes.
We're constantly looking at our strategy.
We're looking.
We always look at first at organic opportunities to grow.
Second inorganic opportunities to grow in.
We've done a little bit of inorganic, but most of what you see in terms of the progress there has been a result of.
Organic activities, including some of the as I noted in my remarks from them.
The recent growth in.
In Europe, I mean, I'm not going to comment on market loans.
We feel.
We feel very good about the position we have.
And don't feel that we have to do something at any point, but we also are looking for opportunities to exploit the position we have on.
And to see if there's opportunities to grow it but.
It will be.
Be primarily driven.
On your organic activities.
<unk>.
Something inorganically makes sense strategically it makes sense to shareholders then we'll look at that.
Okay, and then just separately.
And maybe there is if theres any capability sets there that youre looking to expand into that would be helpful to understand but just on the I guess in the servicing side. You know we've also seen some announcements on servicing debt clean Etfs and maybe you could give us a sense as to.
How long do you anticipate it takes to bring that to market and is there anything else youre doing on the crypto side or digital currency side.
In particular.
Are you going to be looking to.
Service Physicals or do you expect to use others too serious physicals of sub custodians, just just your strategy there would be helpful to understand thanks.
Yeah on started.
Eric will probably want to add to this.
There's a lot of activity in this space.
And crypto meaningful want it means different things to different people we've been active.
And certainly digital ledger and blockchain technology for a long time now.
We we do see this as a growing segment of the marketplace. We've got a number of initiatives in place to figure out how we can establish a leadership position there.
There is I think it's fair to say that there is low.
On the regulatory environment has some catching up to do here.
And that's clearly on the minds of regulators and there's clearly lots of applications in front of them, but right now thats part of the gating factor, but we would view this as a.
There is a trend that's here to state.
And I think it's a combination of how do you think about crypto currencies.
Servicing crypto currencies and the force form not just traditional currency put administration, how do you think about in the context of an ETF, whereas crypto basket creation look like.
Then there's the other side of this it's crypto assets and we're very active in thinking about how do we move from custody.
Something that's physical or near physical too comforting a token.
What does that mean for us so it's a very very important part of our R&D.
R&D and it's very very important part of our share of mind zone.
Good morning Betsy.
I'd just add that as Ron described there's a whole across the whole value chain alright, there are ways for us to participate in crypto and you've seen us.
Do that announce a number of partnerships minority investments and so forth I think we're also very conscious of where's the white space, where there near term opportunities and we think ETF crypto Etfs is an important one why because it takes something that is a bit on the side a little bit more retail and makes it.
Stream it makes it mainstream for retail and for institutions that increases access and so we're very active and you saw one announcement, we've set a strong pipeline of.
Of our clients because these are by and large our clients who are.
Innovating and crypto Etfs.
And while many of those need to go through a regulatory approval stage. They all need record keepers and administrators right. The core of this is is the credibility that we could bring and we think thats a real area of white space, where we can lean in and both support our clients and also.
<unk> be a real.
Important.
Participant in player in one of the emerging spaces from.
When do you expect the capability will be up and running.
The the other different capabilities right, there's everything from.
Custody of the tokens itself, we often partner to do that and we had sub custody relationships just like we have sub custody relationships.
<unk> and core assets a record keeping and administration is something that we have the capability today to do which is why we've.
We've been appointed by.
Bye bye several.
ETF providers or in various stages of.
On the regulatory approval process and I'd say, that's not just a point is here in the U S. But.
We have a pipeline and appointments and.
Around the World Germanys very advanced market in this space, Canada, Australia and so.
But that recordkeeping and administration capability, we have today and are ready to roll that out in support of our clients.
Okay. Thank you.
Your next question comes from Ken <unk> with Jefferies. Your line is open.
Thanks.
Eric a follow up a couple of follow up questions on the balance sheet.
Saying that the investment portfolio was smaller on both period end and average, but you had a good amount of deposit growth. So it seems like you actually have more cash sitting around today.
Is that how do you contemplate that going forward and any changes in terms of how you reinvest built into your NII outlook.
Yeah, Ken. Good question, you know, we always have to be mindful of the balance between NII growth driven by the investment portfolio on the amount of.
A OCI risk that we take especially.
Now that we're in a place where rates are likely to either stay flat or rise and the question is we're going to get a rate shock or not so we just need to be careful of that we took a little bit of duration off the table on the in the in the first quarter as rates Rose remember naturally our MBS duration will lengthen.
And so that was one of the reasons. We we shortened up is just to protect against that and I think the two.
Jim that we have had quite a nice job of doing that early on in the early in the quarter.
And and protected some of what we wanted to around a OCI.
Sure.
It does put us in a position where we have some cash that we can put to work in the coming quarters that that is included in our.
In the outlook that I gave and I'll provider.
<unk>.
Partial offset to the the long end rate debt downdraft that we continue to see.
But we are also at the point, where the investment portfolio.
Was was re sized relative to a year ago by.
Solid.
10% larger we did that but it doesn't need to have a there's a certain capacity that we can run and.
It's in the right range.
Though we may we will.
<unk> had a little bit adjusted a little bit trade around around the edges to make the most with what we have.
Okay and to that point, you did mentioned the episodic increase in <unk> I'm. Just wondering if you could help us understand how much of a week was that on the 10, 8% CET one and then I think you mentioned getting back above the.
The target range. So just does that come back and just wondering if this is how much of an anomaly where the ratios this quarter outside of what we saw on OCI.
Yeah, the episodic items that I mentioned two of them on worth about half a point of CET one so.
US being equal we print and 10, 8% we would have printed 10 210 three.
If if they hadn't flowed through and I mentioned those because in fact, that's why we have buffers. That's why we have ranges, it's kind of part of what we need to.
Two.
Us too.
Two to operate around and always flag, if they come in a low <unk>, which might occasionally push ratios down a bit or lighter, which sometimes happens as well, which will push ratios up and thats fine. These are just pretty typical.
Overdrafts occasionally you know spike up and you know you spike up overdrafts.
$2 billion to $3 billion. It on on the base of our balance sheet. It adds a quarter point of our CET one impact and then the other one is the FX book just by nature of it having instead of a derivative positions when the dollar is in the money.
Strongly we end up because the book is hedged we have liabilities and.
And in assets in that book, we are in this case as the dollar strengthened we ran positive mark to market, but that has a.
That that gets weighted.
Heavily by the.
RW way standardized rules and so you kind of had a four.
$3 billion to $4 billion <unk>.
Move, which actually literally has has remediated back over the last two weeks as the dollar moves the other in the other direction. So anyway, just part of running the business and.
We'll always have some of this volatility but.
At this time it cost us about a half a point on the CET one.
It's reverse since.
Yeah.
Okay. Thanks, Eric.
Sure.
Your next question comes from Brennan Hawken with UBS. Your line is open.
Yes.
Yeah. Good morning, Thanks for taking my questions.
Just curious on the servicing fee outlook.
It seems as though.
There is some I know that this is an imperfect way to model, but it's the only way we got it seems as though there's a decent amount of.
Fee rate compression or the relationship.
AUC and AUM to revenues it seems to be.
With revenues lagging given given the outlook here if you look at the full year it almost suggests as though.
That will remain intact for the rest of the year.
Is there anything specific going on does your outlook assume a normalization in the volume driven components of the servicing fee.
Piece that could be a bit of a headwind to that right.
Or is there some mix going on this adverse if theres any additional color you could give them that'd be really helpful.
Sure.
Yes.
Brennan I think the biggest thing that's happening right now is that.
As AUC as.
Rise very significant due.
<unk> to equity markets, and actually are offset a little bit by lower bond markets.
That we have is that that anomalous fee rate impact just because it's not a.
A point for point change remember every 10 points of change in <unk>.
Effectively drives.
If it is driven by equity markets, a three point increase in servicing fees right, it's that different which means the fee rates just naturally and just mathematically.
Comes in lower.
It's not like the asset management business, where it tends to almost be percentage linear where 10% and 10% play.
Play through between AUC and servicing fees. So I think that's the biggest.
On.
Items that plays through.
If we look at first quarter to first quarter.
Year on years.
And.
You'll you'll see that for the for the rest of the year. So I'll just be very careful about that just mathematical result.
I think if you step back and opened up the lens on on servicing fees and I think you saw we had a good result, this quarter or servicing fees up 7% year over year nominally 4% adjusted for currency translation.
I guided in the second quarter that servicing fees again would be in that 7% to 8%.
Range there'll be a few points of currency translation that again.
But that's still a very healthy.
Growth rate.
Lot of that most of that is driven by.
The equity market appreciation offset by some of the bond market and that's part of our business model. That's always part of our business model and when equity markets are going south its hard and when when theyre going up its part so.
That's that's the large driver right now of of the revenue growth and we think that at these levels of equity markets that we're at.
A strong set of year on year comparison, so we expect for second quarter and then you can we could model out for the for the year.
Okay. Okay. Thanks for that color and then when we think about when.
When you think about the one thing is kind of a little bit.
Struggled to me because I know, we talked a lot about NII on the outlook.
Hi, I'm going to beat this dead horse a bit.
There was the update that was just.
Sort of late in the quarter in March that seem to suggest that things were going a little better.
And maybe we were we were getting to.
An inflection on NII.
And then the guide here more suggests.
Debt, there's plenty to offset.
Those green shoots.
So.
What changed.
In.
In the either the portfolio or in the market that would cause the delta in between.
<unk>.
Or a quarter update and here.
Because it.
<unk> is clearly a problem right short rates are they mattered equal and it seems like that's what's holding back some of the.
Some of the more constructive dynamics, we're seeing at the long end of the curve, but it seemed like we knew that.
When we heard the update so.
Was there something that happened.
Behind the scenes that maybe we werent aware of debt it could have.
The outlook, maybe take a little off of the outlook or make it a little bit less constructive.
Brennan good question and I appreciate your being candid and.
Direct I think two things happened exogenously debt that mattered since the <unk>.
Beginning of March when we stood up the numbers and now first as we've seen the short rates persist at a much lower level and so I think when we were here early March where are we going to have one month in.
Three months.
<unk> sit at four basis points for the rest of the quarter rest of the year or what are they going to bounce back and they've clearly sat here or.
<unk> been weighted down so I think that's that that cost us about five bucks in first quarter and relative to where we would've been.
Cost us effectively another five bucks in <unk>, which means kind of 10 Bucks cumulatively into Q10 Bucks from <unk> 10 Bucks from <unk>. So that's not a I think that's on a welcome development now that the bounce back we will have some some upside but that's that's real and then the other one debt where I think all just.
Pull it out is the attenuation of.
On the MBS premium amortization and I think you've seen a number of commentators talk about that around the industry.
The last.
Print that we all saw from the from Fannie Freddie had a had a small.
On.
Acceleration of prepayment rates instead of a downtick and I think most in most of that was modeled then by folks but.
Hopefully the last gasp on prepayment as rates have to have boomed up and now we are.
We're in burn out mode, but I think that debt that that that's like one month that I'm fairly comfortably one month it will be a and it's an index. It's industry wide. It's in the Fannie Freddie data I think it's just a reminder, that we don't aren't sure of the pace of the attenuation of the premium amortization in these in these <unk>.
MBS books that we all run we just have to be careful obviously, if the burnt out goes faster and premium amortization falls more quickly. Let me tell you I'll be the first to signal that because I like you and many others are looking for not only the stabilization and we are confident in the stabilization now.
But I'd love to see better than stabilization.
We're just not not quite quite at that point yet.
Thanks, I appreciate the color.
Your next question comes from Gerard Cassidy with RBC. Your line is open.
Thank you good morning, Ron Good morning, Eric.
Hi, Gerard.
Eric can you share with us.
Obviously pre pandemic.
State Street's balance sheet deposits, roughly average about $175 billion and now they're sitting around $247 billion in the current first quarter.
And during this time.
Of course.
This balance sheet dramatically from about four trillion to over seven and a half trillion.
We're going to continue with QE as we all know at least through the end of the year into next year to $120 billion a month.
Securities purchases can you share them on this or how are you guys calibrating, what kind of deposit growth that youre likely to see as the fed continues with QE for the remainder of this year and into next year.
Gerard It's Eric I think that's the $64000 question that many banks are wrestling with especially assets.
Some of the rule changes happen for others on on SLR.
And so you think about the leverage leverage ratios.
And.
Clearly we're in a in a in a new world. We had seen post the global financial crisis. The extension of the fed balance sheet and then it's.
It's recompression on now now.
On a new era again.
I think our general view is that the.
Parts of the banking system will roughly track the fed monetary policy expansion.
So it will do so in waves and I think we saw that in.
<unk>.
First and second quarter of last year, we saw quite a quite an expansion and then we saw some flatness in deposit balances and then there's the fed buying offset by some of the compression in the treasuries on portfolio we saw some.
On some.
Further uptick.
And we've seen that again. This this year I think we do expect continued expansion.
Because we expect continued expansion on the fed balance sheet, we do expect that to come back to banks and I think from our standpoint, what we're trying to do is be.
Open for business for our clients and we'd like to do that every day of the week because that's important to them.
And we've got some capacity to accommodate some of this some of this growth.
As it comes it's not infinite capacity, but but we've got some capacity and then we'll have to do is if the if the fed balance sheet goes up another 2030 40, 50% we have to see when they're going on.
When they are going to.
Start to to come.
Constrained their own bond buying activity slows down pause et cetera.
We will at the right times have to just work on some of our discretionary pulls on deposits. We have those and we have some capacity to Twitch us we've got a suite of.
<unk>.
Of options for our clients from our deposit rates are at zero or near zero. So for our clients. We can certainly facilitate other activities at the right point, that's not for today or tomorrow or next quarter necessarily it's but if in a year or two that comms right.
We can we can help them sleep to money market funds, we can help them sleep to.
With Treasury Securities, who can help on sweep into the repo business and so we'll have to just navigate through.
We feel pretty comfortable where we are today and then the next quarter or two but it will just have to see if theres a wave we'll we'll.
We'll address.
I think we'll just have to navigate through.
And just as a quick follow up to that have you guys disclosed what percentage of your deposits are operational for your customers versus excess where you would have that flexibility to move those deposits maybe elsewhere.
Yeah.
Gerard there is some.
Good good disclosure in some of the.
Post quarter end.
LCR.
Type type information that we and all the bank share and we can I think I can ask the IR team to point your analysts too that it gives different types of deposits and it gives different kind of those different liquidity values, which starts to get at.
Some of some of what youre, describing around operational versus non operational so we can follow up with you.
Great and then as a follow up question.
You guys are not big lenders I understand that your loan portfolio relative to your total assets.
It's obviously quite low, but I did notice that the average loans in the quarter were down but period and quarter to quarter. We're up I think 13% any color on what drove that increase at the end of the quarter in loans.
Yeah, we're always getting a little bit of volatility I think one of the.
Well.
One other things that we have is just overdrafts are coming through as alone right as a as part of the book So Thats, one and I mentioned how that.
Uh huh.
That had a spike up at the end of the quarter. The other one is theres a good part of our loan book is the private equity firm capital call financing that we do and Thats had a nice trajectory you know earlier in the quarter.
You just have a bit of a seasonal effect than late in the quarter.
We've as we've seen these these funds start putting more and more capital work. We've started to have draws on those loans and those have started to.
B.
Those draws of added to the balance is in a nice way and that's one of the reasons why we have.
We see some good.
Continued growth in lending force.
Very good thank you.
Sure.
Okay.
And your next question comes from Mike Mayo with Wells Fargo Security. Your line is open.
Hi.
I had a big picture question on specific question, but let's just go with the Big picture first.
Originally you were talking about.
Converting SSG a to Charles River and that would be a flagship client.
That you could use to sell to other asset managers.
Is that still something that's contemplated is proceeding do you have a timeframe for that.
How is that looking.
<unk>.
That's underway.
It's.
It's proceeding exactly the way I would describe it.
It's a big complex projects so it's.
On a good one.
Two.
Client number one.
Probably one other.
Clients since from some of them.
Much simpler most complex, but very.
Very much underway.
And on true Okay.
Okay.
And then.
Just just more generally as it relates to you said new business is neutral.
And is that.
Is that just the environment because of the pandemic gets tougher to do.
Knock on doors.
Or is that execution that you'd like to see improve now you have talked about the coverage model expansion and I guess there is a it.
It takes time to get that but when you talk internally do you say well. It's it's the pandemic, it's been tough to get new customers or do you say no you have to do better we're raising the bar, we're raising the intensity.
Yes.
Mike we've been very open on this with you.
Over the last few quarters, it's the latter.
The.
Much of the natural growth in this industry.
Is not there any longer.
Go back.
10 years ago or.
More than that much of the growth would be existing clients doing opening new funds opening new fund ranges in different parts of the world.
On a lot of that has already accomplished and in many cases Youre seeing fund closures right is every distributor is narrowing the range.
There is.
<unk> delivered from West choice not for choice. So it absolutely is about increasing intensity and we're starting to see that pay off.
We talk a lot about <unk>, but the way to think about this is.
Alpha in front to back.
Not on or right, we still have an existing core business and which we see opportunity to increase penetration.
<unk> penetration in medium sized asset managers to continue to grow what we're doing with asset owners and insurance companies. So it's very much about from water.
The alpha, particularly as we continue to.
Uh-huh land, new assignments and install those as being able to provide you a little bit more growth over the medium to long term.
And then lastly.
I guess are you nearing the bottom for the NII on the fee waivers I guess on.
Alright, well NII. So your guidance is just a little bit lower than it was in the first quarter right. It's not.
Falling off a cliff from.
Unless I'm reading something wrong in the fee waivers net 40 million worse.
Can you just clarify one more time on the NII and fee waivers and when do you think we hit bottom.
Mike It's Eric on on Ni.
Hi.
I think the second quarter as the.
At the bottom.
Why upset.
Likely to be at 460 to 465 million per quarter for the for the rest of the year. So I think fleets.
Or where at the stabilization level you know.
Plus or minus a few bucks and that in and around that range and.
Gift given given what we know today. So we think we think we're there we're confident we're there and.
Now now the question is how long is it flattish at that level and then when does it tick up in that I think we'll know more on the coming coming quarters.
And on the on the fee waivers.
What we've done is forecasted what they'd be for second quarter, the net 40 ish or so offset by balances versus the net.
15, or so from first quarter.
But that's predicated on short rates being where they are today and they've been they've been kind of flattish with the last.
30, 45 days and.
But that's the that's the assumption, we're obviously, hoping short rates.
Stay flat or actually move up as opposed to go the other way.
And so.
Just based on that.
Alright, thank you.
Sure.
Your next question comes from Rob <unk> with Autonomous Research Your line is open.
Good morning, guys on the call in January you talked about addressing sales to mid size asset managers and so can you talk about some of the key differences in maybe challenges between selling to a large asset manager and selling to a mid size. One and then I appreciate that it's pretty early in that but any update on your progress on that part of the market would be.
Two.
Rob.
A couple of things on this.
You are part of.
The sale to a medium size of manager as Rick as well.
More standardization.
That's not to say that they don't need customization, but we're much of our.
Our success over the years was built around servicing very large assets.
Managers, so much of what we've been doing as much to do with standardizing the product of around.
Adding to sales and coverage capabilities, but at the same time, we've recognize that.
How you sell.
So in service to them.
<unk>, having a weighted.
Scale up service.
Such a way that they are receiving the appropriate amount of service, but on a cost to serve that works from us.
And again that has required us to.
Tom.
Effect establish a parallel model here.
And to make sure that were.
Delivering expected service, we're doing it in a way that's.
That can be done it on.
And at the right unit cost for us so and that work's underway. This is not on.
I mean, we've talked to you about this on a new problem.
At the same time, we also want to be able to do.
There's many firms.
Medium level that either through their sophistication through their range of products from.
Actually do need and can tolerate pricing was.
A bit of a higher service model. So a lot of this is about really understanding and segmenting the client base.
Getting our clients into the right bucket, if you will and making sure that they truly are satisfied based on what their needs are.
Not underserved and they're not over served.
Thanks, that's really helpful and then.
Earlier this year to you announced an expansion of our business in Latin America and I was wondering if you could talk more about the opportunity there and the potential for international expansion, Latam and otherwise to be a source of growth going forward.
Well historically.
One of our growth come from outside the U S.
Hum very relatively little of it though from Latin America part of it has been.
We haven't had as much coverage there as we've had elsewhere.
We have a.
Small, but very loyal client base there.
Skilled debt from people.
Covering that market now and we're already seeing from <unk>.
Attractive green shoots so we see that.
Our medium to long term opportunity.
Activity is already happening.
One on less than a year into this intensified effort.
And so we see it as a nice supplement to what we already have in place in EMEA.
Hey, Patrick.
Okay. Thanks, Ron.
Yeah.
Our next question comes from Vivek <unk> with Jpmorgan. Your line is open.
Thank you.
Hi, Ron and Eric a couple of questions for you folks asset management fees, which were down about 1% linked quarter ex FX translation.
Interest on debt it was just client asset reallocation.
Was that it wasn't a one time thing or and how much of an impact did that have.
Perfect.
I would describe it as.
Idiosyncratic because maybe the best way to describe it it was a extremely large client.
Corporate pension fund.
And was doing with a lot of corporate pension funds are doing these days de risking so moving from.
High up on the fee schedule too.
To a much more of a derisked environment as a result of their asset allocation.
I mean, that's a trend that we have.
<unk>, that's not new but the fact that it happened to such a very large client.
Very big risk on asking on asset allocation before them.
Did it show up.
The weighted hub.
Okay.
Eric one for you just a follow on to an earlier question on NII given that you've seen a lot of growth in your liquid assets on your securities.
On an average basis were flattish linked quarter.
The level of rates.
Do you want to see before you are willing to move.
Some of this liquidity into higher yielding securities. So is there something else that would.
Drive you to do that.
They're really.
That gets Eric there really.
Two.
Uh huh.
Two or three.
Triggers are breakpoints force I think one is the outright level rates.
We've seen some good movement intends it doesn't seem that much moving in fives and so.
The question is a little bit when does the curve.
More broadly move because we.
While we'd like to put more money to work, we need to be a little careful of our duration.
Because with duration comes a OCI volatility and so it's actually a mix of.
On a higher curve in the belly of the curve that would be good to see and right now five sorry on the whatever $85 90 basis point range.
Nice to see them.
You know a good bit a good bit higher.
And.
Tens for tends to pay off either in clean duration treasuries are on MBS, we need higher rates on a good bit higher before where we want to make that trade at the right levels of higher rates.
You get the benefit.
Rates were to come down of a positive than a OCI. So that's that's helpful. But we're not at that level, where we everything grades are going to come back down very quickly and so we actually need more more more more of an upswing before we've really.
Lean into the trade it doesn't mean, we won't.
We won't.
Trade around the edges and trade the slope and so forth, but that's that's probably a little bit of framing that might help.
One quick one just yet.
You had legal and other cost of $29 million, but I noticed.
28 of it was in transaction processing and info systems can you give a little color on what one thing Walter.
Yeah.
This is a legacy matter that day to a number of years ago there were some.
On cost that we at the time thought were reimbursable.
That ore.
Bye bye bye either clients or other.
Partners that we had.
They did accumulate on the balance sheet and we came to the <unk>.
Inclusion recently that they are not reimbursable until effectively.
They need to be Expensed.
And so we.
We cleaned up the books here, but it's it dates back a number of years and.
We made the adjustment accordingly.
Great. Thank you.
Okay.
And then I don't know if Ken is still on operator, but just to clarify I Miss spoke a little bit on <unk> question.
<unk> was up as I said for.
On an episodic way about five or $6 billion. This quarter had it not been up our 10 eight.
CET one ratio would have been.
On the 11, 2% to 11, 3% range.
Your next question comes from Rajeev body with Morningstar. Your line is open.
Hey, Good morning, just a quick question for Charles River can you comment on the on your competitive competitive environment and retention trends and how much of your new wins is from competitive takeaways vs firms deciding to outsource.
I mean.
In terms of the competitiveness of the product.
I mean, it's.
It's competitive.
You can look at it.
<unk> penetration you can look at it when you lay out alongside.
Our other competitors just in terms of.
On the R&D.
And the software development, we've put into it in terms of.
Of the new business.
From a cheap it tends to be a mix.
Many cases.
Replacing.
EBIT proprietary.
Or Memphis or.
On a risk analytics systems or.
Systems that were put in that really arent being supported anymore that tends to be most of it.
And I think that tends to be most of the four big competitors. There is a little bit of takeaway going on typically when somebody is doing from consolidating but it's not so much.
Takeaway is replacing.
Something proprietary or something that's just no longer being supported.
Which is by the way, we make market attractive to put their interest.
Inherent growth in the market as opposed to.
Hum duking it out with.
<unk> strong competitors.
Got it so like your double digit like.
Growth outlook that doesn't necessarily much like competitive displacement.
No.
Uh huh.
Alright.
Brian.
Okay.
Your next question comes from Brian Klein, Townsville with K B W. Your line is open.
Great. Thanks, two quick questions for Eric kind of around the guidance.
More clarification questions here I'm sure on that full year free revenue guidance that you gave was that inclusive or exclusive of the money market fee waivers.
That was inclusive so it's all in guidance.
It covers all the ins and outs of the of the business, including the <unk>.
Update on money market fees.
Okay, and then also on the guidance <unk> and full year.
Are you, giving that as of where the equity markets were as of quarter end or as of today, obviously, a big moving the market quarter to date, thus far.
I think I've split the difference on that it's the markets move so much we're trying to give some directional guidance I think the.
For equity markets.
We're still assuming the point to point.
Increase in the period last year and it appeared this year of 10 percentage points, we'll see if that.
If that stays or not given where we are and.
We.
We wrote this over the last week. So we're also assuming equity markets stay around where they are now which would line up with that that endpoint as well.
Okay. Thanks.
Sure.
There are no further questions at this time I will now turn it back to Mr. Hanley for closing remarks.
Thank you operator.
Thanks to all for your question and thanks for joining us from look forward to speaking with you throughout the quarter.
<unk>.
This concludes today's conference call. Thank you for participating you may now disconnect.
And then.
[music].
Yes.