State Street Corporation

Good morning and welcome to the State Street Corporation's fourth quarter of 2018 earnings conference call and webcast. Today's discussion is being broadcast live on State Street's website at investors.statestreet.com. This conference call is also being recorded for replay. State Street's conference call is copyrighted and all rights are reserved. This call may not be recorded for rebroadcast or distribution in whole or in part without the express written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street website. Now I would like to introduce Eileen Vassell-Buehler, Global Head of Investor Relations at State Street.

Eileen Vassell- Good morning, and thank you all for joining us. On our call today, our CEO, Ron O'Hanley, will speak first. Then Eric Ablos, our CFO, will take you through our fourth quarter and full year 2018 earnings slide presentation, which is available for download in the investor relations section of our website. Investors.StateStreet.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 adjusts one or more items from GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our slide presentation. In addition, today's presentation will contain forward-looking statements. Actual results may differ materially from those statements due to a variety of important factors, such as those factors referenced in our discussion today. Our forward-looking statements speak only as of today, and we disclaim any obligation to update them, even if our views change. With that, let me turn it over to Ron.

Good morning, everyone. As you know, this is my first opportunity to address you since becoming State Street's CEO at the start of 2019. Let me turn to slide three. We announced our fourth quarter and full year 2018 financial results this morning, and I want to start by providing some context in terms of the overall environment, addressing our performance, and then importantly, focus the bulk of my comments outlining what we are going to do differently going forward. Market dynamics are changing for our clients. The shift from active to passive means thinner fees as well as more competition amongst managers who are increasingly challenged to outperform their peers and consequently face lower volumes and thinner fees themselves. The resulting margin compression for investment managers has led them to increase pressure on their providers. Asset owners facing inadequate returns are similarly pressuring providers to do more for less. In turn, these same clients need better technology and streamline operations to increase their ability to generate alpha more efficiently and reduce operating costs. Given these headwinds for our clients, we are adapting strategically to become increasingly more competitive, offer greater functionality, and be the essential partner to our clients. I have made it clear to my colleagues at State Street and want to make it clear to you. We want to better drive our own destiny and more effectively manage our exposure to market headwinds. That means change, real change, that I will talk about today and in the year ahead. Year over year, our revenue growth in the fourth quarter was driven by strong performance in net interest income and FX trading, as well as the contribution from the recently acquired Charles River Development business. We are encouraged by the continued interest we are seeing in CRD, with a total of 98 client engagements since announcing the deal. These positive trends were offset by unfavorable market conditions, including the significantly down markets during the fourth quarter and ongoing fee compression, which impacted our servicing fee revenues. Assets under custody and administration decreased quarter over quarter, reflecting lower equity market levels and client transitions. Fourth quarter new servicing business wins were $140 billion. Additionally, at quarter end, AUCA, yet to be installed, totaled approximately $385 billion. At $1.9 trillion for the full year of 2018, we experienced a record level of new servicing wins. State Street Global Advisors was also impacted by the market environment as our business has a disproportionate exposure to equity markets and other risk-on asset classes such as high yield. Assets under management decrease quarter over quarter. primarily driven by weaker equity markets as well as institutional and cash outflows, partially offset by ETF net inflows. While SSGA results are not yet where we would like them to be, we have been working to diversify our business mix, leverage relationships across State Street, and fill in offerings as we take advantage of the shift from products to solutions. These offerings include asset allocation, exposure management, and outsource CIOs, as well as demand for our range of ETF products. For example, this quarter we saw good organic growth in our European ETFs and our low-cost U.S. ETFs, and remain confident that our strategy of targeted growth in areas such as ETFs, OCIO, and other multi-asset solutions, and ESG, just to name a few, will drive future growth. Regarding our overall bottom line performance, simply put, we need to and can do better. That means reigniting servicing fee growth in a sustainable way, reducing costs across our organization, and building upon the advances that we have made in digitization and automation. Collectively, this means being faster and smarter about how we deliver solutions that solve our clients' greatest challenges. Our capital position is strong, Moreover, we are optimistic that balance sheet repositioning actions completed during 2018 better position us for the 2019 CCAR cycle, supporting stronger levels of capital return for our shareholders. In light of our recent results and ongoing industry dynamics, we are taking immediate action on expenses to ensure that we become a more efficient organization for our clients and shareholders alike. I have implemented a firm-wide hiring freeze for all non-critical roles. We are rolling out a rigorous new performance management system and are structurally compressing and reducing the senior management pyramid by 15% while improving spans and reducing layers across the bank by 25% to create a more agile and accountable organization. These actions are enabled by the beacon work and the consolidation of work into our global hubs. Thus, we are confident in our ability to execute quickly. In fact, initial reductions have already occurred. Additionally, we are focused on addressing inefficiencies across our entire expense base and have launched a new cost savings program that will continue through 2019 to reduce structural expenses while also enabling us to invest in the business appropriately. As part of that program, which Eric will cover shortly, we recorded a 223 million pre-tax repositioning charge, the benefits from which we expect to fully realize within 12 to 15 months. Let me turn to slide four. Slide four outlines my vision for State Street. We intend to be the leading asset servicer, asset manager, and data insight provider to the owners and managers of the world's capital. This vision will be driven by five strategic priorities. One, we will increase core fee growth by becoming an essential partner to our clients, gaining share of wallet and building enduring institutional relationships. The issues faced by our clients have moved services, technology, and operations to the C-suite agenda. Thus, we are upgrading our client coverage model to meet these needs. These changes, including new senior leadership, are already underway. Two, we must deploy the industry's leading front-to-back asset servicing platform as a technology-driven scale provider. Three, we will continue to innovate to grow diversified revenue streams, including new markets and NII opportunities. We must generate structural expense saves by automating key processes to reduce unit costs and by leveraging our global hubs and scale among other initiatives. And five, become a more high performing organization through flattening our structure, increasing the speed of decision making, and evolving our employee skill base around our technology and data priorities. Executing against the strategic vision will require concerted action and select investments, which I'm driving forward across the business. At the same time, we need to do more to improve performance in the short term, which is evidenced by our actions announced today. And with that, let me turn it over to Eric to take you through the quarter in more detail.