State Street Corporation

particularly in the second half of the year. Assets under custody and administration increased 4% quarter over quarter to a record $34.4 trillion. We saw a strong level of new wins during the quarter, totaling $294 billion, which took our total wins in 2019 to just over $1.8 trillion, within touching distance of our record amount of wins in 2018. Assets yet to be installed stood at $1.2 trillion at quarter end. At Global Advisors, assets under management increased 6% quarter-over-quarter to a record $3.1 trillion, supported by higher period and market levels and strong U.S. and European net flows to our SPDR range of ETFs. During 2019, Global Advisors recorded over $100 billion in total net inflows, driven by strong ETF institutional and cash net flows relative to 2018. Relative to the year-ago period, fourth quarter total revenue increased 1%, reflecting improved servicing and management fees driven by stronger equity markets, partially offset by lower NII and markets revenues. On a sequential and year-over-year basis, fourth quarter total fee revenue increased 5% and 2% respectively. Whole year 2019 total revenue decreased 3% year-over-year as a result of lower fee revenue and NII partially offset by the positive contribution of Charles River Development. We are pleased that we were able to begin to grow servicing fee revenue again with our focus on client service. Servicing fees increased 3% during the second half of 2019 relative to the first half of the year. During 2019, we implemented a number of client initiatives to drive better service quality and deepen relationships. This included the completion of our senior executive client coverage model for our largest clients. We also implemented a new client onboarding process that has enabled us to scale rapidly and take on large tranches of business, while also meeting client service requirements. Further, we implemented changes to better manage client pricing decisions through the establishment of an executive deal review committee. We know that there is more for us to do, and as we begin 2020, reigniting total revenue growth remains a core strategic priority for all of us. We believe that building out our front to back alpha platform strategy provides an attractive value proposition for our clients. During 2019, we undertook significant actions to improve our operational efficiency and reduce expenses. This time last year, we launched a comprehensive firm-wide expense savings program to aggressively manage down expenses, driven by new resource discipline, process reengineering, and automation efforts. Initially targeting $350 million of gross expense saves, we subsequently increased our expense savings target to $400 million, which we exceeded, finishing the year at $415 million in gross expense savings. Part of our efforts were aimed at tackling headcount growth, which had been too high for too many years. During 2019, we successfully reduced total headcount by 3% from year-end 2018, driven by automation and standardization as well as process reengineering, with high-cost location headcount down by over 3,400. As a result, we reduced our full-year 2019 expenses, excluding notable items in CRD, by almost 2%, thus exceeding our initial target of 1%. As we look to 2020, we remain focused on reducing our total expense base again. This past December, I outlined the outcome of the initial reassessment of our technology cost structure. In the coming year, we are targeting a change in the trajectory of our IT expenditure, aiming for it to be flat to down 2% during 2020, excluding notable items. For resource discipline and process re-engineering efforts, we are also targeting a reduction of total expenses company-wide, excluding notable items by approximately 1% during 2020. During 2019, we were also particularly focused on balance sheet management. As a result of a number of deposit initiatives, as well as improved client engagement, we have recorded a third straight quarter of total average deposit growth. In addition, as a result of an improvement of balance sheet under stress, following the 2019 CCAR stress test, we increased our quarterly common dividend by 11%, 52 cents per share. Further, we returned 2.3 billion to our shareholders during 2019, including 500 million of common share repurchases during the fourth quarter. To conclude, during my first year as CEO in 2019, we have faced a number of challenges But through our actions, we have made measurable progress towards our goals, particularly expense management and capital return. My focus for 2020 will continue to be on delivering a distinct value proposition and world-class service to our clients, enabling us to reignite revenue growth while generating further expense reductions and sustainable improvements in our operating model. We remain confident in the trajectory of our business. I expect that our global reach and expertise in servicing and data analytics, combined with our unique front-to-back alpha strategy, will enable us to realize our vision of becoming the leading asset servicer, asset manager, and data insight provider to the owners and managers of the world's capital. 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. Before I begin my review of our fourth quarter and full year 2019 results, I'd like to take a moment on slide four to discuss several notable items. In 4Q19, we recognized $110 million of pre-tax repositioning costs consisting of severance and real estate, which sets us up to drive further process automation and organizational rationalization in 2020. We also had $29 million of acquisition and restructuring charges primarily related to Charles River, as expected, And in addition, we had a $44 million gain related to the tender of sub-debt in 4Q19 and a $22 million after-tax cost associated with the redemption of our Series E preferred securities. Taken together, we recognize notable items of $95 million pre-tax or $0.25 per share. You'll find a bit more detail in the appendix. Moving to slide five, on the top panel, we show our quarterly and full-year GAAP results. On the bottom panel, we show results ex-notable items for those of you who want to see some of the underlying trends. I would note that we were able to generate positive operating leverage in the fourth quarter on both the GAAP and ex-notables basis, helping to improve our 4Q19 pre-tax margin, both quarter-on-quarter and year-over-year. Turning to slide six, we saw end-of-period AUCA levels increase 9% year-on-year and 4% quarter-on-quarter. The year-on-year move was driven by higher-end-of-period market levels and client flows, partially offset by a previously announced client transition, which is now largely behind us. Quarter-on-quarter, the AUCA increase was mainly due to higher-end-of-period equity market levels, client flows, and net new business. AUM levels increased 24% year-on-year to a record $3.1 trillion. driven largely by higher end-of-period market levels and strong net inflows of approximately $100 billion, which were spread relatively evenly across our institutional, cash, and the SPDR range of ETFs. Amidst a challenging organic growth environment for asset managers, State Street Global Advisors realized AUM share gains during the year in both money market funds and across our low-cost ETF array. It's a reminder that our business is positioned to further scale its offerings and to improve margins in doing so. Moving to slide 7, servicing fees were up 1% year-on-year and 2% quarter-on-quarter. As Ron discussed, while industry pricing pressure persists, the pace of quarter-over-quarter servicing fee headwinds continued to moderate in 4Q19, with this quarter's results showing three consecutive quarters of stable to increasing servicing fees. primarily driven by higher average market levels and net new business. And while equity markets were supportive over the course of the year, we are confident that management actions taken since late last year, including the rollout of our new client coverage model and newly formed Executive Pricing Committee, have had and are continuing to have an impact. Nevertheless, there is much more to do, as Ron mentioned. Driving higher servicing fee growth will remain a strategic priority in 2020. And we continue to see significant interest in our front-to-back alpha platform. We now have four wins, all of which have expanded our scope of business with existing clients. On the bottom right panel of this page, we've again included some sales performance indicators to provide a little more texture. As you can see, AUCA wins totaled $294 billion in 4Q19 and approximately $1.8 trillion for the full year. The sizable wins this quarter and throughout the year again demonstrate the benefit of our scale and capabilities as we build new relationships and continue to grow existing client relationships by providing additional products and services. Turning to slide eight, let me discuss the other fee revenue lines. Beginning with management fees, 4Q19 revenues were up 6% year-on-year, primarily due to higher average equity market levels and inflows from ETF and cash, partially offset by mixed changes away from higher fee institutional products. Compared to 3Q19, management fees were up 4%, driven by higher average equity market levels and inflows from ETFs, partially offset by outflows from institutional. FX trading services were down 7% year-on-year and 4% quarter-on-quarter as the business was negatively impacted by low volatility levels, partially offset by higher volumes. Securities finance revenues were also down 8% year-on-year and 4% quarter-on-quarter due mainly to lower industry volumes and spreads. Finally, software and processing fees were up 18% year-on-year and 54% quarter-on-quarter, reflecting higher CRD revenue and positive market-related adjustments. Moving to slide 9, you'll see in the top left panel a five-quarter summary of CRD's standalone revenue and pre-tax income. For Q19, CRD generated $126 million of standalone revenue, which was up 4% year-on-year and 48% quarter-on-quarter. I would again remind this audience the lumpiness inherent in the ASC 606 Revenue Reporting Accounting Standard and not to read across any one-quarters results. On the upper right panel, we've also included a comparison of CRD's 2019 standalone revenue versus an estimate of 2018 revenue, pro forma for the ASC 606 reporting standard had we owned the business for the full year. As you can see, CRD generated $401 million of revenue in full year 2019, up 8% versus $372 million of estimated pro forma revenues in full year 2018. On the bottom right panel, we wanted to provide you with a bit more texture on the momentum we're seeing in the business and how we've enhanced it since our acquisition last year. We remain confident in the revenue and cost synergy goals announced at the time of the acquisition. Turning to slide 10, NAI was down 9% year-on-year and 1% quarter-on-quarter, with our NIM declining 19 and 6 basis points, respectively. The sequential decrease in NAI was primarily driven by the absence of episodic market-related benefits seen in 3Q19, partially offset by increased deposit balances. Excluding the episodic benefits seen in 3Q, NII would have been up 2% sequentially. Our deposit gathering initiatives continue to generate benefits. Average total deposits are up 3 straight quarters and up 3% year-on-year. Interest-bearing deposits are up 9% year-on-year. Non-interest-bearing deposits have been steady for the third straight quarter at approximately $29 billion. On the earning assets side, we targeted careful growth in client lending and a modestly larger investment portfolio, with both the average 4Q loans, X overdrafts, and the investment portfolio up 12% year-over-year. On slide 11, we're again providing a view of expenses this quarter, X notables, so that the underlying trends are readily apparent. Year-over-year, our 4Q expenses, excluding notable items, were down 2% and flat quarter-on-quarter. You can see consistent improvement in the comp and benefits, as well as several other lines. As you recall, we announced the 2019 expense program this time last year with an initial target of $350 million. And thanks to a significant company-wide effort, we achieved approximately $415 million in saves on the full year, exceeding our initial target by nearly $65 million. And so let me provide some color on a couple optimization initiatives that really helped us reduce costs last year. First, supplier negotiations and consolidation have been a big focus. We've made great strides in both telecom and tech infrastructure services while also consolidating the number of our IT vendors. Second, the organization has been focused on realizing greater productivity. Automation initiatives launched last year have now led to four consecutive quarters of total headcount declines resulting in high-cost location headcount reductions of about 3,400 this year, more than double our original target of 1,500. More to come in 2020 as we continue to work on every line of the P&L. Moving to slide 12, during the quarter, we returned a total of approximately $686 million of capital to shareholders, and for the full year 2019, we returned approximately $2.3 billion of capital representing 108% of net income available to common, as we executed our 2019 CCAR plan and delivered on our priority of increasing our capital return to shareholders. Moving to the right side of 12, you can see that both the standardized and advanced approaches set one ratio is at a healthy 11.9%, even with that level of capital return. We also consciously reduce our Tier 1 leverage and SLR ratios, primarily driven by the post-SECAR redemption of our Series E preferred stock, which is worth about $0.12 of EPS. We remain confident in our capital position and believe that we have incremental opportunities to continue to optimize our capital structure as changes to the capital rules are finalized. Turning now to slide 13, I'd like to cover our full-year 2020 outlook as well as provide some thoughts on the first quarter of 2020. Before I start, let me first share some of the assumptions underlying our current views for the full year. At a macro level, we are assuming slow global growth, interest rates based on the current forward curve, and a modest uplift from equity markets, as well as continued low market volatility, which impacts our trading businesses. So, beginning with revenues. We currently expect that fee revenue will be up 1 to 3% for 2020. This includes servicing fees growing modestly at the low to middle end of this range, management fees growing at the high end of this range, and CRD revenue should grow at low double digits. Regarding the first quarter of 2020, we would expect fee revenue to be down quarter over quarter by low single digits, perhaps 2 to 3%, given headwinds, such as the expected asset makeshift by a single client in asset management, as well as seasonally lower CRD revenue. Regarding NII, we expect it to be down 5% to 7% in 2020 versus 2019, driven by the carryover impact of lower market rates and some continued rotation in the deposit books. Starting first quarter of 2020, we expect NII to be down about 5% sequentially, driven by the full quarter impact of the October's Fed rate cut, lower day count, and the fourth quarter long-term debt issuance. On a positive note, we do expect that NII should largely stabilize in the second half of 2020, assuming, of course, that there isn't a significant change in the interest rate environment. Turning to expenses. As you can see in the walk, we will continue to be laser-focused on expenses and expect to achieve approximately 4 to 5 percent in savings, driven by our continued focus on resource discipline and process engineering, as well as our technology optimization plan. This will include a reduction in headcount of an additional 750 roles in high-cost locations in 2020, which is related to the repositioning charts I mentioned earlier. These expense days will be partially offset by approximately 3% to 4% of ongoing business building investments in areas like CRD, tech infrastructure, and the variable costs of new business growth. This should yield a net 1% reduction, excluding notable items, in 2020 total expenses. Regarding first quarter 2020, we expect expenses to be largely in line with this guide year over year and consistent with the seasonal expenses usually occurring in the first quarter. Taxes should be in the 17% to 19% range for the year, but we expect first quarter 2020 to be at the high end of that range. And finally, given our strong capital position and recent capital optimization, we expect to continue to actively return capital to common equity holders in the form of payouts and returns, subject, of course, to the Federal Reserve scenarios and associated approvals. So, moving to our summary of full year 2019 results on page 14. We were pleased to see fee revenue improve over the course of the recent quarters as management actions and moderating fee pressure helped drive total fee revenue up 2% in the second half of 2019 versus the first half. At the same time, we continue to navigate a challenging interest rate environment and enhance NII with deposit gathering initiatives with three straight quarters of total deposit growth. We also successfully executed our full year 2019 expense savings program. significantly exceeding our initial savings and headcount reduction target, and helping drive down expenses, ex-notable items, and CRD by 2% year-over-year, demonstrating our ability to bend the cost curve. We're committed to doing more in 2020. Finally, we continue to optimize our capital structure and deliver on our promise of increased capital return to shareholders. with approximately 2.3 billion in capital return in 2019 for a total payout of 108%. And with that, let me hand the call back to Ron.

Operator, can we open the line to questions?