State Street Corporation

Good morning and welcome to State Street Corporation's first quarter 2020 earnings conference call and webcast. Today's discussion is being broadcasted live on State Street's website at investors.statestreet.com. This conference call is 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 expressed 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 Feazell-Buehler, Global Head of Investor Relations at State Street.

Good morning, and thank you all for joining us. On our call today, our CEO, Ron O'Hanley, will speak first. Then Eric Abloff, our CFO, will take you through our first quarter 2020 earnings slide presentations. which is available for download in the investor relations section of our website, investors.statestreet.com. Afterwards, we will 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 presentations 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 filing, including the risk factors in our Form 10-Q. Our forward-looking statements speak only as of today, and we disclaim any obligation to update them, even if our views change. Now, let me turn it over to Ron.

Thanks, Eileen, and good morning, everyone. You will have seen that today we released our first quarter earnings results. I am pleased with our performance during such turbulent times, and I am proud of our team members worldwide who achieved these results. The COVID-19 health crisis has necessitated a rapid curtailment of economic activity which in turn has driven significant financial market volatility and a lack of liquidity in some fixed income markets. The markets in general, and State Street specifically, have withstood the volatility well. Central banks moved quickly to help alleviate market stress, and State Street's longstanding business continuity planning, supplemented by rapid innovation, has enabled us to operate, protect our employees, and serve our clients exceptionally well. Throughout this period, we have continued to execute against our strategy, which is reflected in our strong performance. Before discussing our quarterly financial performance, I want to review some of the actions that we have taken in support of our clients and to protect the safety of our global workforce, all while remaining focused on State Street's operational excellence, resiliency, and business performance. Turning to slide three, I will outline some of the key aspects of State Street's response to the pandemic. As a global company operating in 29 countries, we have been addressing the coronavirus since its very inception. With significant operations and approximately 3,000 employees in China, we had somewhat of a head start on adapting our global operating model to the rapidly changing needs of our clients, as well as to the safety concerns of our approximately 39,000 employees across the globe. Our actions in response to this global health crisis have centered on maintaining employee safety and business continuity and resilience, while concurrently supporting our clients, the financial markets, and the broader economy. Let me start with our people. Here, our senior global crisis team has worked continuously since mid-January with local management and relevant authorities across the world to safeguard employee health and well-being. Our IT capabilities rapidly allowed us to add capacity for remote access solutions while also maintaining cyber safety. And today, approximately 90% of our global workforce is working from home. We announced that through the end of the year, we suspended any workforce reductions other than for performance or conduct reasons in light of the COVID-19 crisis. I believe this is the right decision for our people, our clients, and our communities. It aligns with our culture and values and reflects our financial strength. We are undertaking actions to offset the cost of this decision, which we will describe later in the presentation. Let me turn to our clients in the broader markets. The macroeconomic environment remains uncertain, and the pace and timing of an economic recovery will influence investor behavior, financial market conditions, and our clients, who are the owners and managers of the world's capital. State Street plays a central role in the infrastructure of the global financial system. This crisis has demonstrated our deep operational capabilities at a time of significantly increased business volumes. Our global operating model has enabled us to run split operations where we can efficiently transfer work with minimal disruption to client service at a time when we have seen a significant expansion in activity. For example, in March, we experienced a 50% increase in back office transactions and an over 80% increase in middle office transactions. Similarly, valuation checks for NAV calculations due to significant asset price moves, which typically run at approximately $70,000 per day, hit as high as $1 million per day at the height of the market volatility. Due to the scale and reach of the current COVID-19 crisis, Asset owners and asset managers have been impacted globally, with many struggling to cope with market disruptions, reduced workforces, limited access to normal workplace infrastructure, and continuing uncertainty. To assist these clients, we have focused on a number of priorities during the last few weeks. First, we have increased our level of client engagement and communication, ensuring we better understand client needs and how we can rapidly assist them in this unique and challenging environment. Second, we are maintaining a state of operational readiness through increased IT resource capacity, with strong and tested business continuity plans put into action, as I mentioned earlier. Third, we are providing a suite of liquidity solutions. State Street has a range of short-term cash investment options for our clients, including deposits, centrally clear repo, and access to a full range of money market funds via our investment portal, FundConnect. Global Advisors also has a number of specialized cash strategies. In addition, our global credit finance team supports clients with overdraft capacity and committed lines of credit. We also stand ready to support the broader economy. State Street is actively assisting our clients to tap various Federal Reserve programs that support the flow of liquidity and credit, facilitating approximately 50 percent of money market mutual fund liquidity facility or MMLF usage while also serving as the custodian and accounting administrator for the commercial paper funding facility. Many clients appreciated that we worked closely with the Federal Reserve to set up the MMLF and enable clients to access liquidity even before it was fully operational, which helped clients stabilize their funds. As we look out over the longer term, the evolving needs of all of our clients are at the center of our strategy to continue to be our client's central partner and provide the technology and scale they need to grow when the current uncertainty dissipates and global macroeconomic conditions recover. We believe this crisis will only accelerate the desire of clients to outsource more of their operations and partner with a fully capable front-to-back provider like State Street. Turning to slide four, I am pleased by the direction of progress of our strategy as demonstrated by our strong first quarter performance. Relative to the prior year period, first quarter total revenue increased 5%, and on a sequential quarter basis, total revenue increased 1%. First quarter EPS was $1.62, up 37% year over year, and ROE was 10.9%. I am pleased to report that our first quarter pre-tax margin improved by over three percentage points to 25.6%, excluding notable items. Despite the unprecedented levels of equity market volatility during the first quarter, our results benefited from the relatively stable domestic equity market averages relative to the fourth quarter of 2019. Market averages were materially higher than the year-ago period as a result of the dramatic global equity market selloff in late 2018. Industry flows were positive in aggregate as investors moved from long mutual fund positions into ETFs and money market funds. At State Street, we saw a particularly strong recovery in US flows relative to the first quarter of 2019. While FX volatility remained at low levels for the first half of the quarter, our results ultimately benefited from materially higher levels of FX volatility experienced during the latter half of the quarter and the market tumult associated with COVID-19. That volatility, plus our multi-year innovation investments, led to record FX results. First quarter, NII benefited from significantly higher deposit levels as clients turned to us as part of their flight to quality, despite dramatic long and short-end rate reductions. Assets under custody and administration fell 7% quarter over quarter to $31.9 trillion, as a result of lower period end market levels. We saw a healthy level of new wins during the quarter, totaling $171 billion. Assets yet to be installed stood at $1.1 trillion at quarter end. At Global Advisors, assets under management fell 14% quarter over quarter to $2.7 trillion as a result of lower period end equity market levels. Global Advisors recorded $39 billion of total net inflows during the first quarter, the highest quarter of net inflows in a year. Net inflows were driven by strong inflows in cash and good inflows in the institutional business, as clients turned to State Street's offerings in a time of turmoil. After experiencing net outflows in January and February, I would note that March was a particularly strong month for our ETF business, with our spider suite of ETFs gathering more than 20 billion in net inflows. Aided by the integration of Charles River Development We continue to see that our front-to-back alpha platform strategy provides an attractive value proposition for our clients, and building on this remains a key focus for us in 2020. We signed a large sovereign wealth fund as a front-to-back client in quarter one. The front-to-back State Street alpha pipeline is developing and advancing well, with a good mix of deal sizes, functionality, and scope. Turning to expenses, First quarter total expenses were down 1% relative to the year-ago period, excluding notable items. We are building on the strong culture of expense management we successfully established during 2019 when we undertook significant actions to improve our operational efficiency and reduce expenses through a comprehensive firm-wide expense savings program. Today, we are more focused than ever on driving productivity improvements in automation benefits as we strengthen our operating model even during this unprecedented period. In addition, as a result of the current environment and our decision to suspend workforce reductions, we are taking additional expense actions, including a hiring freeze for non-critical operational positions. We also continue to very carefully manage all discretionary expenses. To conclude, while we cannot predict the scope and duration of the pandemic and the associated economic impact, we will remain very focused on three core priorities. First, supporting our employees and our communities. Second, providing service and operational excellence to our clients. And third, driving value for our shareholders. While the markets may be unpredictable, we are well prepared to navigate this volatility with a strong balance sheet, capital position, and proven operational capabilities. We at State Street remain outward looking, globally connected, and laser-focused on helping our clients achieve better investment outcomes for the people they serve. State Street has navigated through good times and bad with our clients for over two centuries, and this moment will be no different. We stand ready to support our clients and our global workforce in any capacity we can. And with that, let me turn it over to Eric to take you through the quarter in more detail.

Thank you, Ron, and good morning, everyone. To start my review of our first quarter results, I'd like to go to slide five, where you see we reported EPS of $1.62, up 37% year over year. On the top left panel, I would call your attention to two items. First, our FX trading business had extraordinary quarter, generating revenues of $459 million off record volumes and increased client demand, which I'll spend more time discussing shortly. And second, we had a $36 million provision expense with a sequential increase driven largely by the effects of the COVID-19 on our economic forecast. On the top right panel, we had $11 million of expected pre-tax acquisition and restructuring charges primarily related to Charles River, as well as $9 million of after-tax costs associated with the redemption of our Series C preferred securities. On the bottom left panel, we show our quarterly results, X notable items for those of you who want to see some of the underlying trends. I would also note that we were able to generate positive operating leverage in the first quarter, helping to improve our first quarter 2020 pre-tax margin year over year. Turning to slide six, period end AUCA levels decreased 2% year on year and 7% quarter on quarter. Year-over-year, AUCA were affected by a previously announced client transition that had a de minimis effect on year-on-year revenues. Quarter-on-quarter, the AUCA decrease was mainly due to lower end-of-period equity market levels. As a reminder, approximately half of our AUCAs reported on a one-month lag, so some of the impact of the equity sell-off seen in March is not yet reflected here. AUM levels decreased 4% year-on-year and 14% quarter-on-quarter to $2.7 trillion, driven largely by lower end of period market levels, partially offset by strong net inflows over both time periods. Amidst extraordinary market conditions for asset managers in the first quarter, State Street Global Advisors saw net inflows of $39 billion, largely driven by cash and institutional inflows. Unpacking the first quarter AUM trends a bit, it was a tale of January and February versus March, as after seeing modest net outflows in the first two months of the quarter, Global Advisors saw strong inflows of approximately $45 billion in March with $27 billion in cash inflows and $23 billion in ETFs. Global Advisors saw strong inflows of more than $10 billion in March alone into SPY, our premier S&P 500 ETF offering and the largest and most liquid product in its class. Moving to slide seven. Servicing fees were up 3% year on year as the core business continued to regain momentum and down 1% quarter on quarter on lower equity markets. As Ron said, the investment services business saw significantly elevated client activity and flows during the quarter, particularly in March, and successfully navigated the activity with minimal service disruptions. Through this stressed environment, we believe clients realize, perhaps more than ever, the value of our scale and capabilities during exceptionally challenging market conditions. By way of an example, a number of our asset manager clients have expressed gratitude for their partnership with State Street and the fact that our investment servicing business has worked tirelessly to ensure that their fund investors are able to buy, sell, and monitor their fund performance both accurately and timely, which gives them the strong sense of confidence they deserve. On the bottom right panel of this page, we've again included some sales performance indicators that underline this dynamic. As you can see, AUCA wins totaled $171 billion in first quarter, with several deals coming through the pipeline in late March. We do expect to see some near-term slowdown in sales, but assets to be installed as the first quarter period end is strong at $1.1 trillion, and we still expect fee pressure to remain moderated as it has in recent quarters. Turning to slide eight, Let me discuss the other fee revenue lines. Beginning with management fees, first quarter revenues were up 7% year on year, but down 3% quarter on quarter, driven by lower average market levels and mixed changes away from higher fee institutional products, partially offset by positive mixed changes in ETFs. As I mentioned earlier, FX trading services were up 64% year on year and 68% quarter on quarter, as the business saw record volumes and increased client demand, given market volatility amidst the COVID-19 pandemic, something I'll be discussing in more detail shortly. Securities finance revenues were down 22% year-on-year as investor asset mix shifted towards lower spread fixed income assets and as hedge fund deleveraging in falling markets drove down the enhanced custody demand. Revenues were down 17% quarter-on-quarter due to similar factors. Finally, software and processing fees were down 41% year-on-year and 49% quarter-on-quarter. As you know, this line includes certain business revenues, such as CRD software fees, as well as other lumpy items, such as the amortization of tax advantage investments, certain currency translation impacts, and the mark-to-market adjustment on employee long-term incentive plans. These other items are worth about $65 million negative this quarter, as opposed to the usual slight positive. Moving to slide nine, we wanted to provide some incremental color around the extraordinary quarter we saw in the FX trading franchise. For several quarters now, we've been highlighting that our FX business had been confronting historically low volatility levels, but that we had been focused on expanding the client base and building share of wallet while reinvesting in our broad set of platforms. This quarter, we were thus well-positioned to support our clients' needs as volumes and volatility levels surge due to the COVID-19 pandemic, spurring elevated client demand across our various FX trading venues. As you can see, the FX sales and trading business, including DirectFX and CustodyFX, saw a 40% increase in volumes from average levels, while our FX trading platforms, including FX Connect and CurrentX, saw a 50% increase in volumes over the same period. On the right-hand side of this page, we've included the most recent Euromoney rankings related to the FX business, including its number one ranking for real money asset managers for two years in a row to give you a sense of the depth and breadth of this important franchise. Moving to slide 10, you'll see in the top left panel a five-quarter summary of CRD's standalone revenue and pre-tax income. For first quarter, CRD generated standalone revenue of $100 million, which was up 1% year-on-year and down 21% quarter-on-quarter. I would again remind this audience of the lumpiness inherent in ASC 606 revenue recognition standards and to not read across any one-quarter results. Having said that, we do expect some disruption in go-live dates and professional services fees over the coming months, as on-site activity is currently somewhat curtailed. On the right panel, we've again included some texture around the momentum we're seeing in the business and how the integration is progressing. We continue to remain confident in the revenue and cost synergy goals announced at the time of the acquisition. Turning to slide 11, NAI was down 1% year on year, but up 4% quarter on quarter. The sequential increase in NII was primarily driven by increased deposit balances and episodic market-related benefits of approximately $20 million, partially offset by long-term debt issuance costs. Average assets were up as average deposits increased 10% quarter-on-quarter from fourth quarter 19, with period-end deposits increasing 41% quarter-on-quarter, as we saw a wave of flight-to-quality client deposits surge at the end of March. particularly from asset managers. We were there to support our clients. We've since seen deposit levels recede somewhat in April, but they still remain elevated versus 4Q19 levels. End-of-period assets were also driven off by $27 billion as we helped clients access the Fed's new money market mutual fund liquidity facility, or MMLF. State Street facilitated just over 50% of the MMLF volume as we asserted our leadership role in supporting our clients and the smooth functioning of markets. Moving to slide 12, we've included some color here on the loan portfolio as well as the company's allowance for credit losses. As you know, State Street's loan portfolio is relatively small, typically 10% or so of average assets, and generally consists of high-quality, and conservatively underwritten mix of fund finance, leveraged loans, commercial real estate, and municipal loans. On the right panel of this page, we've included some incremental detail around the loan book and its characteristics. In the current environment, I'd note a few highlights as of first quarter. Approximately 91% of the book is investment grade, with 84% of the on-balance sheet exposures investment grade, and 98% of the off-balance sheet exposures. The leveraged loan portfolio of approximately $4 billion has relatively low exposure to cyclical sectors currently in focus and has an average rating of BB, which is stronger than the traditional index. Compared to 4Q19, average loans grew 12%, while period end loans grew 23%, primarily driven by elevated client overdrafts, as we helped clients facilitate the higher settlement of trades and FX activities during March. These overdrafts have already receded in April. Moving to the bottom left panel, the total allowance for credit loss has increased by $35 million to $124 million, as we added to reserves, largely related to the effects of the COVID-19 pandemic on the end of March economic forecasts. On slide 13, we've again provided a view of expenses this quarter, ex-notables, so that the underlying trends are readily visible. Our first quarter 20 expenses, excluding notable items and seasonal expenses, were down 2% year over year, driven by resource discipline and reengineering efforts, and down 2% quarter on quarter, primarily driven by the timing of foundation funding, lower travel, and lower professional expenses. We continue to execute on many of the investments and optimization savings initiatives detailed earlier in the year, and believe that, taken together, these various efforts position us to navigate the extraordinary market conditions seen in recent weeks and meet our expense goals. We're making good progress in lowering compensation and benefits costs, occupancy costs, and other costs. And IT costs are lumpy, but on track, too. Given the potential impact of the COVID-19 pandemic on revenues, we obviously need to begin to intervene further on expenses. and now expect to take them down 1% to 2% for the full year. This won't be easy, but we've begun to accelerate our plans and will adjust as we know more. First, as Ron mentioned earlier, for the remainder of the year, unless the crisis concludes earlier, we will suspend most workforce reductions. We also instituted a hiring freeze for non-critical positions. Second, we see opportunities to dig deeper in non-compensation expenses such as occupancy, contractors, travel, and other professional fees. Third, we will be judicious about the reinvestments needed to drive growth in our business. And finally, we will adjust as the situation develops. Moving to slide 14, you can see that we maintain strong capital and liquidity levels during first quarter, with our standardized set one ratio, which was binding for first quarter, ending at 10.7%, and our LCR ratio essentially flat quarter-on-quarter. As you can see in the middle right panel, our SLR and Tier 1 leverage ratios ended at 5.4% and 6.1% respectively, with a sequential decline largely driven by an influx of flight-to-quality client deposits. We have the room to support our client activity under both ratios, especially given that the SLR would have been 7.1% post-implementation of Section 402 on April 1st. During the quarter, we returned a total of approximately $683 million of capital to shareholders, including $500 million in share repurchases before we, acting in coordination with other G-Sub members of the Financial Services Forum, agreed to temporarily suspend our repurchases in second quarter. We remain confident in our robust capital levels and our ongoing ability to continue to deploy our balance sheet to support our clients, the financial markets, and the broader economy. Turning to slide 15 now, we've provided a summary of our first quarter results. As we mentioned earlier, throughout this crisis, we have been differentiating ourselves by proactively reaching out and assisting clients for these difficult times. Our resiliency during heightened volatility and our ability to execute record volumes without sacrificing service quality has created goodwill with our clients as we look to the future and the post COVID-19 time period. That said, the potential length and depth of impact of the COVID-19 pandemic on the economy has made the operating environment uncertain. This uncertainty obviously introduces a higher than usual degree of variability into our financial outlook. However, I would like to share our current expectations for the remainder of 2020 under a certain set of assumptions. While we believe these are reasonable set of assumptions, there is a broad range of possibilities regarding the potential length of the COVID-19 pandemic and the scale of the economic impacts. As such, the current expectations we are providing today represent one potential range of outcomes, but they are not representative of the full range of potential outcomes that may actually occur. So, with a very difficult second quarter economic situation in front of us, we assume global central banks keep short-term rates low and that long-end rates then float up to about 80 basis points by year-end. We assume equity levels in second quarter to be consistent with March averages and potentially float up in the second half of the year. This would leave average equity market levels for 2020 lower as compared to 2019. Given these significant changes to the economic outlook, we currently expect that fee revenue will be down 1% to 2% year on year for full year 2020, looking at the component pieces of our fee revenue. Let me go through each one. Beginning with servicing fees, we expect they will be down 1% to 3%, driven largely by lower than expected market averages. We continue to see good underlying health and momentum in the servicing business, although there may be a slight slowdown in the sales pipeline over the near term as clients adjust to the new operating environment. Moving to management fees, we would expect now that they will be down 3% to 5% year-on-year, depending on equity market performance. Included in this outlook, the zero interest rate environment introduces the likelihood of money market fund fee waivers, which are highly sensitive to short-term rates and could have a modest impact of approximately $10 to $40 million on our business, largely in the second half of the year. Our markets businesses will continue to be informed by the trading environment. We expect a spike in FX trading revenues will subside with market volumes and volatility while securities finance will continue to be impacted by lower levels of leverage. Within software and processing fees, we remain confident in the CRD deal synergies. However, the uncertainty in the operational pressures introduced by the COVID-19 pandemic on the front office clients is now expecting to create go-live delays and slow down professional services projects of several current CRD clients. As a result, we now expect CRD revenue to be up mid-single-digit percentages year-on-year for full year 2020. At this time, we would expect software and processing fees, XCRD, to likely be between $60 and $70 million per quarter for the rest of the year, absent any further significant market-related adjustments. Regarding the second quarter of 2020, on a sequential quarter basis, we expect overall fee revenue to be down 5% to 9% depending on our much lower equity market levels, with servicing fees towards the minus 5% end of the range, management fees coming in towards the minus 9% end of the range, and considering some reversion in the trading revenues. Regarding NII, we still expect to be down approximately 10% year-on-year for full year 2020, as I previously indicated in mid-March, primarily driven by the impact of lower rates and the relatively strong performance in the first quarter. For the second quarter, we currently expect NII to be down about 11% quarter-on-quarter X episodic items, driven by the full quarter impact of lower rates. We expect NII to stabilize by the fourth quarter. Turning to expenses, even during this unprecedented period, we remain laser focused on driving sustainable productivity improvements and automation benefits. We expect that full year expenses, X notable items will now be down 1 to 2%, exceeding our original goal of down 1%, as I mentioned earlier. In regards to our provision expense, 2Q results will be driven by updated economic forecasts embedded in our new CECL models, plus any specific reserves. At the end of March, we assumed a number of factors and a range of scenarios for our general reserve. Among those numerous inputs, our dominant scenario had 2Q GDP of minus 12% and full-year GDP of minus 2%. Had we moved to a different dominant scenario, where full-year GDP was minus 6%, for example, then we would have roughly built an additional $50 million of reserves. I'm simplifying, of course, and there are dozens of important variables, but this example gives you a taste of the sensitivity of the CECL reserving process to potential economic scenarios. On taxes, we continue to expect that we will land within the previously provided range of 17 to 19 percent for a tax rate for the full year, though some discrete items are expected to drive down that rate by about four percentage points lower for second quarter. And finally, we've again included our previously disclosed medium-term financial targets in our earnings presentation this morning because we believe they are the right targets. However, with the onset of the COVID-19 pandemic and the significant uncertainty around the magnitude and duration of its impacts raises the question regarding the timing of when we might realize those targets, which were set on a run rate basis for 2022. We are not changing the timing at this point, but we'll continue to monitor the length of the COVID-19 anticipated impact closely going forward. And with that, let me hand the call back to Ron.

Thanks, Eric. Operator, we can now open the call for questions.

Ladies and gentlemen, to ask a question, please press star, the number one on your telephone keypad, We'll pause for just a moment to compile the Q&A roster. Your first question comes from Alex Blostein with Goldman Sachs. Your line is open.

Great. Good morning, everybody. Eric, thanks for the updated detailed guidance. I guess first question may be around deposits. So, you know, below March levels but above, I guess you said, fourth quarter, obviously it's a really wide spread there. So maybe just give us a flavor for where deposits currently state in April, sort of on average. And then importantly, as you guys think about the capacity to absorb any additional deposits or sustain the current levels, how should we think of that with respect to your capital leverage ratios, how much lower you guys would be able to take them?

Alex, it's Eric. Let me start on the deposits and just give you a little bit of texture on the trends, because I think that that would help you. And obviously, the The deposit levels moved quite a bit. If you recall back in fourth quarter, our deposit levels were about $165 billion in aggregate. And in January and February, they were literally just spot on to those averages. What started to change was the surge we saw at the beginning of March. And so if we just think about the first half of March, we're running at about $185 billion of average total deposits. The second half of March spiked to $235 billion, and that together is what got us to, you know, drove the higher averages for the quarter. And I think you saw our end-of-period print was north of $250 billion, and we literally operated at that level of deposits for about a week at the very end of the quarter. In terms of today, they've been running somewhere around $200, $210 billion. you know, still at hefty and I'll call kind of risk-off levels. You know, we're seeing that flight to quality. And, you know, we're certainly there to support our clients. We do expect them to ebb down. And, you know, I think the question is what's the pace of that? Do we get a resurgence or not? But there's a range of scenarios. What I would say is that the deposits now are – you know, our facilitation, a way for us to facilitate, you know, the needs of our clients, right? We're there for them on overdrafts. We're there for them on deposits. We're there for them on repo. We're there for them on supporting them at the Fed facilities. And I think we're delighted to do that as much as possible. In terms of the, you know, capacity, you know, as I said in my prepared remarks, I think we've got ample capacity at these levels of deposits to support our clients. You see our capital ratios, whether it's the SLR post the April 1st change is quite high, and that's on a reported, on the new basis, about 7% against a 5% level. You see a Tier 1 leverage. We still ran well this quarter, and that's against a 4% minimum. So there's certainly some range. There's not unlimited range, but our perspective is that if deposits stay at the levels that they are at today, the kind of $200 to $210 billion, that's quite comfortable for us, and we're here to do what we need to for our clients.

Got it. That's helpful detail. Thanks for that. And then my second question is around CRD. So revenue is about $100 million in the first quarter. That's up only 1%, I guess, year over year. I think that business has been growing in a kind of high single-digit range, and you guys were obviously hoping to increase that further. So is that sort of the impact of COVID-19 already playing out in the first quarter results, and that's really kind of the slowdown, or is there something else going on And I guess as you look at the pipeline and the front-to-back wins that you guys have been highlighting over the last couple of quarters, any way to help us frame kind of the revenue backlog in that part of the business and timing to recognize it, understanding that obviously the current events could move that timing up and down, but just helping to get some flavor there. Thanks.

Alex, let me start on that and then I'll turn it over to Eric. We remain very pleased with the impact that CRD is having on our business. The front to back pipeline continues to grow and it's having CRD is part of that toolbox, if you will. As I've mentioned before, in some cases, we don't end up in the end with a full front to back, but we end up with a built out relationship or even a relationship that we didn't have before. For example, the one front to back win that we had this quarter, that we announced this quarter, it was not even an existing client of either CRD or State Street. So, from an overall enhanced state street value proposition, that's working well. As Eric noted, the reported revenues are very, very sensitive to the accounting rules and the accounting treatment. and it's very sensitive to when we're delivering things and if delivery gets changed or if the contours of something gets changed, it does affect the timing of reported revenue. Strategically, this remains a very important and integral business for us. It's driving a lot of new activity. It's driving activity. into the profitable back office for us, so we remain unchanged, and it's important to us strategically. And Eric can talk about the actual financial impact in your question.

Sure, Alex. It's Eric. So the quarterly revenues are always lumpy, and I'll just remind you that You know, for a mid-sized client, we'll bring in, when it's on an on-premise basis, potentially, you know, $5 million, $10 million, you know, in a potential installation when it goes live. You know, the smaller clients obviously are $1 million, $2 million, $3 million. And so you can see on a base of $100 million, we could see big swings in growth rates, you know, positive or negative. So I wouldn't read too much into that. What we have done is started to think through the likely revenues for the business this year. And this business, in contrast to our servicing fee business, has more on-site kind of work that needs to be done. There's on-site sort of co-development to integrate our platform with an asset managers. There's professional services billings that also go with that. So between the Professional services billings just being slowed down with work from home, and then the go-live dates likely to be pushed out. I don't think they'll be, we don't expect them to not be there, but we do expect some lengthening of those go-live dates. We're now looking at revenue growth at about 5%, 6%. We said mid-single digits as opposed to the low double digits. that we had expected this year, and we think that's mostly going to be around timing as opposed to underlying performance. The pipeline in CRD specifically is healthy. It's continued at the levels that it had been just a few months ago, and the interest in securing mandates from our clients we think is actually as strong as ever.

Great. Thanks for taking the questions.

This question comes from Glenn Score with Evercore. Your line is open.

Hi, thanks. Quick question on the loan book. So I heard you loud and clear, thank you, on what the environment you underwrote to and what it could be in a worse environment in second quarter. I'm trying to think through, if you look at the composition in the loan book, fund finance and overdrafts, they don't scare me much, and my gut is not much of the reserves are focused on that. So is it correct to say that most of the reserving goes towards the $4 billion levered loans and the $2 billion commercial real estate? And I'm just curious if you can contextualize a little bit more about quality of those portfolios. Because, you know, what you said looks good, but $36 billion. it starts adding up in terms of just reserving, that's all.

Len, it's Eric. I think you've got the right frame of mind on the loan book. This is a modest-sized loan book, which is 10% of our total assets. And it's pretty diversified, both across categories and then within categories. So fund finance, as you mentioned, is primarily capital call finance loans. with recourse to some of the largest and most premier investors in the world. That's a pretty attractive business area for us and one that's grown nicely. Leveraged loans is an area that we obviously in this environment will spend a little extra time on. I'll come back and talk about that in a moment. And then commercial real estate, overdrafts, munis are pretty straightforward. You are right to hypothesize that more than a majority of the reserves for our book is for the leveraged loan book. And the reason we're reasonably comfortable with this book, not to say that things won't happen on an individual name here or there, is that it tends to be an upmarket book. Average rating is about double B. as opposed to the average in the index is single B, and it's literally the center of gravity is quite different. We've been tracking the market prices for this book. This book tends to have market prices, as we've seen some change in the market, to be six, seven points better than the average leveraged loan index. So it's performed well so far. And it's pretty well diversified. There aren't any, you know, particularly unusual exposures. There's not much oil and gas in it. So we're, you know, we think it'll operate well during this time period. But I guess at the end of the day, it's a relatively high-grade version of leveraged lending, and it's only $4 billion. And so we think it'll... It'll perform well, and it'll just be a piece of the broader picture for the company.

Cool. I appreciate the perspective. One follow-up on just NII overall. So keeping it at down 10 as the thought process for the year, but deposit book is a lot more. I'm just curious. A lot of the deposits come in non-interest bearing, and so we'll see how long they sit there, but they're going to hang out for a little while at least. I'm just curious. I know rates stink, but we knew the rates were going to stink. I'm curious why NII with a greater deposit base wouldn't be a little bit less than.

Len, it's Eric. I think you said it right. I won't repeat the five-letter word you used. But prevailing interest rates at the central bank, if you think of IOER as a benchmark, are remarkably low, right? They're at 10 basis points. So if you think about it, whether we take in a deposit at zero or take in a deposit at one, there's very little spread there. And so the value of the deposits while they're there for, you know, they're there on our balance sheet and we can lend against them, we could use them to support our other books. They're transient by and large, and the value is small relative to what it's been. If you think back to the first quarter, on average, you know, first quarter deposits were worth roughly 100 basis points. Just think about the cost of funds versus the IOER rate. In the second quarter, we expect deposits across the spectrum to be worth a fraction that closer to 10 basis points. So it's just been an order of magnitude difference. And so while we may have a surge or higher levels of deposits, they'll not be particularly remunerative this time around.

I got it. I appreciate it. And thanks for all the guidance. Thanks.

Your next question comes from Brennan Hawkins with UBS. Your line is open.

Good morning. Thanks for taking my questions. Just wanted to dig in a little bit on your expectation on trading revenue. I know you referenced, Eric, that you expect it to subside. But can you help us with magnitude? You know, how should we think about the potential decline from what you did in 1Q? Are you really just sort of expecting it to revert back to what we saw, you know, kind of like last year run rate? Or, you know, how should we calibrate and what should we watch for as the year progresses?

And that's a really good question and a real hard one to answer with any conviction. But let me share with you how we're thinking about it from a forecasting standpoint and then some of the possibilities. From a forecasting standpoint, our view is by May and June, absent any other dramatic changes to the environment, the FX volumes will normalize back to what they were pre-crisis, and that those levels pre-crisis will be what we should expect in third quarter and fourth quarter. Now, I'm saying all that assuming that we have stability in equity markets, bond markets, global markets, and that's hard to predict, and obviously any Any further deterioration of the health situation or the economic situation is going to push us right back to where we were. So we're not hoping for that. We're hoping just for the opposite, for the quieting of the enormous disruption that we've seen. All that said, You know, there is a range of outcomes here, not just from the pandemic and its economic impact on markets like we saw in March. You know, if we have a repeat of that in a coming month, then we could see some higher volumes again. But there's also a set of, if you think about the rest of the year, a set of events, right? We've got Brexit continuing in some ways. We've got U.S. elections. We've got a series of different elements, I think, political, economic, global. You know, world trade's going to come back at some point, and we may have tensions there. And so it's hard for me to really predict, and so we tend to try to be careful with our forecasts in FX in particular, knowing that there certainly could be some some upside. But I think we'll all see it when it happens and can probably factor that in.

Okay. Okay, great. Thanks for that. And then circling back as a follow-up to one of Glenn's questions on the loan book, thanks for the additional disclosure there. The two biggest pieces are the fund finance and overdraft. Can you talk about any exposures that you might have in the fund finance book to mortgage rates. What in that book makes you or your risk managers nervous when they go to sleep at night? And obviously it's not, when we go into a market like this, it's not necessarily the stuff you always think that you need to worry about. Sometimes you get hit by surprise. You know, how can we – how is it that you think about that book? How is it that you risk manage? And how do you ensure that we don't end up in a situation, you know, similar to what we had the hot cycle where what we thought was good, like with the liquidity backstops for the asset-backed commercial paper conduits, you know, all of a sudden become assets that end up coming back on the balance sheet and a big headache to deal with it?

Yeah, Brendan, it's Eric. Let me give you a little bit of texture, perhaps, on what's included in the $13 billion of fund finance and how we think about it. And you can imagine over the last month, between finance and our risk organization and our business teams, we've spent extra time in heightening our oversight and monitoring. But let me describe for you what we have there and kind of how we think about the – each of those books and maintaining the quality that we like. So within fund finance, the largest piece is capital call financing. That's literally lines to some of the premier investors around the world, and that's been allocated on a fund-by-fund basis. But the work that goes on behind the scenes is that each of those funds has a set of investors behind it, and what we need to do is maintain a diversified group of liens to those investors, and we want to avoid all concentrations. So there's a lot of work that gets done as we grow that book to make sure that there aren't any unknown concentrations, that the concentrations are all within limits on a literally an investor by investor basis, because that's where we have recourse. So that's the primary approach on the capital call financing. The next piece within fund finance is the 40 Act liquidity funds. These are the funds that can have a certain amount of leverage. They're very well described, I think, in the 40 Act rules, and they have limits on the amount of leverage they can. And there the monitoring is, what's the asset pool? It's effectively a version of margin lending. What's the underlying asset pool? What are the line sizes? How do we constrain those appropriately and have our limit structures? And then there is literally the daily monitoring of that leverage and that margining. But that's pretty straightforward in some sense, but just like you say, you never say never. There's extra oversight in these volatile times to measure and to monitor the underlying collateral literally on a daily basis as you'd expect. And then the smallest piece within fund finance is the BDCs. It's just over a billion dollars. It tends to be BDCs with triple B pools of underlying loans. And so there it's about diversification of the BDCs. They tend to be from some of the most premier alternative asset manager providers, right, some of our largest clients, because that's who we're trying to support there. And there it's about a set of size limits and ongoing monitoring. So that's maybe a little bit of texture. I think, like, I guess the The frame of reference I give you is each of these is a little different, and each of these has a different level of monitoring. And the process now, I think like any bank, but ours is kind of simpler and more vanilla than most banks, is to see if there are any – if margin change is more than expected, occasionally you get – questions around the possibility of adjusting covenants and that quickly escalates so that we have to make sure that how we react to those proactively and consciously and sometimes we grant those and sometimes we grant those and actually ask the borrower to reduce their leverage or our exposure to them. And so there's a I'd say there's a very natural set of actions that we use both on a monitoring and intervention basis on an ongoing basis. But let me pause there with at least that texture.

Yeah, thanks. That's great additional color. Appreciate it.

This comes from Ken Houston with Jefferies. Your line is open.

Hey, thanks. Good morning. Ron and Arik, I was wondering if you could expand upon your comments that you already gave on CRD talking about that, you know, that maybe the cycle is a little bit slower there. Just in terms of your regular way servicing conversations that you're having with clients, giving the changes and how we're all working, how are those conversations going? Does the, you know, How do you approach sales cycles and moving forward with engagements that you've already been in process with and sourcing new business? Thanks.

Yeah, Ken, the level of engagement remains high and has continued to be high even during this last month, five weeks with almost everybody in the world working from home. And in fact, a new very large situation developed right in the middle of all this that we've started to work through. I would say that the underlying themes remain the same with this idea of improving and lowering costs of the asset managers or the asset owners, cost structure of improving their operations, trying to do an outsource of things that are not really critical to their investments but are critical to achieving better outcomes both for their clients and for themselves. I think what's changed and what's been added to the consideration now is all of the operational stress that's been applied to these managers since then. Many, many managers were not prepared to work from home and they certainly weren't prepared for a global work from home. So we see that, if anything, providing another catalyst to these kinds of what we consider fundamental enterprise outsourcing. And you can see that it's playing through even in our new business. The line that we focus on is new business plus business to be installed. And as you can see, the business to be installed number remains quite high. And that reflects the fact that the business increasingly is less about just a single product and much more about multiple initiatives, multiple kinds of offerings that we have underway for our clients. And we see this continuing. We see that the need and desire to outsource at the extreme, you'll have clients that just have antiquated systems or operations that need fundamental upgrading. At the other extreme, and we've experienced this too, highly successful managers and asset owners that are saying, we can do this, but it's not a good use of our time, and we want to be able to scale, and we want to work with a partner that could be there for us. So we see this whole trend continuing and probably accelerating.

I just add that we're also obviously the revenues this year are based on the bookings and the wins from last year by March. I think about the installation process. And, you know, so far I think we've been pleased with the continued implementation. Our onboarding team has been active through the end of March, onboarding some sizable clients on schedule. April, you know, we're halfway through April and have the ability the rest of the month and are not seeing any unusual or major delays and so forth. for the time being, and I think if we can get through March and April, that'll bode well. But the previously one business tends to be installed on schedule because it needs to be. You've got the previous provider who needs to come off. You've got a lot of preparation that's been done. So far, we've actually seen good progress or good continuity on the onboarding side, which is important because that's when the revenues tend to begin to be accrued.

Understood. Thank you. And the follow-up, just on the buyback side, you guys were part of the Financial Services Forum agreement to stop buybacks through the second quarter. But obviously, not being as credit-sensitive of an institution and just looking at the results this quarter, it would seem that you guys would have capacity to continue a buyback regardless of what the credit environment turned into. I'm just wondering just your thoughts on whether or not if the rest of the forum decides to continue to stop buybacks for longer than the second quarter, would you have to be a part of that, or could you start making your own decisions based on your own capacity to do so? Thanks.

Yeah, Ken, we should be clear. We make our own decisions on this. We are part of the forum. We talked to the forum and we considered it actually a very good move to make to instill confidence in the system and to, remember this happened at a time where people were questioning whether or not banks would be there. And I felt it was not going to be useful for us to not be part of this and to have more time spent on, gee, why are there one or two outliers as opposed to the banks are committed to being there during the crisis. But we'll make our own decisions. You're right. We are very different, and our results will play out differently than credit-intensive banks. So, you know, the good news is that with the new rules that are being implemented, capital planning can be much more dynamic than it has been in the past, and we'll take advantage of that as the situation plays out. I mean, the realities are that it's still highly uncertain. You heard that, and the environment's highly uncertain. You heard that reflected in the assumptions upon which we based It's our guidance to you. One could argue that we've been very conservative, but one could argue also that the situation could get a lot worse than what we put out there as a point estimate, and that's exactly what we've done. We've given a point estimate within a wide range of potential outcomes. The market level one is the biggest one. There, the assumption is that average markets will be what they were at period end March. The spot levels are higher than that. We really don't know here, which is why, going back to your question on capital, if this all plays out as we see, we believe we'll be in a position to distribute capital, but we think it's wise to be able to make that decision dynamically quarter to quarter.

Understood. If I could just ask a quick follow-up, Eric, just on one of your prepared remarks. The 10 to 40 of the potential fee waivers, that's not dissimilar to what happened prior cycle. Is that just like an aggregate number, like what could happen on a full year basis as opposed to a quarterly basis?

Ken, it's Eric. Yes, that's for the rest of the year, primarily in the second quarter. I gave you a large range because it's also highly dependent on short rates, right? If the overnight repo rates are at, you know, one or two basis points or six or seven or ten or eleven, you literally, you know, you could go from zero to what could be the upper end of that range. But that would have been for the rest of the year, and it would be primarily in the second half.

Okay. Got it. Thank you. Yep.

Your next question comes from Betsy Grasek with Morgan Stanley. Your line is open. Hi. Good morning.

Good morning, Betsy.

I just wanted to dig in a little bit on the expense side. I know you indicated that you're looking at everything and now we're anticipating that you're going to be able to bring expenses down 1% to 2% more than the prior commentary around down 1%. And I just wanted to understand where, in an environment where you're not doing any redundancies, obviously, this year, could you speak to where there's some opportunity set to dig into that?

Yeah, Betsy, it's Eric. The opportunity set is broad, and it's a set of initiatives that we've had underway. And in the spirit of when things are tougher, you've got to act more dramatically, is I think the theme that I'd share with you. So if you think about the different areas of our expense space, You know, the compensation benefits line won't be as much of a tailwind as we've, I think, made a very conscious and appropriate choice on protecting our people. But if you think about the expense base, that's only about half of the expense base. And even within the compensation benefits lines, for example, there are contractors. There's an infinite amount of contractors that we employ. And if you think about it, if we're going to end up with a larger employee workforce than we expected. Contractors could be an area where we adjust. So it's that kind of action. Occupancy is another natural one. Whoever thought that you could run a company at 80% or 90% work from home? But it does give us a real perspective as we have lease rollovers or where we might have been planning on taking additional leases. And there's always a rolling set of either potential exits or ads that you're doing as you load balance. You could imagine we've got lease ads on a complete moratorium. And where we had rollovers, you can imagine we're now starting to move in the opposite direction and say, hey, Why can't I let this space go? And when employees do come back, I want all my employees back. But we clearly have more flexibility than we ever would. So that's another example. A third one might be around all the other expenses in technology. There's software, there's hardware purchases, et cetera. While our teams are spending time on supporting clients in literally an hourly, daily basis, it's also a natural time for us to slow some of our purchases of capital equipment or software. It doesn't say we won't come back and naturally think about spending some of that in the future but it does mean that we can slow some of those purchases because it's you know we we've shifted some of our some of our time and energy to more immediate situations as opposed to some of the medium-term investments so I think that's the other one which is the kind of the reinvestment will will naturally slow to some extent and if you remember the chart we did at the fourth quarter earnings call in January, we showed expenses down 1%. Now we're seeing down 1% to 2%. But within that, there was 3% or 4% increase in investments of expenses due to investments and 4% to 5% decrease going in the other direction. And so part of what we're doing is also, I think, being more disciplined about those reinvestments that we're doing now and pacing them.

Got it. No, it's interesting, too, on the occupancy side because while you might have people come back to work over time, you might not be as densely organized as you had been in the past. So that's one of the reasons why I was kind of interested in can you actually reduce occupancy or not. But definitely makes sense on the lease rollovers and additional leases. At least for the near term. Are you still? Yeah, go ahead.

What I would add to Eric's comments are a couple. We have had underway, as you would know, a lot of work on process redesign and automation, and that work is not stopping. how and when we realize the benefits of it may change and be delayed, but the work is not stopping. And if anything, we're redoubling our efforts there. So I would just note that, yeah, we've got this moratorium, and we absolutely think it's the right thing to do. But our work, both in IT and in operations, and then of how we connect with our clients, that remains, we're working full speed on that. The other point I'd make on the leases is that I agree with your point that we probably won't be as dense for a long period of time, at least until there's a vaccine. But I think it's surprised everybody, not just at State Street but elsewhere, how effective one can be in work from home. I would have to believe that over the medium and long term that you'll see us having less space than we do today.

Got it. Are you still going to be moving your headquarters?

We are. And that was always a natural benefit to us. So, you know, that's still underway for the end of 22.

Got it. Okay. Thanks so much.

Your next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Great. Thanks. Good morning, guys. Thanks for taking my question. Maybe just focus on the average balance sheet in terms of the non-U.S. deposit rate of negative 20 basis points. If you could just go into that dynamic, what's driving that? I think there may be FX swap expense against that. And then also just a commentary on the driver of the episodic or the net interest income that you described as episodic in the quarter. And then also you mentioned 10 basis points on deposits in a prior comment. I missed what that deposit level was linked to.

Sure. Brian, let me take those in order. Sure. On the average balance sheet, you're right. The non-U.S. deposit costs fell. They were minus four base points or minus 20 basis points. It's literally the effect of the FX swaps, which are diagrammed out in the footnote on that page. I think it's page seven of the financial addendum. and as well as some modest reductions in interest rates in foreign jurisdictions, right? Some of the European and Asian central banks dropped rates, and so that'll flow through that line as well. In terms of the NII that we reported in first quarter, we did note that there was about $20 million of higher than usual NII separate from the deposits. The deposits were welcome and added to NII, but away from deposits and loans and investments. The $20 million was really split into two. About half of that was literally the hedging effect that goes through. We hedge either debt or or the rate coupons on some of the loans, and that creates a mark-to-market as you've got changes in the debt market. So it was worth about half of the 20. And the other half was actually some good positioning that we took in the quarter with the influx of deposits, and in particular dollar deposits. We were dollar-rich. Dollars were quite valuable. And so the Treasury team did quite well to invest those in either yen or euros. They're kind of one and two day overnight basis swaps, and that was remunerative to us. And at the same time, it was helpful to either clients or counterparties in those foreign jurisdictions who were dollar poor and needed some of the access to the dollars that we could provide. Those were the two components of the $20 million. Finally, on the deposits, what I did say to one of the earlier questions is the value of deposits has changed significantly in P&L terms. I mean, the value of deposits is always high on a balance sheet basis, and not that we needed more deposits, but we were happy to accept them from our clients. The point that I made is that the level of deposits in the first quarter and then last year had a large impact to NII because the kind of typical deposit, let me kind of use that in very broad swath, might have been worth 100 basis points. Think about the cost we would have paid on average for the deposits, say, in the U.S. versus the IOER rate at the Fed. That would be kind of a simple approximation. If you fast forward and say in April or in second quarter, how valuable is that same mix of US deposits, it's much less. It's closer to 10 basis points. Why is that? It's because our cost of funds, the cost of those deposits to us could be zero or one basis points or two or three, but we reinvest them at IOER rates of 10 basis points. What we effectively had is a very large change in the value of incremental deposits between kind of the pre-the Fed moves and then post-Fed moves. And that was the point that I was making. So, you know, deposits will matter a little bit to NII in the, you know, going forward, but not nearly as much as they would have mattered in the past.

Right, that's very clear. Okay, thank you. And then just on the CRD commentary on the delay, obviously that makes sense given with going on work from home. Can you comment on whether you think you're still on track for the 2021 revenue and expense synergies and the net benefit of 75 to 85 million EBITs on the revenue side, net of investments, and I think 55 to 65 on the cost side, whether do you think that sort of gets also pushed out with delay in implementations? And then, you know, the timing of the $1 trillion left to install in the servicing business, is that also delayed by COVID-19?

Brian, let me take those two different but related questions. On Charles River, we're still quite confident in the revenue and expense synergies. The expense ones, you know, are – something we do as a matter of course, and you can imagine we'll actually try to accelerate those a bit, but those are on track. And then on the revenue side, a good bit of those synergies are actually coming from some of our trading businesses as we plug in our FX and securities lending and other markets activities into Charles River, and that's on schedule. and moving along at pace. So we're currently confident in our delivering on the synergies for Charles River. On the servicing side, as I mentioned, the client onboarding has stayed on track in March and April. And so as we think about the timeline of that 1.1 trillion of to be installed for the servicing business, we think that'll play out during the year, if you recall. I've talked about those wins, and some of those wins are faster installs, say something like custody, and others where it's a mix of custody and accounting and perhaps some of the offshore cross-border products. Those tend to take longer. When you add middle office, it takes even longer. But those are all part of the standard course of business, and we don't at this point see slow down in the implementation on onboarding rates. And so far, you know, our clients are eager to move forward because in some ways, remember, that business that we won came with some fee adjustments. Clients are, you know, want to conclude on those, and so they need to implement the service. And so those have now, because they're paired up, I think we'll stay on track on both sides.

That's great, Tyler. Thanks very much for all the detail.

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

Hi, thanks. Good morning. Just two quick follow-ups. First on CRD, just in terms of the mid-single digits versus the double digits, I just want to make sure, you know, from an understanding, like if we, you know, get to 2021 and let's say there are medical treatments and most people are back to work, would you expect like a pretty significant acceleration or, you know, from like a head count or, you know, what like people can actually accomplish? You know, would you just go back to, you know, sort of the low double digits? Like would you get that acceleration or is it just not possible just given – like the timing of the implementation and how much, you know, like people power that takes.

Yeah, let me begin on that. I think that, as Eric noted, we stand by the 2021 guidelines. synergies that we laid out there. And I think what's happening here is that the pipeline that Charles River would have seen versus the pipeline that it's seeing now is quite different. It tends to be larger, more complicated and sophisticated clients and it tends to be part of a multi-product installation. So what you're seeing is it's just taking longer to install and therefore for the part of the deal that gets credited to Charles River, it's just taking longer for that to happen. And in fact, you're seeing now in the current installations, too, very large installations underway, one of which has been out there since before we acquired the firm, and that's changed over time, and that's delayed the revenue recognition. So over the medium and long term, do we believe that this business can grow faster under us than it was prior to us? Yes, we do.

okay and then just on fx the comments that you made make sense and given some of the investments that you guys have made you know in the platform when you've seen the uptick in volatility have there been any you know kind of increases in like clients like the number of products that could be sustainable um you know if we continue to get some level volatility obviously we'll get a moderation but I mean, have you seen anything in terms of traction on that platform at the new level, you know, could be at a higher pace?

Yeah. Market share is a hard thing to measure in this business because nobody uses just one provider, but we have invested heavily over the past couple of years in this era of low volatility to build market share to to show and demonstrate to clients the capabilities that we have. And that really helped when it came time. And the team came through. I mean, transactions occurred, really difficult roles, period end roles that were going to be hard to execute got done. And clients remember that. So we think this market share that we've built will last for us. As Eric noted, what we saw was just immense volatility and immense kind of move from risk on to risk off assets including moves out of certain base currencies to others and all crisis driven. So if we see that again, then there's lots of bad news elsewhere. will we likely see, or could we likely see, is maybe a better way to describe it, volumes higher than what we've seen in the 18, 19 timeframe, possibly, right? Because I think we'll be in an era of, I mean, almost any forecast one would have to believe has some level of heightened risk. The other thing, too, is, I mean, we saw a giant rotation out particularly of emerging markets. I mean, at some point, there'll be a rotation back, and that tends to be also beneficial to us, too. So, again, we gave you an estimate, and we tried to be conservative here, recognizing the range of or the amount of uncertainty and, therefore, the range of possible assumptions. There certainly is a case where one could expect to see not sustained levels, at least in our forecast that we saw in Q1, but levels above what we've seen in the prior four to eight quarters. Next.

Your next question comes from Brian Kleinshandle with KBW. Your line is open.

Yeah, good morning. Yeah, just one question. maybe kind of an update on where we're at in April. If you look at the balance sheet, you had the overdrafts that came in at the end of the quarter. You also had the $27 billion of investment securities from the MMLF that were on the balance sheet. And then maybe could you just give an update on where those stand? Did those just roll back off now that things have kind of stabilized? And also same with the money market fund flows. I mean, what are you seeing thus far in April? Thanks.

Brian, it's Eric. The end-of-period balance sheet's a good starting point to follow up on that question. And here's how I'd frame it. I think the MNLF balances, we're at about $27 billion at the end of the reporting period on March 31st, and they've been in that range. I mean, plus-minus a few billion dollars we've been in that range for the first two weeks of April. And then deposits, which had spiked to just over $250 billion, are probably closer to $200 to $210 billion. So it's really the deposit, the reduction in deposits that are adjusting the balance sheet down by, call it, $50 billion in the period relative to what we saw. There will be a few other smaller movements. You know, overdrafts have continued to to float back down to more traditional levels. The mark on the forwards and the FX books have started to revert. So there's a few billion here or there and a couple other areas, but the biggest one is the guidance I gave on deposits coming down by about $50 billion from the end of period levels. It will be the biggest change so far that we've seen.

Your next question comes from Mike Mayo with Wells Fargo. Your line is open.

Hey, Ron, can you talk about the trade-off of basically offense versus defense, the tone that you're sending to the company? When I think of offense, I think of long-term market share, helping out the government being part of the solution like you're doing with the money market, maybe more help as the Fed expands its balance sheet, gaining share versus smaller competitors by doing a little bit extra. When I think of defense, I think of short term, hunker down, live to fight another day, like what you're doing more for employees, you're not buying back stock. And then maybe even for clients, if they're not making you as much money, still kind of living with that. So how do you think about that trade off in this unusual world?

Well, Mike, it can't be one or the other, but I would say that particularly since we feel like over the last year, year and a half, we've gotten a very good handle on our expenses, not just from an expense level, but how we manage those expense levels, how we manage for productivity. I think you will find that our tone and our actions are mostly around offense. Certainly, as it relates to clients, we have had unparalleled levels of client communication and client engagement. And if anything, the time in working from home caused people to redouble and retriple their efforts to be there to support clients. And that will pay off for years to come. So we think that in the short term, we have to be protecting our employees, both physically and mentally, and we think we've taken the appropriate actions there, but we don't think we've taken them at the expense of any kind of long-term opportunity creation for ourselves and our shareholders.

And as it relates to clients, you mentioned the rotation out of Emerging markets historically and emerging markets equities fund would generate higher custody fees than a plain vanilla bond portfolio. So if people move out of high risk into lower risk, wouldn't that hurt fees to assets under custody? And then maybe you're doing a little bit extra for clients, even though you're not getting paid as much.

Yeah, well, my reference to emerging markets, I mean, that rotation was happening. And just if anything, you know, has played itself out even further over the last month. I don't believe that that makes sense over, certainly doesn't make sense over the long term and won't make sense over the medium term. We would expect to see as the situation as the situation stabilizes and investors start looking at relative valuations around the world, they'll see just the value opportunities in emerging markets. So I wasn't suggesting even a greater rotation. The rotations largely happen. The question is, when will the rotation back occur?

I just meant in terms of if there's risk off, does that mean clients go to more plain vanilla portfolios where you get less fees?

Well, certainly in the short term, that's what they're doing, right? I mean, you're seeing a giant push into cash, but at the levels that investors are getting paid and the amount of stimulus, first monetary and increasingly fiscal, that's going to be put in, it's Again, one person's opinion. I think that the more likely long-term trend is for risk assets, particularly equities, to continue to provide superior returns. And in a period of uncertainty like this, which is not only uncertain but previously unknown, you're not going to see as much in the short term until there is more certainty. But all of the ingredients are in place. Lots of monetary stimulus, lots of cash in the system, low interest rates to see a return to risk on at the appropriate time.

And then one more follow-up, Eric or Ron. Anything you can glean from what's happening in Asia or outside the U.S. that gives you extra insight to the U.S., especially what percentage of your workforce is in the office in Asia at this point versus the U.S. or any other trends or like I said, insight since you are in more than one country, obviously.

Yep. And probably China, our Hangzhou operation is a great example of what we can expect worldwide. We started, we were given the go-ahead to start returning employees there back in the middle of March. And we're now back up to about between 75% and 80% back to work. And we've actually metered that. As was noted earlier, we have not densified the office as much. We've got testing facilities on the way in. Initially, people were wearing masks. And now you're seeing a much more normal working environment. And I think that will stay for as long as there's not another outbreak. What we're seeing elsewhere in Asia is not quite as fast a return to work, but you're also seeing guidelines kind of ebb and flow as you see periodic outbreaks. And I think that's probably what we're going to live with around the world. I don't think this will be a straight line recovery in terms of whether it's back to work or back to gatherings. I think that there will be periodic outbreaks. Businesses and governments will need to respond to those. They're not going to respond in the same way. If the lessons from Singapore and Hong Kong or anything, they'll be very targeted guidelines. For example, in Singapore, they just recently limited restaurants again, but they didn't send everybody home from work. So I think that's what you can expect to see. if you will, a steady recovery back over time, but with some bumpiness along the way as there are outbreaks until we get first to testing and then to widespread availability of vaccines.

That's great. How many employees do you have in China? Because that's a fascinating statistic. 75% to 80% are back to work in China. 3,000 in China.

the vast majority of them, 2,800 in our Hangzhou facility.

Great. Thank you.

Your next question comes from Stephen Chibak with Wolf Research. Your line is open.

Thank you. Good morning. So, Eric, I wanted to ask a question on the securities portfolio. Just given your heavier mix towards fixed versus floating portfolio, I think in the 10-K you cited a longer duration of around 2.7 years for your book relative to where some of your peers are managing it. I'm just wondering what causes the NII to stabilize by year-end, just given some of the reinvestment headwinds could persist, and maybe if you could frame what reinvestment yield or level you're assuming versus the 200 basis points that the securities book is earning today.

Steven, it's Eric. There are a number of factors that you've got to assemble to really predict the path of NII. And in our 10-K, we tend to assemble them all together. And the securities portfolio is just one of them. If you think about the average duration of our balance sheet, you are right. The securities portfolio has an average duration of 2.6, 2.7 years. But the rest of the asset side of the balance sheet is actually a much more floating rate. And remember, the securities portfolio is X the MMLF, to keep it simple, is call it just shy of $100 billion out of a $250 billion typical balance sheet. So it's an important piece, but it's not the only piece. The effect of that is that the average duration of the asset side of the balance sheet that we have is about 1.3 years, so about half of the duration of the securities portfolio. And it's that shorter net asset or the lower duration of the total asset side of the balance sheet is what creates a repricing that tends to be a little faster than you would have expected by just thinking about the investment portfolio. So as we've played that through our models, and obviously in our models there's a lot of different factors, but those two are important ones. You see a step down from first quarter to second quarter that's significant. I gave an indication of that. We see another step down, but not as large in percentage terms from second quarter to third quarter. And then starting in fourth quarter, you see a fair amount of stability between fourth quarter and then our guesstimates of what we might see in the first and second quarter of 2021. Part of that is that you've got the interest rate effects playing out. Then you've got some natural balance sheet growth, which creates a bit of a tailwind. Once we get through the bulk of the interest rate effect, which happens in the first couple quarters, the headwinds and the tailwinds tend to roughly even out, which is why we think we'll see some stability from the fourth quarter onwards.

Thanks for that, Eric. Really helpful color. The one piece I was hoping you could clarify is what reinvestment yield or level are you assuming on the securities book?

Yeah, I'm trying to think about a good way to describe that to you. So our investment portfolio yield right now is about just over 2%. And that floated down just marginally, but that's because rates fell quickly towards the very end of the quarter. If I think about reinvestment levels in the portfolio, I guess we could talk about new investments, what's rolling off. There's a lot of ins and outs of that. Maybe the better way to describe it is that the average yield on the portfolio is about 2% on average for first quarter. If we start to think about what's the average yield in second quarter and maybe in the third and fourth quarter, we're closer to about 1.5%. kind of roughly if I eyeball what the averages will look like. And that'll be driven by the new roles being added and the old roles coming off. But that's probably a good rough amount, a good rough estimate for you.

Thanks for that, Eric. And just one more follow-up, if I may. Lots of helpful detail in the loan mix and composition. the provision that you reported was admittedly a bit lighter than peers. If we compare your reserve levels versus DFAS losses, on that screen or on that basis, you look a bit under-reserved. But if we look at your company-run stress tests, it looks like you're bang in line with the rest of the peer group. And so just given that a lot of investors are using the Fed stress test and the DFAS as a framework for forecasting provisions, And I was hoping you could clarify or speak to some of the differences in what the Fed assumes versus what you guys assume for your company run and why you're comfortable modeling lower losses relative to the Fed.

Steve, it's Eric. So a couple perspectives there, some of which you touched on and others which I'll add. I think first, you know, we added to our reserve about $35 million. So the reserve was up about a third. And I think when I scanned across peers, you saw reserve increases of anywhere between 30% and 50% on corporate books. So I think we made the right upward adjustment, just given what we knew at the time and what our forecasts were as of March 31st. In terms of comparing the reserves to, say, the CCAR losses, either the Fed model or our own model, or to loans, I think that's where the mix of the loan book is, that all those ratios is incredibly sensitive to the mix of the loan book. If you think about it, our fund finance loans, and one could go back to the last crisis, the 2008 crisis, performed particularly well. And so we've gotta factor that into our reserving And what I would say is that the reason the Fed both does its math on estimated losses under CCAR and then asks us to do our math is not just to say, hey, there will be a natural bid-ask, but it is to reflect the different nature of the books. If you think about it, I think the Fed spends an enormous amount of time, as you would expect, on what is the typical mid-market corporate lending book. going to result in terms of losses or what's a typical credit card book and how will it perform under stress. I would think that while they have extensive modelers, they probably spend a little less time on a fund finance to capital call line book just because it's small and it's not widespread around the industry. So I would at least say that in our particular circumstances, company-run stress tests that you've been referencing are, in our minds, a good indicator of credit under stress and may, but I'll be sensitive to it because all models are informative, may be a bit more indicative than some of the Fed models just because they tend to be much more averaged across more kind of a non-custodial set of banks.

Thanks so much for the helpful call, Eric. I appreciate it.

Our next question comes from Rob Wildhack with Autonomous Research. Your line is open.

Good morning, guys. In the slide deck, you called out some pricing headwinds contributing to both sequential and year-over-year declines in the servicing fee line. Can you just expand on what you're seeing there and then more broadly, you know, what are your thoughts on pricing from here given the shift in the macro? Thank you.

Why don't I begin?

Sure, Bob.

Why don't I start, Eric? In terms of I'll start with your second part of your question. Eric will answer the first. We have spent a lot of time with our clients. Remember, we've got a fairly concentrated book of business. Our 100 largest clients constitute a big portion of the total, and we're through 80-plus percent of that. We've gotten term out of a lot of them. But more importantly, we've just learned how to do this better than we have in the past. So while for sure our clients will be under their own sets of stress as a result of this, we are not anticipating a heightened level of price compression. And part of it is that it's, if you're given, if you think about the way that that were remunerated in a client relationship. A part of that is NII and they can see as well as we can that that is a source of return is going away. So we think it's reasonable to assume that the pricing, as we've said before, will, pricing pressure is abating, that it'll continue to abate and level out at a normal level, which is, it's not gonna go away, but it'll be a, normal level as opposed to what it's been over the past couple of years. And nothing that we've seen this year suggests anything different on that.

Yeah, Rob, it's Eric. I'd just add that pricing has been a natural part of this custody business for decades. And what we're doing in the disclosure on the slide deck is literally giving you for servicing fees what's the you know, very transparent roll forward and, you know, net new business flows and client activity, which were up this quarter, actually was a tailwind, market appreciation or depreciation, and then pricing going the other way. So it's just part of our natural disclosure now and on a going forward basis. But as Ron said, you know, we expected a certain amount of pricing to come through during this year at that kind of 3% level, so down from the 4%. headwinds we saw last year, and everything we're seeing suggests that we're on track for that currently, and it'll moderate from last year's levels in line with what we currently expect.

Got it. Thank you, guys.

Your next question comes from Gerard Cassidy. Your line is open.

Thank you. Good morning, Ron. Good morning, Eric. Eric, thank you for the detail on the loan portfolio. Very helpful. As another question on that leverage loan portion of the portfolio, are you primarily a participant in those loans, the syndicated type loans, or are you the lead? And then second, are they all subject to the shared national credit exam process?

Gerard, it's Eric. I think the answer is an easy yes to both of those. We tend to be a participant in a set of syndicates with the other large banks and work closely with them. We'll occasionally leave, but we tend to be a participant at the table. We tend to operate within syndicates of sister banks that we feel, when they lead, are very thoughtful about credit and credit appetite because it's not just a particular loan, but it's the covenants, it's the terms and conditions that matter. And so the choice we make of which syndicates to join and which lead banks to partner up with is important. But that tends to be our position, to participate. And then, absolutely, we participate in the SNCC reviews and SNCC tests, and so that's a way for us to, I think, for the industry and for our supervisors to make sure that we evaluate credit consistently. I think what's helpful about leveraged loans is they're also traded in the marketplace, so there's both an external market benchmark, and that's their external ratings, and oftentimes there are prices but there's also the SNCC review process we participate in that and so we feel like we've got a very good read into the the quality and health and of our book and and as I mentioned it's it tends to be a double the the average book with actually some you know some triple B's and higher and and just very few under that double B level.

Great. And then just a quick follow-up. You gave us good information on the deposit flow and what you saw at the end of the quarter and what's happened since then. Can you share with us what were the customers or who were the customers that were the primary drivers of that deposit inflow, and then are they the same customers that are withdrawing now, or is it a different group that are actually withdrawing the deposits?

Sure. Gerard, let me give you a little bit of texture, because if you think about our client base, it's asset managers, asset owners, alternative providers, insurance, a wide breadth. I think what we'd what we saw is that while they all tended to become more liquid and go to cash, and so we had some increase in deposits from across all those segments, the single largest area came from our asset managers. And sometimes it was the asset managers who were running money funds, and they were de-risking those funds and then leaving the deposits with us. And sometimes it was just the asset managers running various funds that we custody for, equity funds, bond funds, U.S., international, et cetera, where they were de-risking within those funds and shifting to cash. And so those are probably the two different factors within asset management, asset manager complexes. And it's that cash that's come back and sits on our balance sheet. And so I think part of what we're watching for is how quickly does that cash get reinvested versus how liquid do those managers want to stay, whether it's the kind of money market complexes they run, and so sometimes they stay in cash as opposed to even buying short and medium-term treasuries, or how risk-off some of the long players or even the alternative providers want to be. But those are the factors, and it was primarily around asset managers. As I said in my prepared remarks, we were delighted to make our balance sheet available to them both as they had these flight to quality deposits or even operationally as we supported them with overdrafts because both of those are important parts of our business. In addition, even to some of the off-balance sheet activity, the sponsored repo and other facilitation that we provided was yet another source of liquidity as well.

Great. Thank you.

That concludes the questions at this time. I'll turn the call back over to Ron O'Hanley for closing remarks.

Thank you, Operator, and thanks to all on the call. Thanks for joining us.

This concludes today's conference call. You may now disconnect.