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.