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State Street Corp, (NYSE:STT)

Q3 2010 Earnings Conference Call

October 19, 2010 09:30 am ET

Executives

Kelly McDonald – Senior Vice President of Investor Relations

Jay Hooley – President and Chief Executive Officer

Ed Resch – Executive Vice President and Chief Financial Officer

Analysts

Howard Chen – Credit Suisse

Glenn Schorr – Nomura Securities

Robert Lee – Keefe, Bruyette & Woods

Mike Mayo – CLSA

Nancy Bush – NAB Research

Brian Bedell – ISI Group

John Stilmar – SunTrust Group

Andrew Marquardt – Evercore Partners

Presentation

Operator

Good morning and welcome to State Street Corporation’s third quarter call and webcast. Today’s discussion is being broadcast live on State Street’s website at www.statestreet.com/stockholder. This call is also being recorded for replay. State Street’s call is copyrighted. All rights are reserved. The call may not be recorded for rebroadcast or distribution in whole or in part without express written authorization from State Street, and the only authorized broadcast of this call is on State Street’s website.

At the end of today’s presentation, we’ll conduct a question-and-answer session. (Operator instructions). Now, I’d like to introduce Kelly McDonald, Senior Vice President for Investor Relations at State Street.

Kelly McDonald

Thank you. Before Jay Hooley, our President and Chief Executive Officer and Ed Resch, our Chief Financial Officer begin their remarks, I’d like to remind you that during this call we will be making forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in State Street's 2009 annual report on Form 10-K and its subsequent filings with the SEC.

We encourage you to review those filings including the sections on risk factors concerning any forward-looking statements we make today. Any such forward-looking statements speak only as of today, October 19, 2010 and the corporation does not undertake to revise such forward-looking statements to reflect events or changes after today.

I'd also like to remind you that you can find slide presentation regarding the corporation's investment portfolio as well as our third quarter earnings press release which includes reconciliations of non-GAAP measures referred to on this webcast in the investor relations portion of our website.

Now I’ll turn the call over to Jay.

Jay Hooley

Thanks Kelly and good morning. Strength and servicing fee and good cost controls drove results of the third quarter. We achieved operating basis earnings per share of $0.86, which was an increase of 21% compared with $0.71 in the third quarter of last year, and down modestly from the very strong second quarter of this year. Based on our new wins and strong pipeline, we expect the momentum in service fee revenue to continue.

In asset management, we continue to experience growth and passes in income oriented ETF products as investors continue to remain conservative. Additionally, the impact of the Intesa and Mourant acquisitions, which closed last quarter, supported our strong revenue growth. I’ll make a few comments about our performance and I’ll ask Ed to provide a more detailed financial perspective and after that we’ll open the call to your questions.

From an operating basis, comparing the results of the third quarter with the third quarter of 2009, total revenue increased 8.4% and total expenses increased 3.1%. As a result, we achieved 530 basis points of positive operating leverage. Total revenue in the quarter declined less than 1% from the second quarter of 2010, which I think is a good achievement given the cyclical strength of the second quarter results and the weakness in the worldwide trading markets.

Our servicing fee revenue increased 19% from the third quarter of last year and was up 3% from the second quarter of this year, reflecting the impact of the acquisitions and the installations of last year’s large wins as well as new business wins of January.

As I said in the second quarter conference call, the large Morgan Stanley mandate is now fully included in the run rate for the third quarter. We converted the state of New Jersey in the third quarter and are just now converting the state of Ohio.

Year-to-date, as of September 3, 2010, we added 1.1 trillion of new servicing mandates. We’ve already installed about 286 billion of those and expect to install about 800 billion in the fourth quarter and into 2011. This pace of wins and installs gives us confidence in the strength of our servicing fee revenue. We’ve added new business pipelines. We have active business pipelines with particular strength outside of the US in our alternative investment servicing business. The acquisition of Intesa Sanpaolo Securities Services business and Mourant International Finance Administration are on track to meet our expectations for the year and contributed modestly to our financial results for the quarter, excluding the merger and acquisition integration costs.

We’re optimistic that our market-leading position in Italy will lead to cross-sell opportunities and new mandates from Italian clients. The revenue from our asset management business declined slightly both from last year’s third quarter and this year’s second quarter. This decline was due primarily to a continuous movement out of active strategies and into passive and ETF strategies. Although net new business at SSgA was slightly negative in the quarter, down 3 billion, flows into passive and ETFs were positive, offset by negative flows from cash, largely from our securities lending business. As expected, trading services revenue declined from a year ago quarter due to weak volumes in worldwide trading markets. The sequential quarterly decline in trading services revenue was principally due to the servicing strength in the second quarter. Demand has not returned to the securities finance markets.

In addition this quarter, the spread between Fed fund and 3 month LIBOR declined from both a year ago third quarter and the second quarter of 2010, negatively affecting revenue. Given all the turmoil in the securities lending business over the past 2 years, we’re especially pleased to have been named as the number one provider in global investors’ 2010 equity lending survey.

Our capital ratios continue to remain strong with our Tier 1 risk base capital at 15.8%, our Tier 1 leverage ratio at 8.3% and our tangible common equity ratio at 6.9%. Regarding the recently released Basel III proposal, we’re pleased that the G20 the Basel committee are beginning to clarify requirements for capital adequacy for banks around the globe. We await the finalization of Basel III requirements and further clarification of how these capital standards will be applied within the United States.

While there’s still uncertainty about the amount of buffers we will need to have, we believe we are in compliance with Basel III as we know it today.

Turning to new business, in the third quarter of 2010, we won 477 billion in assets to be serviced. Among the many encouraging scenes I see in the new business pipeline, the demand for servicing alternative assets remains a highlight.

This quarter, we added 29 new clients in our alternative investment services business, in assets administration, as of September 30, 2010 increased from 620 billion as of June 30, 2010 to 629 billion in the third quarter.

In the broader investment servicing business, we also continue to see strong growth. A few of the highlights include State Street has been appointed to provide custody services for Banca Mediolanum's Italian assets. State Street will also service the sole global custodians for the Mediolanum Group. We expanded our relationship with Martin Currie, which chose State Street to provide custody and accounting for £6.3 billion in assets. We also expanded our relationship with SunLife and we’ll provide custody and accounting services for about £4 billion for [Indiscernible] National in the UK making a total of 6 billion in asset service.

State Street has extended its relationship with Lloyds Banking Group to provide custody fund accounting, financial reporting compliance with transfer agency and services for 27 Luxembourg-based funds across sea cabs. Pyramus Global Advisors, the institutional investors division of Fidelity Investment selected State Street to provide custody, fund accounting and fund administration services for the launch of its Irish funds during the fourth quarter. State Street has been selected by LaSalle Investment Management to provide fund administration services as well as transfer agency services for approximately $2 billion dollars on assets on behalf of LaSalle Property Fund.

State Street had been appointed by Altrinsic global Advisors LLC, a Greenwich, Connecticut based investment manager to provide custody and fund administration services for Altrinsic’s new Irish domestic usage funds. State Street’s global advisors also added new mandates during the quarter including expecting pension fund the Dutch define benefit scheme has hired State Street Global Advisors to manage its European equity brief with about €600 million. State Street Global advisor assistance selected by Lincoln Financial Group to sub-advise variable insurance products which include a range of TTF products as well eight individual sub-advise Lincoln funds. Associated by name by Pegaso Pension Fund of Italy, a public pension scheme for employees of Italian gas electric utilities to manage more than €60 million in active fixed income assets. And finally, associated with one of $3billion global equity mandate from the retiree medical benefits trust for United Arab Workers.

Now turning to expenses, given the current environment, we have applied a keen focus on a aggressively managing expenses on a short term while calibrating expenses against the expected business environment for the longer term. Compared to the third quarter of 2009, salaries and benefits expenses increased at a slower rate than a growth of an operating basis revenue. And compared to the second quarter, salaries and benefits were essentially flat excluding the $41million dollar reduction in incentive compensation related to securities finance required in the second quarter.

Let me share our view on the current economic environment and the outlook for our business. Although we continue to believe the economy in the United States will improve, recovery appears to be somewhat anemic and is affected by the uncertainly in Europe. Market economists are forecasting real annual GDP growth in United States of about 2.3% for the fourth quarter of 2010, a slight decline from the earlier outlook. Economic growth is not strong enough to drive meaningful gains in employment. Creditor type in the housing sector appears to have brought them out at depressed levels and most geographic areas but is mixed by region, and consumer spending has been cautious.

The average of the SNP500 as of September 30, 2010 is about 1118 year to date. And as you recall, our outlook is based on an 1125 average. Also I remind you, one of our assumptions in providing an outlook for 2010 was a trading markets with strength in a bit in the second half of 2010 compared to the first half and improvement that is not yet occurring. Our net interest revenue, however, has strengthen somewhat above our outlook described on our second quarter call, an improvement that is supporting our outlook for 2010.

I’ll now turn the call over to Ed, who will provide further detail about our financial performances in the third quarter, and I’ll return to provide several comments affecting our outlook for the remainder of 2010. And then we’ll open up the call questions.

Ed Resch

Thank you, Jay. Good morning, everyone. This morning I’ll review three areas – first, the results of the third quarter, second the investment portfolio as well as our outlook for management’s margin in 2010, and third a review of a string capital position. This morning, all of my comments will be based on our operating basis results as defined in today’s earnings news release.

Comparing the third quarter of 2010 with the third quarter of 2009, servicing free revenue increased 19% primarily due to impact of the two acquisitions, new business and increases in daily average equity market valuations. Management fee revenue declined 3% primarily due to the mixed of business as investors increasingly chose passive or ETF investment strategies. Compared to the second quarter, our servicing free revenue increased by 3% and operating basis management revenue was up to 10%. Asset management revenue declined slightly by 2% due to the continuing shift in business mix to favor passive investing strategies.

Providing further details on the trading services and securities finance lines, foreign exchange revenue declined 30% compared to the third quarter of 2009 and 42% compared to the second quarter of 2010 with both declines due to lower volatilities and slightly lower volumes. Trading markets were significantly weaker than we expected. Brokerage and other revenue, which was reported as part of trading services revenue, increased about 3% compared to the third quarter of 2009 primarily due to increases in electronic trading and transition management, but was down 14% compared to the second quarter of 2010 due principally to lower revenue from both of these areas.

Securities on loan average $382 billion for the third quarter of 2010 down $17 billion compared with $399 billion for the third quarter of 2009, and down $39 billion compared with $421 billion for the second quarter. Compared to the second quarter, securities finance revenue declined from $109 million to $68 million primarily due to seasonality on the second quarter, a lower low of demand and the compression in the average spread between Fed funds and three-month LIBOR. This average spread decline to 19 basis points in the third quarter compared to 24 basis points in the second quarter of 2010. Compared to the third quarter of 2009, revenue also declined from $105 million due primarily to compression of six basis points in the average spread between Fed fund and three-month LIBOR.

Average lendable assets to the third quarter of 2010 were about $2.2 trillion flat with the second quarter of 2010 and up about 5% from $2.1 trillion in the third quarter of 2009. As of September 30 of 2010, the duration of the securities finance block with approximately 24 days off from the unusually low 17 days on the second quarter of 2010 and down from 29 days in the third quarter of 2009. Compared to the second quarter 2010, processing and other fee revenue of 71 million dollars decreased 18% due to primarily to lower revenue from tax advantage investment and was up 58% in the third quarter of 2009 due to the impact of higher fees from structured products. Operating basis management revenues increased about 20% from the third quarter of 2009 to the higher yield investment portfolio following the adjustment of the composition of our US treasury securities position in the second quarter as well as the full quarter impact of the Intesa acquisition. Compared to the second quarter, operating basis management revenue was up about 10% due to the full quarter impact of securities purchase in the second quarter, the impact of the Intesa deposits and a modest improvement in funding cost.

Operating basis net interest margin of 177 basis points which excludes this kind of creation was up 21 basis point in the third quarter of 2009 and was up 11 basis points in the second quarter of 2010. Including this kind of creation of $189 million in the third quarter of 2010, $172 million in the second quarter in 2010 and $279 million in the third quarter of 2009, net interest margin was 236 basis points compared with 221 basis points and 247 basis points respectively. In the third quarter of 2010, we recorded about $91million in net gains from sales of available for sales securities and separately about $74 million of other then temporary impairments resulting in $17 million of net gains related to investment securities. The OTTI was primarily due to the increase as expected future credit losses from US non agency mortgage back securities.

To recap where we are relative to future this kind of creation, we recorded $189 million of this kind of creation on the third quarter of 2010, so we now expect about $3.6 billion in this kind of creation to accrue into interest revenue although the remaining lines of the former conduit assets. There has been no change in our view relative to credit. We continue to expect a total of about $750 million to accrete into interest revenue in 2010 and $550 million in 2011.

As you undoubtedly aware of significant number of assumptions going to the estimate of future this kind of creation over the remaining lines of the assets including that we hold the securities to maturity, estimating pre-payment speeds, expected future credit loss as across various assets classes, and sales to date. Regarding operating base of expenses, third quarter 2010 expenses increased to 3.1% compared to the third quarter of 2009, due primarily to increases in salaries and benefits as a result of the Intesa and Mourant acquisitions all set partially via decline in other expenses.

The 6% increase in salaries and benefits expense was due primarily with the cost associated with the employees added in connection with the two acquisitions. Other expenses declined 15% from the third quarter of 2009 primarily due to the impact of a $50 million insurance recovery. Expenses in the third quarter of 2010 increased 35 from the second quarter of 2010, primarily due to increases in salaries and benefits. Salaries and benefits expense increased 55 compared to the second quarter of 2010 due primarily to the impact of the $41 million reduction in incentive compensation in the second quarter of 2010 related to the securities finance charge as well as the full quarter impact of the cost associated with the Intesa employees. Of course the accrual for compensation is subject to company performances.

Information systems and communication expense increased $16 million or 10% compared to the third quarter of 2009 and was up $7milion or 4% from the second quarter of 2010 both to the full quarter impact of the Intesa acquisition. Transaction processing increased 11% from the third quarter of 2009 due to the impact of the two acquisitions and increased about 1% compared to the second quarter of 2010 due to higher transaction volumes. Other expenses increased 2% from the second quarter of 2010 due to primarily to increases in securities processing cost, offset partially by a higher level of recoveries. Our operating basis tax rates for the third quarter is 28.1% in line with our previous outlook and down from 29.1% in the second quarter of 2010 due to changes in the geographic mix of our earnings.

Now, I’ll return to the investment portfolio. Our average investment portfolio in the third quarter increased about 16% to $98.2 billion dollars compared to the third quarter of 2009. This increase is due primarily to the continuing execution of our reinvestment strategy, offset partially by maturity and sales of selective securities. During the third quarter, we invested about $4.7 billion in highly rated securities at an average price of 99.73 with an average yield of 2.07% and a duration of approximately 1.28 years. Those $4.7 billion are primarily composed of the following securities – 89% of which are rated AAA, $1 billion on agency mortgage back securities, $200 million in non-agency mortgage back securities, $3 billion in assets back securities including about $800 million of foreign RMB which are mostly UK and Dutch issues, and about $1.2 billion in student loans. Additionally, there’s another $500 million in orals, $300 million back by credit card receivables and $200 million CLOs.

Additionally, $100 million in commercial mortgage back securities and $400 million in corporate and municipal bonds. The aggregate net on realized after tax losses that are available for sale and health maturity portfolios as of September 30 of 2010 were $281 million and $713 million or 72% improvement from the second quarter of 2010 \, and improvement of about $2.7 or 91% from September 30 of 2009, and an improvement of $6 billion or 96% from December 31st 2008. As of last Friday, the net unrealized lost was $122 million and improvement of about 52% from September 30 of 2010.

In our investment portfolio slide presentation, we have updated the data through quarter end for you to review. As of September 30 of 2010, our portfolio is 82% triple or double A rated. The duration of the investment portfolio was about 1.32 years up slightly from the second quarter of 1.28 years enough from the third quarter of 2009of 1.07 years. The duration gap of the entire balance sheet as of September 30, 2010 is 0.32 years down slightly from 0.34 years at June 30 of 2010. The number of downgrades from major rating agencies slowed from the level experienced in the second quarter. The majority of the downgrades was in non agency asset back and mortgage aback asset classes.

I will now provide some of the assumptions we used in determining or turning an outlook for net interest revenue from net interest margin. We continue to believe we should invest through the cycle and to invest in highly rated agency, mortgage back securities and highly rated assets back securities. Following the acquisition of the Intesa business , given the uncertainly in Europe, we decided to leave the majority of the acquired customer deposits primarily in the ECB as we continue monitor market conditions in the Euro zone.

As a result of this investigation to invest in certain US treasuries during the second quarter as well as reflecting the strength of the first three quarters of 2010, we now expect a net interest margin in 2010 for the full year excluding conduit excluding discount accretion to be slightly above the higher end range of 155 to 165 basis points that we disclosed last quarter. We expect this outlook to be supported by the higher yields that we earn on the recent treasury security purchases, slower pre-payment speeds, and a slightly smaller average balance sheet.

We continue to expect the Bank of England rate to remain at 55 basis points for the rest of the year, the ECB rate to remain at 100 basis points for the rest of the year, and the Fed to keep your overnight Fed funds rate at 25 basis points for all 2010. We expect the SMP 500 to average about 1125 in 2010 up about 19% from 948 which was the average in 2009.

Finally, I’ll review our capital ratios. In the third quarter State Street Corporation’s capital ratios remain string. As of September 30 of 2010, our TIER 1 leverage ratio stood at 8.3%, our TIER 1 capital ratio stood at 15.8% and our tangible common equity ratio was 6.9%.

So in conclusion, we’re pleased with our operating basis results for the third quarter. Despite continued weakness in our trading results, and given the strength of our core business and the slight increase in net average margin, continue to expect our operating basis earnings per share for the year to be slightly above with the adjusted operating basis, $3.32 per share recorded in 2009.

Now, I’ll turn the call over to Jay to conclude our remarks.

Jay Hooley

Thanks, Ed. In the face of weak trading markets, the achievement of revenue growth compared to last year’s third quarter confirmed to the strength of our strategy. In addition of performance of the third quarter compared to second demonstrates our ability to calibrate expenses against revenue. Very importantly, our service team momentum continue reflecting the client management of first three quarters of 2010.

As I mentioned the acquisitions are preceding in line with expectations, together they modestly created an equally important, both are contributing new clients to State Street to whom we can sell additional services. In asset management, State Street Global advisors continues to position itself to benefit from the increase to man from past strategies, ETF investment and defying contribution plans.

Looking to the future, if the economic recovery remains anemic and the trading markets continue to be weak, our industry will face continued challenges in market sensitive business. Overall, I’m pleased with our performances in the third quarter particularly given a week in this trading market. The growth of our core servicing business, the contribution of our two acquisitions as well as improvement in the net interest revenue, we enforced our confidence in achieving operating basis earnings per share slightly above the adjusted operating basis level of $3.32 in 2009.

Now, Ed and I are happy to take your question.

Question-and-Answer session

Operator

(Operator instructions). Your first question is from the line of Howard Chen of Credit Suisse.

Howard Chen - Credit Suisse

Good morning Jay, good morning Ed.

Jay Hooley

Good morning, Howard.

Howard Chen - Credit Suisse

Jay, just a longer-term question to begin with. You have alluded to the opportunity that the current financial services reform may bring to asset servicing, maybe akin to what we have seen in the past with middle office outsourcing. Could you just give us a flavor for what – as we get more clarity here, what maybe fits in that bucket? Where are we in that conversation with potential customers? And maybe how you've framed that opportunity longer term?

Jay Hooley

Sure, Howard. How they do that. As you know, the regulatory reform led by Dodd-Frank is far by finalized review as a framework, although it is pointing to few things. I would say, the most tangible thing that we’re focused on right now that could result for an opportunity would be some of the movement to immobilize certain securities most notably their evidence. Do if you look at some of the derivative regulation and the expectation at some large percent of over the counter derivatives will be forced to be cleared to central count of parties.

We view that as something that’s interesting. We think somebody like stage three that the processing oriented bank might be able to play a role there. So I would say that’s the narrowest thing that we’re focused on right now. I would say, the other thing that worth paying attention to is I think some of this regulation depending on how it gets ultimately needed out could result to become meaningful shift in non-trust bank sectors and whether or not that provided opportunities for the trust and custody side of the business, is yet to be determined.

Howard Chen - Credit Suisse

Okay, thanks. And then switching gears, I appreciate all the comments on Basel III and you know your view of being compliant. Risk-adjusted capital seems really, really strong. Do you see longer term having to change anything to your liquidity and leverage profile for what the Basel committee has suggested so far?

Jay Hooley

You know, I just repeat what I said before and maybe Ed come way in here. I think it is very positive that the BASEL committee has started to clarify and I think we all expect that in Korea next month, we’ll see the global standards for BASEL III be finalized, and then I hoped and expect that the US regulators will move swiftly to interpret what that means in this country. I don’t know if Ed would add anything with regards I think the question more on liquidity.

Ed Resch

Yeah, I just tackle which he said basically which is that I think so far we’ve received a lot of clarity which was good. But we haven’t received certainty in terms of some of the rules. Really, until we can work through all those part of requirements, I think it’s a little premature to give specific comment on aspects of BASEL III. But, I broadly agree with what Jay said. We’ll obviously have to work through the effects on us as we get more clarity in terms to the final rules.

Howard Chen - Credit Suisse

Okay, understood. Then Ed, on the NIM, appreciate the guidance for 2010, but just qualitatively how do you think about the opportunity to put more of that liquidity to work on the asset side and any further flexibility on the funding side as to what you showed this quarter?

Ed Resch

Well, you know we’re still over view that we should continue investing through the cycle. We think of ourselves as being opportunistic in terms of taking some games which we’ve done this year as well as selling out some securities that we feel are possibly a little weaker. So, we’ve been a little more aggressive there this year as the market as presented certain opportunities. Generally, I’d say that we’re still in a pretty conservative mindset only investing at the top of this back, investing in some US treasuries as I mentioned in the second quarter and I talked about it today. We’re comfortable with all liquidity position. I think overall, there’s a possibility that the balance sheet could move a little bit to a smaller size that’s customer reinvent conservatively in the market. We see in a little bit moving out in the customer deposits and that money being put back to work which relinquish overall a good thing. I think we’re comfortable of where we are Howard, and I don’t really don’t really see us changing much on the way of philosophy. There are on the liability studies to move forward.

Howard Chen - Credit Suisse

Okay, thanks. Then just a quick numbers one, Ed -- and apologies if I missed this in the release. Could you just quantify the size of the insurance recovery within this quarter's results, and any further outlook there that you have on that?

Ed Resch

Five-zero. That was 5-0 in the quarter Howard. And as far as outlook goes, it’s significantly premature to say, I mean we are pursuing various claims that we feel are valid claims coming out of some fo the things of the last couple of years. But no comments are worth mentioning right now because I don’t have anything concrete.

Howard Chen - Credit Suisse

Okay, thanks so much for taking the questions.

Operator

Your next question is from the line of Glenn Schorr of Nomura Securities.

Glenn Schorr - Nomura Securities

Hi, thanks very much. Numbers question on the average balance sheet. So I appreciate the detail you gave us on the purchases that you've made with the yield of I think you said in the range of 2.07%. How does the -- in the investment securities portfolio -- the average yield for treasury and agency securities go up by almost 30 basis points when your purchases are made below that? Is there a lot of stuff running off?

Ed Resch

No Glenn, it’s mainly due to repositioning of the treasury element of the portfolio that we did in the second quarter.

Glenn Schorr - Nomura Securities

How do you mind reminding us of how big that was?

Ed Resch

Yeah, that was $8 billion where we move from bills which were yielding about 17 basis points into a laddered structure of T-notes with average duration of less than five years, about four and three quarter years. So we picked up from 17 basis points up to about 200 basis points by doing that in the second quarter. That the driver of the increase.

Glenn Schorr - Nomura Securities

Okay, cool, I get it. And then did you -- I apologize if I missed it. Did you give us any color on flows inside SSgA, both the active and passive side?

Jay Hooley

We did and if I can give you a little bit of color, Glenn. I mentioned broadly the borader trends are we still see close out of that in past. Cash is down in the quarter largely because of the securities lending collateral pool investments. But I think the number to use for the quarter with 25 billion in net inflows into passed of ETF products to give you some color. So, cash down quantitative through passive an ETF up with generally the trends in the market place ad active down.

Glenn Schorr - Nomura Securities

Active was an outflow?

Jay Hooley

Active passive.

Glenn Schorr - Nomura Securities

Understood. And on the passive and ETF side, there was -- I guess that was actually building momentum over the last couple of quarters. You seeing it. $25 billion is a nice number. Do you still see that pipeline and those forward conversations building? And is there -- is it picking up outside the US, as I see it?

Jay Hooley

I would say steady that is the move into passive has come off a bit last year and early this year. But I’d say pretty steady and I don’t think I distinguish you as non-US. I think that market place is looking for some departure point of confidence, but right now I’d say there’s still a fair amount of money going to obey the strategies and where the recipient or what the beneficiary of that.

Glenn Schorr - Nomura Securities

Thanks very much.

Jay Hooley

Welcome.

Operator

Your next question is from the line of Robert Lee of KBW.

Robert Lee - KBW

First I'd like to start maybe with some of the new -- the $477 billion of new business wins. Maybe get a little bit more color on the components of that. For example, you know, how much of that was cross-sell existing clients versus new clients? Maybe US versus global? Just trying to get a better feel for some of the places that's coming from.

Jay Hooley

Let me, I think it’s consistent with the past. You can look at 7030 mix as far as the existing customer expansion versus new customer acquisition is generally in line with what the make up for the 477 would be. And well diversified. Now, US – non-US but you know cut for the vertical segment. If I would appoint to distinguishing traits of that pipeline, it would be the fall in one and I mentioned that in my remarks, one is we can clearly see, this proportion opportunities broadly in the alternative sector. And that’s not only coming from new funds, new assets but it’s coming from as you hedges on as one example, hedge funds determining that they would outsource previously in towards activities. The other distinguishing traits or trend within the pipeline and this is the point where I think we continue to be differentiated in the market place is the bigger deals almost all have middle office component. So we continue to see significant demand in the integrated solution which include the middle office, I think a place where we continue to look different than other competitors in the market. So those two things aside geographically pretty well diversified, also pretty diversified across large and small customer segments.

Robert Lee - KBW

Okay. And one of the things I think a lot of investors sometimes struggle with, you have these positive -- these good new business trends, but in trying to get a feel for what that translates -- could potentially translate into for kind of net new revenues, means which -- maybe to venture a number out there, if we're looking at $477 billion of net new wins, should we be thinking that, all else equal, that's $50 million in annualized revenue? Or how should we be thinking of that?

Jay Hooley

Given that the diversity of the mix, we tried to put a number. What I tried to do is to try to give you a little sense of implementation progress as a means to try to give you a some sense of how these assets translate to revenues. So, I think we’ve got 287 of 1.1 trillion that has been installed, a good part of that in that in the third quarter, later in the third quarter. And the other is another 800 still in which we’ll ladder in fourth quarter, first quarter which kind of big implementation quarters in the beginning of 2011. So, probably the closest that I can do give you some sense of how new commitments become revenues.

Robert Lee - KBW

Appreciate it. Then one last question, going back capital and Basel III. I understand the -- until things are completely finalized, the reluctance to kind of talk about what you are new targets may be for capital ratios and whatnot. But best guess at this point, if we're thinking of capital deployment, I mean, are you thinking that first part of next year, first quarter, you hope as things move along, you think you could be in a position to begin announcing or talking about some specific capital action, whether its dividends or share repurchase?

Jay Hooley

I only point to I think it’s very positive that some of these over hangs like BASEL III is starting get clarified, and I think the more quickly they get clarify, my expectation – just my expectation, the sooner we would be in the position to take capital actions. So, if you presumed that in November we’ll get global standards and the US regulated moves swiftly to clarify those on a domestic basis, I would hope and it’s just hopeful that in the first half of 2011 that we’d be in a position to look at, you know capital actions other than acquisitions which I think a fair game today.

Robert Lee - KBW

Great, thanks for taking my questions.

Operator

Your next question is from the line of Mike Mayo of CLSA

Mike Mayo - CLSA

Good morning.

Jay Hooley

Good morning Mike.

Mike Mayo - CLSA

Can you comment on the client retention for the Intesa acquisition?

Jay Hooley

Sure Mike, we had set an internal target which is pretty consistent with past acquisitions and performance of in excess of 90%. We’re on our way to achieving if not exceeding that and to my knowledge there isn’t any material customer that’s considering not moving ahead with us.

Mike Mayo - CLSA

Separately, you mentioned a stronger net interest margin. Can you just give the simple reason why the margin might increase despite the lower interest rate?

Ed Resch

Yeah, Mike some couple of reasons. One is that we have the US treasury trades that I talked about that we put on the second quarter. Secondly, we have in third quarter release, the full quarter Intesa which we did not have in Q2. And in the third quarter versus the second quarter, we have some live off floaters we priced when live order spiked up. So we were fortunate in that regard. Off-setting each other, we’ve had some slower pre-payments speeds which have an effect on keeping some of the high yielding assets on the balance sheet longer that what we originally thought. And against that you have a slight decline in earning asset as some of the asset sales that we took in the quarter obviously that we made. So you have a couple of competing factors there, but overall we think that we’re going to be for the full year of slightly above the top end in the 165 range that I talked about.

Mike Mayo - CLSA

Then separately, Jay, I think you mentioned it, that low rates create challenges. Are you suggesting challenges above and beyond what we saw this quarter? Should we expect some incremental weakness ahead?

Ed Resch

Yeah, a little bit. If this constrained environment continues, I think it depends on what the factors. My commentary was pointed at obviously the trading market. The lack of risk taking in the world right now impinges on our cross boarder trading, on our securities lending business. I think on the portfolio on the asset portfolio, you might make a comment or two on the assets on the portfolio.

Jay Hooley

Yeah, Mike I mean if this environment continues, there’ll be a slight negative effect. We slowed over the short term. Certainly, that’s the comment that applies to the fourth quarter versus the third quarter. It also applies frankly as you move for around at the time. The longer rates they low, then the more challenge we are on the portfolio to generate earnings.

Mike Mayo - CLSA

And with that pressure, why do you feel okay about the four year operating EPS target, if that is the fourth quarter?

Ed Resch

Well, again I think if you look at what we said about the margin, it’s going to be slightly above the 165 top end of the range. So we feel reasonably comfortable at the margins not going to fall off a cliff from Q3 to Q4. And then couple with that overall, we can see about we believe have good servicing fee results as we’ve had all year as we anticipated. And we’re going to keep a real close line of expenses as we have all year. So, we put it all up together and that’s we feel comfortable with being slight above the 332.

Mike Mayo - CLSA

All right thank you.

Operator

Your next question is from the line of Nancy Bush of NAB Research LLC.

Nancy Bush - NAB Research

Good Morning, guys.

Ed Resch

Good morning, Nancy.

Nancy Bush - NAB Research

I’m sorry if I missed this if you addressed this on the first 15 minutes you served in another call. But, I’m sure you saw a very long article on securities lending on the New York Times yesterday morning. And a few things for to jump on me, number one, the reporter not much the clue what securities lending actually was. But the second part was that many or some of the institutional accounts that are supposedly sophisticated investors are not all that sophisticated.

I’m wondering if you sort of interactions with securities lending prior particularly on the public fund side in the future is going to be different just to protect yourself from litigation because some of these people seemed to want a risk-free return but with a greater yield in treasury bill. So, would you just address the whole stock lending, the litigation and protecting yourself issue?

Jay Hooler

True, Nancy. I did see the article. I think physically had been pretty good throughout this period. And being very transparent what our customers about – what risks they’re taking on based on their reinvestment choices. As you might imagine through the stress period, some people have short memories and so we had to reinforce that choice that they made. I think going forward and I would say this is not just about securities lending.

We’re doing everything in our power to make sure whenever we have an arrangement with the customer with regards to what it is that’s for transparency that’s repeated conversation and reminds as to know what risks they’re taking. I think that in the second quarter, we discussed some of the actions we take in our securities lending program in order to provide liquidity to customers that was received very well by customers that we were thinking putting ourselves in their shoes and working to the issues that they’re working through. I think the tone of dialogue with our customers around securities lending is good, open and transparent, and I think we all need to do more that going forward.

Nancy Bush - NAB Research

It was just a thought that I’m assuming that we’re going to continue to have volatility in this market and when rates begin to rise, we may have more volatility than we want. Do you guys feel that you’ll have to sort of build extraordinary litigation reserves for those can’t claim or do you feel okay with restrictions such that.

Jay Hooley

I feel okay with the education process. Having said that, we’re all subject to if somebody has a different recollection or see things differently. We’re probably going faced more of that. I feel very good about to contain my comments to securities lending but it’s across the whole business that we’ve been very upfront with portfolio choices one has to reinvest. They can pick and choose whether they want a separate account where they have full control, whether they want a comingled account, what they’re risk appetite.

I expect that when markets normalize that we’ll see customers wanting to take more risk in order to gain more return on their securities lending. I think this is the statement broader that State Street customers. The industry has educated itself significantly through this period. I expect that once we get to something that’s more normal, customers will be better informed, providers will be even more transparent and I would hope it doesn’t turn frequently to litigation.

Nancy Bush - NAB Research

Would you just remind us from where you are, if there’s any outstanding litigation remaining in that area at this point?

Jay Hooley

We have a couple of situations, which are not new but have been tracking for quarters of not years. Most of them around just characterizations or clarifications of what reinvestment for they rent. But nothing new, Nancy, nothing material or nothing – no change from prior outlooks.

Nancy Bush - NAB Research

Okay, all right. Thank you very much.

Operator

Your next questions is from the line of Brian Bedell of ISI Group.

Brian Bedell - ISI Group

Hi, good morning folks. A quick question on the net interest revenue strategy or basically the investment portfolio strategies – we’re going to 2011 if we did get more pressure on longer term yield. I think you had mentioned quite a while ago better broad range if I’d say on hold for a very long time. We’d have in the end that could be a 140 to 150 basis points range. Can you just talk to if that still hold and then what type of strategies would you employ on the balance sheet to mitigate? Also, if you’re willing to say, how much do you expect to re-price in 2011?

Ed Resch

Let’s suppose back up and put back those numbers in contexts. So those are the once that we put for in our investor day. We were trying to give a couple of scenarios for how 2010 could shape up and almost predicated on the March 31st balance sheet, and what we tried to finance a normalized environment, okay. And the purpose was to try to give you a sense of what we thought given a whole list of assumptions was a normalized member in company.

As I recall, we’re talking about our fund rates being around 3% in amore normalized environment. We gave you some spread relationships all for that. Today’s world is materially different from what we assume in that presentation. Just to give you a couple of facts relative to where we were in the third quarter versus investor day – for example, we did not assume any of the treasury repositioning that we’ve done in the second quarter. We’ve actually experienced slower prepayments overall and what we had experienced – what we expected experienced when we out up that normalized picture of them in.

As I mentioned earlier, the balance sheet is slightly smaller that we assumed was a normalized balance sheet. So, the world is different. We feel pretty comfortable about the guidance for the year being slightly being above the 165. But I really don’t want to get too far out there and go in 2011 at this point other than to say that if rates continue to stay low, that would put down more pressure on them. That’s maybe obvious. Our philosophy is not to reach for yield, not to try to figure out how in a lower environment with a 10 year going below 250 for example, that we could maintain them.

At some point, there’ll be more of compressing effects on them as rates stayed low for a longer period of time. But, overall we’re looking at continuing to overdoing within the context than not reaching for yield.

Brian Bedell - ISI Group

Yeah, I think the big debate is how much of the pressure on and now before you’re starting now at 177, that’s pretty good and keep a very good running start into this. I think some people are concerned that the name would compressed in sub-140 or worst. I just try to see if there’s some things you can do on both the liability side of the balance sheet as well in terms of reducing deposit cost.

Ed Resch

Well, we always look in both sides of the balance sheet. We have a group in our treasury function, which is charged with looking at our liability cost and making sure they fit within the pricing construct of overall customer relationships. We don’t talk about that a lot because we seem to focus a lot on the investment portfolio, but we do look at both sides of the balance sheet from a cost and return perspective.

Brian Bedell - ISI Group

All right, and had a 56-basis point deposit cost in the US deposits, which is upfront 28 second to third quarter. So, it seems like there’s a lot of room to take that down. I guess can you juts a quick comment why it went up to Q every Q.

Ed Resch

I think that was just on a very small balance. I wouldn’t read anything into that in terms of the trend, Brian. I don’t have the exact number but it was an increase of rate on a very small amount of principal.

Brian Bedell - ISI Group

Okay, so that should normalized back to the State?

Ed Resch

Yes.

Brian Bedell - ISI Group

Okay, that’s’ good. Just on maybe you can talk about a little about the makeup of the new ends. You talk quite about it. I guess my question really is, are there any large mandates within that 477 billion. It’s really a lot of small new business that on from existing clients. For example, perhaps in prime region in New Jersey and Ohio are not in that number, correct?

Jay Hooley

That’s correct. I would say it’s a mix. There’s a large number of mandates within there. There are some more sizable mandates in there. Some of whom have to remain confidential. As suppose to prior quarters, we’re able to give you a few more meaningful names. We’re not able to do these this quarter. So, it’s a mix. There are some sizable transactions and there are that have to remain confidential for various reasons. As I said, the most encouraging thing to me not as most standpoint of the number, so it’s not just a couple of big deals – the volume and all that diversity.

Brian Bedell - ISI Group

Yeah, that’s what I mean of the billion that you plan to install over the next couple of quarters. So, I would think the overall theories of those assets are higher that your existing quarter base given they’re more oriented to alternatives in that office. From becoming in that, is that fair statement?

Jay Hooley

That’s probably too bog at least given that the mix is very diverse. I think you can look at gross number and interpret something from that. But, I don’t think you can really take the lead at being higher yielding assets based on being alternatives oriented or being middle office.

Brian Bedell - ISI Group

Right, okay, and then maybe just down on in terms what difference second to third quarter. If you can talk about the impact from the additional six weeks of in terms of and then also foreign currency appreciation in terms of the actual service you feel on.

Jay Hooley

Yeah, Brian. In terms of the servicing free line, a weaker dollar contributed in the range of about a quarter of the increase on a sequential quarter basis, so $32 million increase sequentially – so 8 million bucks of that box. Overall on test, it was significant. Our growth just to put in contrast, our growth without the acquisitions would have been about flat on the servicing free line for the quarter sequentially at overall test, as well on track as Jay said to reach our objectives both from standpoint of revenue of customer attention and our EPS guidance for the year.

Brian Bedell - ISI Group

Okay. Just for last, the expense line of 50 million insurance recovery – you know it’s hard to predict what recovers will be in the future. But, I guess is it fair to look at the core one way or another expense line as to 189 plus the 50, or do you think you’re operating a little better that in future quarters in order will in terms of expenses improve that line.

Jay Hooley

I said last quarter that I thought, we could average around to I think was around 250 and so for the third and fourth quarters of this year. I think we’re probably around there, maybe a little higher. Add the $50 million then a haircut a little bit for the fourth quarter number.

Brian Bedell - ISI Group

Got it, okay. Great, thank you.

Operator

Your next question is from the line of John Stilmar of SunTrust.

John Stilmar - SunTrust

Good morning, gentlemen. I just have one question for you. As you’re looking and you think about the next year of your business especially with the emphasis on alternatives and the trends that you’ve certainly highlighted with alternate sources of revenue and macro variable suppose the financial reform, do you think that we can start seeing a little bit more of operating expense improvement on a dollar basis? Or are we just start looking at a little bit more on operating margin basis, or is it that we think that we’re in potentially an investment cycle commensurate with the degree of change in order to have revenue sustainability beyond sort of 2011?

Jay Hooley

Let me try that one, John. I think that underlying even to this stressful period over the last couple of years, we continue to invest. We continued to build new products, create new capabilities which I think is sustained of ability to win new customers and drive business forward. I would say, the longer term if you look at the assets for you to managing or assets that we’re servicing what we are on board, I think that’s done in period of depressed market based rather as well that interest revenue foreign exchange driven by cross-border and securities lending which we talked about so I think over time we’re continuing to try to drive market share and the core businesses that we know we are good at and doing that broadly across the globe and we think that as we come through this troth, this headwind that we speak about the market base revenues, we should be able to generate our operating leverage to the bottom line.

John Stilmar – SunTrust Group

Okay, so it’s more of a return from market normalcy to give the expense leverage more so than looking for actual dollars of expense improvement next year. I just want to make sure I don’t get too optimistic.

Jay Hooley

I read your question a bit differently so my commentary there was more the long term and the short term if we continue to face constraints as I think Ed picked up earlier, we’re looking at every aspect of the expense line, not sacrificing investments for our new product development and other things that would make a long term healthy for the business, and as you’d expect, we’re anticipating that we could be in a period of sustained or longer term market headwinds, we’re looking at where we need to work, we’re looking at different process improvements so we’re working the expense lines pretty hard back here for the short and long term.

John Stilmar – SunTrust Group

Wonderful. Thank you gentlemen.

Kelly McDonald

Tiffany, we’ll take one more question.

Operator

Your final question is from the line of Andrew Marquardt of Evercore Partners.

Andrew Marquardt - Evercore Partners

Thanks. Good morning guys.

Jay Hooley

Good morning.

Andrew Marquardt – Evercore Partners

Just want to circle back on the margin discussion. Just to be clear, should we now kind of not consider your prior comments from the analysts’ day about normalized margin of 175 to 185, is that out of the window now or how do we think about that?

Ed Resch

I think that given the assumptions that we laid out on the investor day presentation Andrew, that still a valid presentation where -- with all the caveats in terms of a normalized fed funds level and a normalized balance sheet, I think that that’s still an appropriate analysis.

Andrew Marquardt – Evercore Partners

Okay, but the near term pressure part of it in terms of Brian’s earlier question may not be valid in terms of 140 to 150 kind of near term if rates are different.

Ed Resch

The world is a lot different now, at least as we see it, evolving in the fourth quarter than the assumptions we made out on investor day so we’re very comfortable, as I said, with what we set for the full year then, which is slightly above the 165, and that’s obviously materially above what we’ve said was the low case for 2010 given those assumptions as at yesterday.

Andrew Marquardt – Evercore Partners

And then did you mention -- so the guidance implies kind of fourth quarter maybe 165ish, how to think about the degree of pressure going into next year if rates are where they are today?

Ed Resch

No, other than -- acknowledge that there will be pressure if rates continue to stay low. We haven’t given any 2011 name guidance at this point.

Andrew Marquardt – Evercore Partners

And then the last question is just on the capital levels. Can you just remind us where you’re targeting for internal purposes, what metrics and what level?

Ed Resch

Publicly, we’ve stuck with the goals that we’ve had, which have been out there for a long time. The world has overtaken those; our high end of TC, for example, is 4.75%. We’re obviously well above that and continuing to build capital as we drive toward more certainty relative to the regulatory landscape so we haven’t updated them. Once we get more certainty in terms of the Bassel III, Dodd-Frank, etc, we will do that.

Andrew Marquardt – Evercore Partners

And then last question, I think I saw on your release your reconfirmation of your long term financial goals, are those still valid or are you still reaffirming those?

Jay Hooley

Yeah, we still stand behind those. With the caveats that Ed mentioned, which is further clarification on capital will help refine that hopefully over the course of 2011.

Andrew Marquardt – Evercore Partners

Great. Thanks guys.

Jay Hooley

You’re welcome.

Kelly McDonald

Okay Tiffany, I think we are finished.

Jay Hooley

Thanks everybody, look forward to talking to you in January after the fourth quarter.

Operator

This concludes today’s conference call, you may now disconnect.

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