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Executives

Kelley MacDonald – Sr. Vice President, IR

Ronald E. Logue – Chairman, CEO

Edward J. Resch – Executive Vice President, CFO

Analysts

Kenneth Usdin – Bank of America

Brian Bedell – Merrill Lynch

Glenn Schorr – UBS

Thomas McCrohan – Janney Montgomery Scott

State Street Corporation (STT) Q4 2007 Earnings Call January 15, 2008 9:30 AM ET

Operator

Good morning and welcome to State Street Corporation’s fourth quarter conference 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 or rebroadcast or distributed in full or in part without expressed authorization from State Street and the only authorized broadcast of this call is housed on State Street’s website. Now I’d like to introduce Kelley MacDonald, Senior Vice President for Investor Relations at State Street. Please go ahead.

Kelley MacDonald

Good morning everyone. Before Ron Logue our Chairman and CEO and CFO Ed Resch begin their remarks, I’d like to remind you that during this call we may make forward-looking statements relating to the corporation’s financial outlook and business environment, exposure to claims and the adequacy of it’s reserves among other things. 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 2006 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 may make today. Any such forward-looking statements speak only as of today, January 15, 2008, and the corporation does not undertake to revise such forward-looking statements to reflect events or changes after today. In addition information related to this webcast including information concerning and reconciliations of non-GAAP measures referred to in the webcast is available in the Investor Relations section of our website www.statestreet.com/stockholder under the heading Annuals Reports and Financial Trends. I’d also like to remind you that this morning we will be using several slides to illustrate some of the material that Ed Resch will present regarding the performance of assets in the commercial paper conduits. You can access these from our website and some are also included as an addendum in our print package which is also available on our website.

Now I’ll turn the call over to Ron.

Ronald Logue

Thank you Kelley and good morning. On January 3rd, we told you of the actions we were taking to put the issues concerning a small number of active fixed income strategies managed my SSgA firmly behind us. We also shared with you our expectations for the fourth quarter and the full year of 2007. Let me confirm those expectations and explain in some more detail why we believe this performance will serve as the basis for further momentum in 2008. Ed will then provide specific detail with respect to our results, the investment portfolio and our asset back commercial paper program. I’ll then return and provide an outlook for 2008 given market conditions we expect as well as our position within the industry.

State Street this morning reported a strong year’s performance with increasing revenue and operating earnings per share in each successive quarter, excluding the impact of a $279 million after tax charge associated with certain actively managed fixed income strategies at State Street Global Advisors and the merger and integration costs associated with the acquisition of Investors Financial in July of 2007.

Excluding the tax adjustments recorded in 2006 as well as the charge and merger and integration costs in 2007, both our earnings per share on an operating basis and our revenue grew 32% in 2007 compared to 2006. Also excluding the 2007 costs just mentioned and the tax adjustments in 2006, we achieved 17.7% operating return on equity in 2007 compared to 17.1% in 2006. Also excluding the impact of a charge in the merger and integration costs in 2007 we once again achieved positive operating leverage of 500 basis points on an annual basis. Just looking at the fourth quarter’s results we achieved 410 basis points of positive operating leverage on a sequential quarter basis and significant positive operating leverage of 1280 basis points when compared with the prior year’s quarter.

Strength in our asset servicing and asset management business including internationally, continues to drive our results. On a year over year basis servicing fees increased 24% and management fees grew 21%. While market conditions in the second half of the year presented challenges it also created more opportunities for over performance in foreign exchange and in securities finance. Foreign exchange revenue in 2007 was up 31% and securities finance revenue was up 76% both compared to 2006.

Now let’s talk about some of the fourth quarter wins which include on the servicing side, we’ve been appointed to provide a range of investment services for €620 million in pension fund assets for Royal [Corsin] a leading food producer in The Netherlands. State Street will provide Royal [Corsin’s] three pension funds with global custody, accounting, regulatory reporting and performance measurement and analytic services.

State Street has been appointed to provide a range of custody, accounting and fund administration services to the Excelsior Funds. This mandate expands State Street’s services to Columbia Management, Bank of America’s asset management arm by $20 billion in assets for a total of $320 billion. State Street Global Advisors also added significant new business as well. State Street has been appointed by the pension schemes of the British Airport Authority Pension Trust to manage £330 million of Global Equity 130-30 mandate. New York State teachers also opted to renew contracts with State Street Global Advisors for their management of an $886 million passive international equity account. Puerto Rican government employees’ retirement system appointed SSgA to manage $60 million in an active large cap strategy.

Net new business for SSgA for 2007 was $116 billion. Of note is the growth in our ETF assets from $134 billion in the third quarter to $171 billion in the fourth quarter, and increase of 28%. Not let’s turn to our balance sheet for a minute.

Net interest revenue and net interest margin again performed very well achieving a 55% increase in fully taxable equivalent net interest revenue in 2007 compared to 2006 and a net interest margin of 171 basis points in 2007. Our investment portfolio is performing as expected. As you can see from the improvement over the past year in net interest margin, our strategy is bearing results. Ed will provide further details about these results and our outlook in a few minutes. On the expense side, excluding the fourth quarter charge and the third and the fourth quarter merger and integration costs, our expenses on an operating basis grew at a rate less than the rate of growth in revenue which resulted, as I said, in about 500 basis points of positive operating leverage on an annual basis.

We’ve not completed the first six months of the consolidation of Investors Financial and we’re confident that we will achieve our customer revenue retention target of 90%. As you can see from the press release issued this morning, the performance of the business we acquired from Investors Financial was excellent and has exceeded our expectations adding $462 million in revenue since the July acquisition. We reported $0.06 dilution per share for the six month period from the acquisition ahead of our model of $0.14 dilution per share that we provided in February, 2007 when we announced the transaction. We also expect the acquisition to be modestly accretive this year slightly ahead of our plan. The consolidation is proceeding according to plan. We have retained key talent from Investors Financial and have also outlined plans for conversion of customers and their accounts are being converted according to our plans. As they convert, we are removing costs on schedule while also providing access for those customers to a broad range of new products and services.

Let me comment on the position of our Asset Back Commercial Paper conduits. As we explained last quarter, the assets backing this commercial paper do not come from our balance sheet but rather from high quality assets that we select and then the conduits sell in the form of commercial paper to our customers. This is a somewhat unique program, very different from other programs you’ve been reading about, many of which are backed by less highly rated assets or have a higher percentage of unrated assets or contain sub-prime assets. The ratings on the assets backing the commercial paper in the space responsive conduits are primarily AAA or AA and none are sub-prime. Most of the assets benefit from asset-specific credit enhancement. In addition, State Street provides liquidity and credit facilities to the conduits as we have disclosed in our SEC filings in the past. We do not have concerns as to the overall quality of the underlying assets in the conduits.

Now I’ll turn the call over to Ed who will provide some of the details of our financial performance, further information about performance of the assets in our investment portfolio and the Asset Back Commercial Paper program.

Edward Resch

Thank you Ron and good morning. This year certainly underscored the strength of our business. We reported strong growth in both fee and net interest revenue, and please note that all of the numbers I am presenting will include the results of Investors Financial beginning in July.

Our growth in assets servicing, asset management and securities finance revenue continues at a combined rate of about 29% in 2007 compared to 2006. Trading services revenue and particularly securities finance revenue performed very well in the second half of the year given the volatility in the market. We continue to expand globally introducing new services to a broad base of customers. Approximately 41% of our revenue came from non-US sources in 2007 which is above the 39% pro-forma with Investors Financial for 2006. We reported strong net interest revenue growth of 75% on a fully taxable equivalent basis comparing the fourth quarter of 2007 with the fourth quarter of 2006 and on the same basis; net interest revenue was up 19% comparing the fourth quarter of 2007 with the third quarter of 2007. Our net interest margin improved to 195 basis points in the fourth quarter, up 62 basis points from last year’s fourth quarter and up 22 basis points from the third quarter.

Obviously the positive trends I mentioned last quarter continued into this quarter as well as some benefit from the two recent cuts in the FED funds rate, the last one of which will have greater impact on the first quarter of 2008. I will provide more detail on our net interest income and margin and the outlook for 2008 in a few minutes.

Excluding the impact of the charge and the merger and integration costs, we achieved positive operating leverage on an annual basis or as compared to the fourth quarter of 2006 as well as compared to the third quarter of 2007. For the 13th consecutive quarter, our assets under custody were at a record level for State Street at the end of the quarter. Our assets under custody were $15.3 trillion compared to $11.9 trillion on December 31st, 2006. Our assets under management stood at $2.0 trillion at the end of this quarter. As Ron noted, the business acquired from Investors Financial continued to perform well. As we reported this morning, total revenue in the fourth quarter in 2007 compared to the fourth quarter of 2006 including Investors Financial was up 53% and excluding Investors Financial total revenue was up 38%.

In the second half of 2007 we saved $170 million annualized excluding certain variable expenses that are tied to the revenue increases from the acquired Investors Financial business as well as the amortization of intangible costs. So for 2007, we achieved in the second half of the year 24% of the total savings target which was $350 million which we set last February. Our expectations are that we will achieve about 80% to 85% of the savings target in 2008 consistent with our original plans. As we convert client accounts, we will be able to reduce the expense base. Due to continued strength in revenue growth from customers we acquire from Investors Financial we now expect the acquisition to be modestly accretive to 2008 results.

I hope you’ve had an opportunity to review our earnings press release distributed this morning. Please review the financial statements included with our earnings press release and in our financial trends package on our website for detailed information on our financial results. Now to discuss those results.

This morning all of my comments will be based on our operating basis results excluding for 2007 the charge associated with the under performance of certain fixed income strategies at State Street Global Advisors, the merger and integration costs associated with the acquisition of Investors Financial and for 2006 the tax adjustments.

On an operating basis, earnings per share in the fourth quarter were $1.38 up 60% from $0.86 per share last year and up 20% from the third quarter. Revenue on a fully taxable equivalent basis totaled $2.496 billion for the quarter, an increase of 52.8% from last year’s fourth quarter compared with a 40% increase in expenses to $1.649 billion on an operating basis. Compared to the third quarter of 2007 revenue was up 10.6% and expenses on an operating basis increased 6.5%. Return on equity on an operating basis was 18.7% in the fourth quarter up from 15.9% in 2006 and up from 15.8% in the third quarter. Servicing fees were up 39% from the fourth quarter of 2006 and up 3% from the third quarter. Management fees were up 17% from the fourth quarter of 2006 and down 1% from the third quarter. Performance fees were about $21 million down from $24 million a year ago, and up from $19 million in the third quarter of 2007.

Higher volumes and stronger volatility in our foreign exchange business drove a 79% increase in foreign exchange trading revenue compared with the fourth quarter of 2006 and up 13% from the third quarter. Brokerage and other fees were up $38 million or 61% to $100 million from the previous year’s fourth quarter. This increase was due primarily to $23 million in fees from [Current Ex]. Brokerage and other fee revenue were up 4% from the third quarter of 2007. Also, due to fixed income market disruptions we saw continued demand for securities finance in the fourth quarter. Securities finance revenue was up 184% from last year’s fourth quarter due primarily to improved spreads and higher volumes and was up 55% compared to this year’s third quarter due to improved spreads. At quarter-end we had $662 billion in securities on loan and the duration on the securities lending book was 26 days. Net interest revenue on a fully taxable equivalent basis increased $245 million or 75% from $328 million to $573 million and was up $92 million from the third quarter. In addition compared to the fourth quarter of 2006 net interest margin of 195 basis points was up 62 basis points and up 22 basis points from the third quarter of 2007.

Some of the trends that benefited us in the fourth quarter include higher yields on reinvestments in our investment portfolio, lower cost funding due in part to the 100 basis point decline in the FED funds rates since August and the impact of additional revenue from Investors Financial. The average investment portfolio increased from $65.7 billion to $75.9 billion during the fourth quarter from the year-ago quarter and was up from $74.6 billion in the third quarter of 2007. Mortgage backed securities in the fourth quarter represented about 39% or $30 billion of the average investment portfolio. Floating rate asset backed securities in the fourth quarter of 2007 represented about 32% of the average investment portfolio or $24.5 billion. The credit quality of the portfolio at December 31st, 2007 has remained about the same as at last year-end, 95% is invested in AAA or AA rated securities. As of December 31st, 2007, 89% was invested in AAA and 6% in AA rated securities. None of our asset backed or mortgage backed investment portfolio securities was downgraded. Three asset backed securities collateralized by sub-prime mortgages that we own totaling $10 million have been placed on watch for downgrade due to rating agency concerns regarding certain financial guarantors.

If the current trends we have been seeing continue we expect our net interest margin for the full year 2008 to be in the range of 185 basis points to 195 basis points, probably toward the higher end. This outlook assumes that growth in the non-US transactions balances may abate somewhat, that we maintain the existing favorable mix of customer liabilities and expectation that the investment portfolio will re price upwards as about $7 billion in older fixed rate securities mature in 2008 but these will be reinvested at lower rates than the 2007 maturities. A generally declining interest rate environment worldwide but more uncertainty in the current rate environment than we have previously seen. Future rate cuts from the FED will help us but the benefit may tail off a bit in the second half of 2008. Declining rates in Europe we expect will reduce spreads. We expect our ’08 average balance sheet to be roughly flat with the average balance sheet in the fourth quarter of 2007.

Our duration gap has not changed significantly from year end. Our assets are about 12 months and our liabilities are about nine months. The investment portfolio duration is about 1.4 years down slightly from 1.5 years in the fourth quarter of 2006 and also down from 1.5 years in the third quarter of 2007.

Now I’ll address the asset backed securities that are collateralized by sub-prime first lien mortgage assets, an element of the portfolio that I have been commenting on since last March. First of all the portfolio has performed very well. Our portfolio of asset backed securities collateralized by sub-prime mortgage is $6.2 billion as of December 31st, 2007. Seventy-one percent of the portfolio was rated AAA and the remaining 29% is rated AA. None of the securities have been downgraded. We have a 40% average credit enhancement based on the structure itself which gives us confidence that securities will mature at par. This means that even if every mortgage backing the security were to default we would not lose $1 until the recovery rate for that security fell below 60%. And further, the assets we believe are well diversified by vintage, geography and originator.

I’ll now turn back to expenses and just a reminder, on speaking about them on an operating basis. Salaries and benefits expenses on an operating basis increased 35% compared to the fourth quarter of 2006 due primarily to the additional staff from Investors Financial and staff added to service new business. Compared to the third quarter of 2007 also on an operating basis salaries and benefits expense increased 2% primarily for additional headcount to service new business partially offset by reductions in Investors Financial staff. Transaction processing expenses increased 52% compared to the year ago quarter primarily due to the acquisition of Investors Financial as well as increased volumes in the asset servicing and trading business and 12% from the third quarter of 2007 due primarily to increased volumes. Other expenses were up 84% compared to the year ago quarter and were up 30% compared to the third quarter of 2007 primarily due to acquisition costs, fees such as for professional services and recruiting and securities processing costs. Regarding this increase we had amortization costs for intangibles related to the acquisitions we did this year and in addition we calibrated spending due to the strong revenue we experienced in the quarter. Lastly we incurred some expenses due to the significant growth in the business.

Let me review in detail our capital structure following the $279 million after-tax charge we recorded in the fourth quarter to address legal exposure and other costs associated with the under performance of certain actively managed fixed income investment strategies. The principal capital ratio that we manage to is the Tier 1 leverage ratio. We will continue to target between 5 ¼% and 5 ¾% over the long term but will allow our leverage ratio to reach 6% or slightly above in order to preserve flexibility in what appears to be continuing volatility in the market. At December 31st, 2007 our Tier 1 leverage ratio stands at 5.27%, down from 5.40% as of September 30th, 2007. The decline was driven by the legal reserve we recorded in the fourth quarter and growth in average assets offset partially by net earnings. Our tangible common equity ratio 3.49% level with 3.49% as of September 30th, 2007. This ratio was negatively affected by the reserve but was offset partially by net earnings.

We announced this morning that we intend to conduct a public offering of approximately $500 million of non-dilutive securities for treatment as Tier 1 capital. We propose to use the net proceeds for general corporate purposes. Goldman Sachs will act as sole book runner.

Now let me answer some of your continuing questions about the asset backed commercial paper conduits. On our website we have provided an update to the slides we presented on our third quarter call. I will not discuss them in detail but suggest that you review these to update your knowledge as to the commercial paper conduit program at State Street. I will however refer to the first slide. As I stated last quarter, we created this program in 1992 primarily to address customer requests for high quality, highly rated commercial paper. The financial performance of the conduits during this time period has been very strong. They’ve never suffered a credit loss on any asset they purchased, evidence of our strong credit discipline at State Street. Also, State Street in its capacity as a liquidity and credit provider has also never experienced a loss from having to fund under these facilities. We believe our approach to the asset backed commercial paper market is different than most other programs in that no assets from State Street balance sheet are sold to the conduits rather they are sourced from the market.

The first slide in the conduit group illustrates my point. Here you can see the assets by rating of State Street conduit program as of December 31st, 2007 on the left compared with the Moody’s multiseller bank index as of August 31st, 2007 on the right, the last date for which data is currently available. As you can see here, the numbers did not change that much from what we disclosed in the third quarter. For State Street conduit program the three categories of AAA, AA and A represent 85% of the total. Five percent is rated BBB and the remaining 10% is non-rated. Let me differentiate these ratings from the average ratings of the holdings of a multiseller peer group using data provided Moody’s which is on page 10 in the trends package provided on our website.

First, just to reiterate the assets in State Street’s conduits are not sourced from our balance sheet. While State Street’s conduits hold 61% of AAA rated securities, a peer group of the major multiseller conduits holds 11%. While State Street’s conduits hold 16% in AA rated securities the peer group of the major multiseller conduits holds 13%. While State Street holds 10% of securities that are not rated the peer group of the major multiseller conduits holds 42%. While State Street holds 5% rated as BBB the index of major multiseller bank sponsors holds 12% within this rating category. And while State Street holds essentially no assets rated below BBB or investment grade the peer group of major multiseller banks holds 11%. And none of the assets in our conduits are sub-prime nor are there any structured in investments in the program.

The point of this detail is to provide data that will help you differentiate generally between the commercial paper issued by our conduits and that of other programs. These comparisons may help you understand the confidence we have in the quality of our assets. So what happened in the fourth quarter? Overall the asset backed commercial paper program continued to perform very well as it did in the third quarter. We believe that our asset quality was a major point of differentiation for the conduits during the period of time when some weaker programs exited the market and the overall asset backed commercial paper market contracted significantly. Our overall weighted average maturity of the commercial paper at the end of the fourth quarter of 2007 was approximately 20 days compared to approximately 23 days at the end of the fourth quarter of 2006 and approximately at the end of the third quarter of 2007.

We disclosed that we held $730 million in State Street sponsored asset backed commercial paper at September 30th, 2007 and $222 million at October 15th, 2007 most of which was associated with our two Australian conduits which are much smaller than either of the other two. As of December 31st, 2007 we held $2 million of the asset backed commercial paper on our balance sheet and as of last Friday, January 11th, 2008 we held $58 million of the paper, well within our typical holdings as a dealer in the paper. We do not anticipate the consolidation of the conduits. If due to the triggering of liquidity asset purchase agreements or due to [FIN 46-R] we were required to acquire all the conduits’ assets or consolidate the conduits using December 31st, 2007 estimated fair values, the loss would be approximately $530 million after tax. If the assets are the result of consolidation under [FIN 46-R] this would be an extraordinary loss for financial reporting purposes. This loss would reverse back into income over the remaining lives of the assets assuming the assets were held to maturity and State Street recovered the full principal amount of the securities as anticipated.

From a funding standpoint the risk I just described is included in our contingency funding plan. We believe that we can access multiple sources of liquidity to fund any such asset purchases. Our sources of this liquidity include borrowing from the overnight inter bank or repurchase markets issuing corporate commercial paper, issuing bank CDs and time deposits, and/or accessing the FED discount window. We in fact, as part of our contingency plan in the second half of 2007 raised approximately $14 billion of incremental liquidity given the market environment. Also we reduced the size of the program slightly in the fourth quarter. As Ron said last quarter it will take some time before we can size it in line with our capital. As you may remember it was $29.2 billion as of September 30th, 2007 and it stood at $28.8 billion as of December 31st, 2007.

So in conclusion, 2007 was a very strong year for State Street in terms of operating performance with nearly every revenue line on the income statement up in double-digits. We hope the information we provided about our balance sheet and our conduit program has been helpful and now I’ll turn the call back over to Ron who will provide our general outlook for 2008.

Ronald Logue

Thank you Ed. Looking back over the quarter and the year, I’m certainly pleased with the performance of our core businesses. I think it’s striking when you consider that even after the reserve we took we achieved earnings per share growth at the lower end of our original financial targets finishing the year at 10% annual earnings per share growth. I think it says something about the resiliency of our business and I believe, is as some think; we are headed for a slower growing economic environment in the US. This resiliency along with the momentum we have built up will allow us to continue to grow revenue faster than our competitors.

So specifically looking at the outlook of 2008 we expect our earnings per share on an operating basis excluding merger and integration costs to increase 10% to 15% compared to 2007 operating basis results of $4.57 per share. We expect our revenue to increase between 14% and 17% including Investors Financial, up from our traditional goal of 8% to 12%. We expect our operating return on equity to be between 14% and 17%. We expect to achieve these goals at the lower end of these ranges. We will have more detail for you on February 5th at our Investor and Analyst forum in New York City. We will also continue to perform against the tactics I laid out more than three years ago. We target positive operating leverage on an annual basis. We will continue to prudently manage our balance sheet to improve the return from our net interest revenue without taking significant credit or interest rate risks. Our non-US business stood at 41% of total revenue as of December, 2007 up from 39% pro-forma level as of December 31st, 2006 due to the Investors Financial acquisition. We expect growth in this business to continue to outpace the growth in the US as we execute against our goal of achieving 50% of our total revenue from non-US sources and since we have a higher percentage of our revenue coming from outside the US than our competitors, we believe this will be an important growth engine for us.

We expect to see growth at SSgA continue to be a strong contributor to State Street. I also want to clarify that SSgA’s US money market and cash funds are performing strongly and are well positioned for the current market environment with no exposure to asset backed commercial paper, SIBs, CDOs, or sub-prime home equity asset backed securities. Growth in SSgA’s mutual fund cash funds increased 37% to $37.7 billion at December 31st, 2007 up $27.6 billion a year earlier.

I also want to remind you that SSgA acts as a collateral manager of CDOs amounting to $6.7 billion which are issued by others. You may have read that one or more of them are subject to liquidation by the trustee. That decision and any impact on the funds will not be borne by SSgA but rest with the issuer. There is no financial impact to State Street.

So we begin 2008 with momentum from a strong 2007 operating result from both State Street and the acquired Investors Financial business and with our consolidation of Investors Financial exceeding expectations. I believe the winners in this business will be the organizations that can generate top line revenue growth even during slower economic environments. I also believe we know better now how to bring the strong revenue growth down to the bottom line. But for these reasons we have confidence that we will meet our 2008 financial goals despite what we anticipate in the US to be a less robust equity market. Ed and I are now happy to take your questions.

Question-and-Answer Session

Operator

Your first question comes from Ken Usdin – Bank of America

Ken Usdin – Bank of America

Good morning, Ed I was wondering if you could just talk us through on the net interest margin guidance, what your exact rates forecasts are as far as number of cuts or [inaudible] in the US or abroad and also what your expectation is for the funding costs for the capital raise and if that’s incorporated within the guidance.

Edward Resch

Well I’ll start with the second one first, I can’t comment specifically as I’m sure you appreciate because we just announced the transaction this morning, but we do have an estimated cost of the capital issuance included in the guidance for the year. We have a couple of offsetting things going on in terms of the margin in 2008 which is why I said that we were sticking with the 185 to 195 but probably will be toward the higher end. We’re approaching certainly the first half of the year on a very conservative basis where we anticipate that we’re going to be growing capital and we’re thinking about the balance sheet on average as being relatively stable with the fourth quarter, the NIM being stable and we’ll grow the capital and run the ratios at or above the top end of the ranges and we’re doing this for the reasons we said previously, which is conservatism. We’ll also probably not be buying back any stock in the first quarter and maybe the first half.

In terms what we expect in terms of the FED we have the probable benefit which is partially baked into our NIM expectation of the FED cutting. We expect them to cut at the end of this month down to 4%. If they go below that and there’s possibly more of a likelihood of that in the last week or so than there was before that, we have the offset in our forecast for the ECB of the Bank of England which we’re currently forecasting the ECB to be down about 3% to 3¾% and the B of E to 4% to 4¾ % by mid year so the proposed FED decreases will help us in terms of net interest margin. The proposed foreign central bank decreases, principally the ECB and the Bank of England will hurt or net interest margin. The bias is toward the FED helping a little bit more than the foreign central banks hurting us because we’re still much more dominant in terms of the FED. But that’s our rate forecast and the reason why we have the margin still at around 195.

Ken Usdin – Bank of America

So just to be clear, if the FED goes further than 4 and the foreign central banks don’t move there could potentially be upside.

Edward Resch

Yes.

Ken Usdin – Bank of America

Okay my second question is just on the capital, understanding the conservatism that you want to have and building up to 6% can you give us any color or commentary you have on any negative impacts you expect on capital from incremental negative pricing on the APS that you hold or any other negative calls on capital that you might expect through the year.

Edward Resch

We really don’t have any negative calls on capital expected this year and the mark on the investment portfolio is something that we have in our plans and we have an expectation already baked in, in terms of the capital guidance I just gave you.

Ken Usdin – Bank of America

Okay thanks a lot.

Operator

Your next question comes from Brian Bedell – Merrill Lynch

Brian Bedell – Merrill Lynch

Good morning guys, lets just circle back to that question on the ECB rates and the Bank of England rates if the foreign governments lower their rates doesn’t that help your non-US deposit costs of which were about $64 billion and shouldn’t that be a positive…?

Edward Resch

Yes it will on the liability side Brian but we have assets generally shorter than liabilities in those currencies affected by those rates so the assets will re price more quickly than the liabilities which is why it’s a net negative for us right now given where we’re positioned.

Brian Bedell – Merrill Lynch

Right that your assets are much, your level of assets are substantially lower than the $64 billion correct that are key to [those rates]?

Edward Resch

Yes that’s why I said that the US FED rate cuts on balance will help us more than the foreign rate cuts will hurt us.

Brian Bedell – Merrill Lynch

Right, near term. But I would just think it’s the, if the ECB is actually cutting that would be enough of a positive driver on your deposit costs that that would give you actual NIM expansion, so that would be actually a good environment for this year if everyone was cutting, but you’re saying no, its really just more….

Edward Resch

Net it’s not.

Brian Bedell – Merrill Lynch

Okay the $298 deposit costs that we saw in the fourth quarter versus the $325 is that, what was the main driver of that decline?

Edward Resch

Decreased US rates.

Brian Bedell – Merrill Lynch

Of non-US deposit costs, the $325 to $298…oh are you basing that off of the US rates?

Edward Resch

Our deposit costs went down overall because of the decreasing US rates.

Brian Bedell – Merrill Lynch

No, the non-US deposit costs, you said they went down from 325 basis points in the third quarter according to your average balance sheet down to 298 basis points in the fourth quarter. The $64 billion of non-US deposit costs?

Edward Resch

Okay.

Brian Bedell – Merrill Lynch

So they went down from 325 basis points to 298 from the third quarter to the fourth quarter? My question is are you linking those to the FED decline or is there some other driver of that reduction in deposit costs outside of the US?

Edward Resch

Well part of it is because we swap a portion of that back to US dollars, that’s the main driver of that decline.

Brian Bedell – Merrill Lynch

Okay I got it, so you’re actually more leveraged to the FEDs even on that line on that deposit line. Then just switching over to your outlook for ’08, how are you thinking about securities lending revenue and foreign exchange trading in your ’08 outlook?

Ronald Logue

I don’t think you can take the fourth quarter numbers and multiply them by four. We’re still seeing some volatility in foreign exchange. My sense is and again this is our forecast, we would think that gradually over time they would come back down into more normal levels and that’s what we’re planning for anyway.

Brian Bedell – Merrill Lynch

Right, do you see it in the near term them staying at elevated levels for both securities lending and foreign exchange trading?

Ronald Logue

Well I guess you would have to define the near term, maybe in the next month or so but I would think that it would come down beginning towards the end of the first quarter would be our guess.

Brian Bedell – Merrill Lynch

Right okay. So when you say more normal levels, you’re run rate say earlier in the early part of this year?

Edward Resch

Back to the early part of I’d say, the first half of 2007 be more representative.

Brian Bedell – Merrill Lynch

Okay and so that’s implied in your guidance for ’08?

Edward Resch

Yes.

Brian Bedell – Merrill Lynch

Okay and what are you assuming for equity market returns in ’08?

Edward Resch

We’re assuming a flat S&P, high 14s, around 1500 for the full year on average. It’s obviously up from where we are today but when we entered the year that was our expectation from a budgeting standpoint.

Brian Bedell – Merrill Lynch

Okay and then the processing fees being down from $61 million to $38 million was most of that due to contracting spreads in the conduits or you also mentioned lower JV revenue.

Edward Resch

Both, you’re referring to processing fees in the quarter Brian right?

Brian Bedell – Merrill Lynch

Yeah, the $38 million.

Edward Resch

Yes, the conduits had a bit of a negative affect there. We have a lot going through that line as you know, we have the equity pick-up, we have certain tax advantage investments that we do, there’s a service fees, software fees from some software that we sell, so it’s a mixture of a lot of different things that go into that line, but the conduits were down from a revenue standpoint as well as the equity.

Brian Bedell – Merrill Lynch

Right but assuming that the cost of rolling over that CP are lower now because of the quality of your program should we expect that to bump back up closer to the $60 million type of normalized level?

Edward Resch

Assuming that we keep the conduits at the same size the answer to that question is yes but as we said we expect to better calibrate the conduits as against our capital so the answer over the longer term is probably no.

Brian Bedell – Merrill Lynch

Okay great and then just lastly on the core servicing, can you just remind us again you went $825 billion last quarter in asset servicing mandates, if you can just remind us how much of that is included in fourth quarter numbers?

Ronald Logue

I could give you a calculated guess here, I’d say maybe somewhere between a third and a half, we will continue to be installing in the first and second quarters of this year.

Brian Bedell – Merrill Lynch

Okay so about roughly a half is already in the numbers?

Ronald Logue

Yes.

Brian Bedell – Merrill Lynch

And then the $300 billion obviously none of that is converted in the fourth quarter yet?

Edward Resch

A little bit but not a lot.

Brian Bedell – Merrill Lynch

Great thanks very much.

Operator

Your next question comes from Glenn Schorr - UBS

Glenn Schorr - UBS

Just a couple of quickies, I think you mentioned $116 billion in net inflows for the year, can you just tell us what it was in fourth quarter and maybe separate any impact on [BOCO] the internationally people that left?

Edward Resch

Was that net inflows of what?

Glenn Schorr - UBS

I think you mentioned $116 billion for the year.

Edward Resch

[inaudible] Net, new business?

Glenn Schorr - UBS

Correct. What was fourth quarter and what was the impact on the team that left in Boston Company.

Edward Resch

I don’t see any real impact on the team that left at this point. Fourth quarter it was flat.

Glenn Schorr - UBS

Fourth quarter was flat.

Edward Resch

Yes.

Glenn Schorr - UBS

Okay and on the money market side, given the strength I’ve seen in the industry, that was kind of interesting assets under management were actually down 1% in the quarter, anything special there?

Edward Resch

No, nothing real special.

Glenn Schorr - UBS

And I think you just went through the net new business of like a trillion over the last two quarters, did I miss a comment, did you make a comment on the current state of pipelines.

Edward Resch

Pipeline is still strong, servicing business is strong especially outside the United States. We’re going to anticipate in a strong pipeline and continued strong winds.

Glenn Schorr - UBS

Great and then maybe last question on the ABCP conduits, I think you’ve done a great job showing us the quality of the underlying assets, and given us some maturity comments and what’s on balance sheet, if we could step back for two seconds and just think, okay you give us, if it all comes on balance sheet what the after tax loss would be and that’s just a mark to market and that spreads wide and I’m certain of the asset classes deteriorate, right? Because there’s a big widening this quarter but spreads wide a lot, so is there an in between, is the worst case is nobody wants to roll these anymore and all of it comes on balance sheet and that’s your mark to market hit right?

Edward Resch

Right.

Glenn Schorr - UBS

In the interim, is there any other way we should be thinking about what a cushion or [subordination] protection would be if, or is it black and white, is it it either continues to roll or it comes on balance sheet?

Edward Resch

I’ll take a shot at that Glenn, it’s not black or white and we present the analysis as though all of the $28.8 billion came on as of 12/31/07. In reality the conduits are comprised of over 800 individual positions and each one of those positions has a liquidity asset purchase agreement associated with it. So there is a continuum if you will from one liquidity asset purchase agreement being invoked which would mean we’d have to buy the assets from the conduit at par to the full consolidation of all $28.8 billion. So it’s not a black or white situation where it’s zero or $28.8 billion. An important point to note though from a P&L standpoint is that related to the liquidity asset purchase agreement if it was to be invoked, there would probably be a loss associated with the purchase of a specific asset assuming it’s in an unrealized loss position, because we’re obligated to purchase at par.

Glenn Schorr - UBS

And as far as right now, you mentioned the small amount that’s on balance sheet, so we’re to assume that everything else is rolling and can you make a comment on what the yield on the paper and aggregate has done over the last three months.

Edward Resch

You’re correct, everything is rolling. We only have the $58 million on the books as of last Friday. Things have actually overall gotten a little bit better as [Libor] has come in with the new year, I think there’s a general expectation in the asset backed commercial paper market that rates are coming down so there’s an overall higher level of interest. The cost of the funding overall for the program in the fourth quarter was 5.584%.

Glenn Schorr - UBS

Great okay thanks very much.

Operator

Your next question comes from Thomas McCrohan – Janney Montgomery Scott

Thomas McCrohan – Janney Montgomery Scott

Good morning everyone, two quick questions, one on Investors Financial and a follow-up on the investment securities portfolio available for sale. The baseline results that you included in the press release for Investors Financial, can you just give us a sense what’s included in the fee revenue categories, what clause [inaudible] performance Investors Financial and what’s included in other revenue in that bucket in the baseline results.

Edward Resch

Let’s just do it from the bottom up. All other revenue is basically their net interest revenue. Fee revenue is everything else. And what’s been driving the over performance for Investors Financial were the first two quarters since we’ve acquired it has been strong fee revenue, especially fee revenue retention which has been higher than what we have modeled, and then stronger net interest revenue for some of the same reasons we talked about net interest revenue being strong at overall State Street.

Thomas McCrohan – Janney Montgomery Scott

Net interest revenue for those guys at least last trend report I had from them was, it didn’t seem like that was a big driver, they were generating about $50 million of net interest revenue in Q1 of ’07, they did $40 million this quarter, so it seemed like a lot of the out performance was more on the fee side, is that fair?

Edward Resch

It’s both net interest revenue and fees have been very strong for Investors Financial.

Thomas McCrohan – Janney Montgomery Scott

Even though they were $10 million higher in the first quarter of 2007?

Edward Resch

Yes.

Thomas McCrohan – Janney Montgomery Scott

Okay. Can you give us a feel for how much foreign exchange fees are included in that $201 million of fee revenue for Investors Financial?

Edward Resch

Yes I can, foreign exchange for the full year was $43 million.

Thomas McCrohan – Janney Montgomery Scott

Forty-three so that, and they did like $18 million in Q1 of ’07 so that was a big part of their ability to out perform and how about core servicing fees, do you have them for the quarter?

Edward Resch

For the quarter?

Thomas McCrohan – Janney Montgomery Scott

Yes, the $43 million you gave me was for the quarter or the year?

Edward Resch

For the year.

Thomas McCrohan – Janney Montgomery Scott

Oh for the year, okay.

Edward Resch

What would you like Tom?

Thomas McCrohan – Janney Montgomery Scott

The core servicing fees for Investors Financial?

Edward Resch

Okay for the full year, $304 million.

Thomas McCrohan – Janney Montgomery Scott

Okay, maybe I’ll just follow-up with you later; I’m not sure how that drives the two in one. And securities portfolio, can you just talk a little bit about the unrealized losses that seem to be growing this year, is that a function of changes in interest rates and if so which rates should we be looking at or is it just more of a liquidity hit that you’ve been taking this quarter. I mean unrealized losses this quarter went up about $400 million, I’m just trying to get a sense, is that going to reverse itself next year or what should we be tracking for that.

Edward Resch

Well we have two somewhat offsetting factors going on in terms of the mark. First of all it’s a function of US interest rates in the investment portfolio and with the benefit that we’ve received from the FED cutting rates in the US we’re actually seeing a decline in the unrealized mark associated with that element of the mark. But we are seeing a continued illiquidity in certain of the asset classes especially the asset backed element of the portfolio which is more than offsetting the benefit we’re receiving from the FED rate cuts. So net net it’s been a negative because of the lower liquidity in the second half of ’07 than what we had previously.

Thomas McCrohan – Janney Montgomery Scott

Okay well thanks very much.

Operator

At this time there are no further questions in queue, so I’ll go ahead and turn the call back over to Mr. Ron Logue. Please go ahead.

Ronald Logue

Thank you, I don’t have any further comments other than we hope to see all of you February 5th at our Investors Conference in New York City so we’ll see you then. Thank you very much.

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Source: State Street Corporation Q4 2007 Earnings Call Transcript
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