Anthony Ostler - SVP, Investor Relations Jay Hooley - Chairman and CEO Mike Bell - Chief Financial Officer.

Ashley Serrao - Credit Suisse Glenn Schorr - Evercore ISI Ken Usdin - Jefferies Brian Bedell - Deutsche Bank Luke Montgomery - Bernstein Research Betsy Graseck - Morgan Stanley Mike Mayo - CLSA Alex Blostein - Goldman Sachs Jim Mitchell - Buckingham Research Adam Beatty - Bank of America Brennan Hawken - UBS Geoffrey Elliott - Autonomous Research.

Good morning and welcome to State Street Corporation's Second Quarter of 2015 Earnings Conference Call and Webcast. Today's discussion is being broadcast live on State Street's Web site at www.statestreet.com/stockholder. This conference call is also being recorded for replay. State Street's conference call is copyrighted and all rights are reserved.

This call may not be recorded for rebroadcast or distribution in whole or in part without the expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street's Web site.

Now, I would like to introduce Anthony Ostler, Senior Vice President of Investor Relations at State Street..

Thanks Holly. Good morning and thank you all for joining us. On our call today are Chairman CEO, Jay Hooley, who’ll speak first, then Mike Bell, our CFO will take you through our second quarter 2015 earnings slide presentation which is available for download in the investor relation section of our Web site at www.statestreet.com.

Afterwards we’ll be happy to take questions. Before we get started, I would like to remind you that today’s presentation will include operating basis and other measures presented on a non-GAAP basis.

Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our 2Q '15 slide presentation. In addition today’s presentation will contain forward-looking statements.

Actual results may differ materially from those statements due to a variety of important factors, such as those factors referenced in our discussion today in our 2Q '15 slide presentation under the heading forward-looking statements and in our SEC filings, including the risk factor section of our 2014 Form 10-k.

Our forward-looking statements speak only as of today and we disclaim any obligation to update them even if our views change. Now, let me turn it over to Jay..

Thanks Anthony and good morning, everyone. Our second quarter 2015 results reflect the strength of our core business as evidenced by 4% growth in service fees compared to the first quarter of 2015 and the benefit of the seasonal increase in securities finance activity.

Net interest revenue in the second of 2015 continued to experience pressure as resulted the ongoing low interest rate environment. Overall we remain on track for the growth rate of operating basis fee revenue to exceed the growth rate of operating basis expenses by at least 200 basis points in 2015.

We remained focused on returning capital to our shareholders. During the second quarter of 2015 we purchased approximately 350 million of our common stock and have approximately $1.45 billion remaining on our March 15th, common stock purchase program authorizing the purchase of $1.8 billion of our common stock through June 30, 2016.

We also increased our quarterly common stock dividend to $0.34 per share in the second quarter of 2015. Now I would like to provide a brief overview of economic and market developments and how our business is affected. Europe has been a major source of marketing stability in the recent past.

First modest signs of recovery against the backdrop of zero or even negative yield contributed to the sharpest rise in European bond yield since the resolution of the European debt crisis back in 2010. European equity markets responded by giving back half of the year-to-date gains from the peak of May 21st with some recoveries more recently.

The European debt crisis is still of course very much with us in the form of Greece and has monopolized the headlines from much of the past few weeks.

The uncertainty as to whether a deal with Greece could first be reached and now implemented has helped to push investors to move assets away from emerging markets and also contributed to increased foreign exchange volatility and volumes compared to the second quarter of 2014. However volatility in FX market was lower than first quarter 2015.

Not all the risk in global markets has been driven by Europe, Chinese equities fell by more than 30% from the peak giving back more than half of the gains for the year and it's concerned about the growth in China. Although recently government [intervention] has provided some support to equity markets there.

Combined these significant disruptions drove market down in June and into July and have reduced risk appetite. Despite these international risks our view of divergence in 2015 still holds as we see easing of monetary policy outside the U.S. but we still expect to see tightening in the U.S. This led to a much stronger U.S. dollar so far in 2015.

Much of the initial change occurred in a first quarter 2015 in anticipation of U.S. tightening and the US dollar has generally moved sideways since then as the markets are waiting to see when tightening might actually start in the U.S. Together these events and trends impact our business in several meaningful ways.

First and most significantly, the low interest rate environment continues to negatively impact our net interest revenue and net interest margin as a higher yielding portfolio investments mature or experience pre-payments and then those funds are reinvested in lower yielding investments.

Second, amidst the various Central Bank actions and changes to various market structures, we continue to experience high levels of deposits. As you know, we imposed charges for holding Euro deposits in the fourth quarter 2014 with a number of increases in the charges so far this year.

We are continuing to have discussions with our clients regarding excess deposits given the negative effect of these deposits on our capital. Third, the stronger U.S. dollar has slowed the growth of our servicing fee revenue relative to 2014.

However it's important to note that excluding the impact of the stronger US dollar our core business performed well benefiting from growth in our client relationships. Furthermore towards the end of second quarter 2015 we start a number of significant market disruptions which reduced risk appetite.

Now I'd like to discuss asset servicing and asset management businesses. Demonstrating a continuing priority to provide solutions to our clients we added a 143 billion of new servicing commitments during the second quarter. Importantly these wins were broadly diversified across sectors and geographies. U.S.

to be serviced that remained to be installed in Q2 period totaled $174 billion at June 30 and we continue to see deep and diverse pipeline.

Our asset management business experienced net outflows of $65 billion during the second quarter of 2015, driven primarily by net outflows of $36 billion from institutional passive equity, 17 billion from ETF primarily institutionally oriented market index funds and 17 billion from cash products.

The significant drivers of passive equity outflows were included rebalancing and cash need by some of our clients due to lower commodity prices. Despite the net asset outflows the impact on net new business revenues were relatively minimal because much of the redemptions were priced lower than the net contributions we received in the quarter.

Our asset management business continues to be innovative and has launched 45 new products in the first six months of 2015.

OneLine is off to a fast start is despite a double line total return taxable ETF which is an active fixed income ETF launched in partnership with DoubleLine, it's attracted 800 million in net flows post launch which ranks as the second most successful ETF launched in the U.S. this year.

Now I'll turn the call over to Mike who'll review our financial performance for the second quarter and after that Mike and I will be open to take your call..

Thank you, Jay, and good morning, everyone. Before I begin my review of our operating basis results, I’ll comment on a non-operating charge included in our 2Q '15 GAAP basis results. We recorded an after-tax charge of $156 million, or $0.37 a share in 2Q '15 to increase our legal accrual associated with indirect foreign exchange matters.

Although we believe these recorded legal accruals will address the financial demands associated with the previously disclosed claims and active investigations regarding our indirect foreign exchange business asserted in the United States by governmental entities and civil litigants.

Significant non financial terms remain outstanding and settlement agreements have not been finalized.

Consequently there can be no assurance that we will enter into these settlements that the cost of the new settlements or other resolutions of any such matters will not materially exceed our accruals or that other potentially material claims related to our indirect foreign exchange business will not be asserted against us.

As I'm sure you can appreciate settlement discussions are confidential and we're not able to make more specific comments on these matters at this time. Now refer to Slide 7 for discussion of our 2Q '15 operating business results and from the six months ended June 30, 2015 which I'll refer to as year-to-date.

By way of summary 2Q '15 results were driven by strong servicing fees and the seasonal increase in securities finance revenue offset by lower FX trading revenue and continued pressure on NIR. Year-to-date EPS increased approximately 7% compared to the year ago period.

Total revenue increased 3.3% from the year ago period reflecting strength in core servicing and management fees. Trading services revenue and securities finance, partially offset by lower NIR and the impact of the stronger U.S. dollar.

Compared to the year ago period year-to-date fee revenues were negatively impacted by approximately a $149 million from the stronger U.S. dollar, largely offset by a similar benefit in total expenses. Our operating basis effective tax rate for 2Q '15 was 29.6% which is lower than our current expectation for the full year.

The first half of 2015 operating basis effective tax rate of 29.1% is also lower than our current full year 2015 expectations primarily due to some one-time items in the first half of 2015 and the timing of our tax advantage investments.

We continue to expect the operating basis tax rate to average within a range of 30% to 32% over the course of the full year. On the capital front in 2Q 2015 we declared a common stock dividend of $0.34 a share and purchased approximately $350 million of our common stock.

In addition we issued $750 million of preferred stock during 2Q 2015 with the first semiannual dividend to be paid in the third quarter of 2015. On Slide 8, year-to-date fee revenue increased 5.1% while expenses increased 2.4% versus a year-ago. Importantly on a constant currency basis year-to-date fee revenue increased 8.8%.

We continue to make progress against our targets for operating basis total fee revenue growth to outpace operating basis expense growth by at least 200 basis points for the full year 2015 relative to 2014. Turning now to Slide 10, I'll discuss additional details of our operating basis revenue for 2Q '15. First I would note that the stronger U.S.

dollar adversely impacted total fee revenue by approximately $71 million as compared to 2Q '14 with a similar benefit to total expenses. Net interest revenue was adversely impacted by the strong U.S. dollar by approximately $17 million compared to 2Q '14. Foreign currency translation did not materially affect sequential quarterly results.

Servicing fees were up from 2Q '14 primarily due to net new business and stronger U.S. equity markets partially offset by the impact of the stronger U.S. dollar. On a constant currency basis servicing fees were up approximately 7% compared to the year-ago period. Management fees increased modestly relative to the year-ago primarily due to higher U.S.

equity markets and net new business partially offset by the impact of the stronger U.S. dollar. On a constant currency basis management fees increased approximately 6% compared to the year-ago period. Total trading services revenue increased from 2Q 2014 due to higher FX trading revenue reflecting higher volatility in volumes.

Compared to 1Q '15 FX trading revenue decreased due to lower volatility. Securities finance revenue increased from 2Q '14 primarily due to new business in enhanced custody and was higher than 1Q '15 reflecting the seasonal increase of revenues in this business which tends to peak in the second quarter.

Processing fees and other revenue increased primarily due to higher revenue associated with tax evasion investments. Moving now to Slide 11. You can see our operating basis net interest revenue and net interest margin continue to be challenged in the prolonged low interest rate environment.

Operating basis in IR decreased from 2Q '14 primarily due to lower market interest rates partially offset by higher client deposits. Now let's turn to Slide 12 to review 2Q '15 operating basis expenses. Total operating basis expenses increased 3.5% compared to 2Q 2014.

As a reminder 1Q '15 expenses included an incremental $137 million associated with the seasonal deferred incentive compensation for retirement eligible employees and payroll taxes.

Compared to the 2Q 2014 result compensation and benefits expenses increased modestly reflecting increased cost to support to business and regulatory initiatives mostly offset by the benefit of the stronger U.S. dollar. Transaction processing service expenses increased primarily due to higher volumes.

Occupancy expenses decreased from 1Q '15 reflecting certain one-time positive items in 2Q '15 for 3Q '15 we expect occupancy expenses to increase as the beneficial items of 2Q '15 are unlikely to repeat. Other operating expenses increased sequentially and from the year-ago quarter primarily due to additional regulatory and compliance costs.

Turning now to Slide 13. I will provide a brief overview of our June 30, 2015 balance sheet. During 2Q '15 we took several actions to move towards our balance sheet optimization and regulatory compliance objectives. The impact included a small increase in the duration of our investment portfolio assets.

Now turn to Slide 14 to review our capital position. As you can see we remained well capitalized which has enabled us to accomplishing top priority of returning capital to shareholders through dividends and common stock repurchases.

At June 30th, our common equity Tier 1 ratios under the Basal III fully phased in standardized approach increased from March 31st principally due to lower credit risk. Under the fully phased and advanced approach our common equity Tier 1 ratios remained relatively unchanged from March 31st.

The fully phased in holding company supplementary leverage ratio increased from 1Q '15 primarily due to the issuance of $750 million of preferred stock in 2Q '15. On Monday Federal Reserve issued the final [GSIP] rule which contains the methodology used to determine the capital surcharge for the eight systematically important U.S. Banks.

The Federal Reserve's estimate for State Street indicates a surcharge of 1.5% and this is consistent with our discussion of the potential impact of the proposed rule during our investor day this past February.

The primary driver of the higher surcharge under the final rule is a level of non-operational deposits from clients which rule classifies short-term wholesale funds. Now that the rule is final we'll incorporate the surcharge into our balance sheet and capital optimization efforts.

Since excess deposits on the primary driver on the higher surcharge this final rule increases the importance of our objective to materially reduce these excess deposits. Now I'll guess the question likely we are on investors and analyst minds and that is how is our program tracking to reduce the level of excess deposits or our balance sheet.

We continue to have discussions with our largest clients regarding the implications for our balance sheet associated with excess deposits and to work together to identify solutions. Although these discussions were constructive our average excess deposits in 2Q '15 did increase as the external factors driving these balances did not abate.

We continue to take actions appropriate for each market for example in Europe we've increased the rate we are charging for Euro deposits. So overall we're targeting a net reduction in excess deposits over the remainder of the year from the 2Q '15 levels. Turning now to Slide 15, we continue to maintain our outlook for the full year 2015.

Despite the weaker Euro exchange rate we continue to expect 2015 total operating basis fee revenue to increase 4% to 7% compared to full year 2014. We also continue to target our operating basis total fee revenue growth to outpace our operating basis expense growth by at least 200 basis points for the full year 2015 relative to 2104.

Regarding NIR we expect full year 2015 operating basis NIR to be between $2.16 billion and $2.22 billion. The range assumes that the Fed increases rates in December of 2015. The administered rates do not change in Europe and client deposits will decline over the remainder of the year from their 2Q '15 levels.

We expect to the year at the lower-end of the range as there are no rate increases in the U.S. Lastly we continue to expect our operating basis effective tax rate to be approximately 30% to 32% for the full year of 2015.

Since our 2015 year-to-date tax rate was 29.1%, we expect the operating basis effective tax rate for the back half of 2015 to be in the range of 32% to 34%.

So in summary our 2Q '15 results were driven by positive momentum in servicing fees and securities finance seasonality offset by softer FX trading revenue and continued pressure on net interest revenue.

We continue to focus on our key priorities in delivering value-added solutions to our clients, investing in growth initiatives, diligently managing expenses and returning capital to shareholders. And with that I'll turn the call back to Jay..

Thanks Mike and I have nothing further to say, Holly so we can open the call up to questions..

[Operator Instructions]. I'll now introduce to our first caller. Your first caller's name is Ashley Serrao with Credit Suisse..

How you thinking about the duration of your portfolio and capacity to extend and like a 50% of your portfolio now being fixed which is the highest it has been in the while and only 1 billion of purchases in 2Q which is a lowest as it's been in a while..

So, good morning Ashley it's Mike. First of all there is been no change in our overall philosophy Ashley and that is that as it relates to the investment portfolio we continue to invest through the cycle. We continue to have the same type of ALM kinds of risk management practices that we've had in the past.

Related to your specific question around the durations, yes it is the case that the -- we can sell in particular some floating rate ABS securities into queue and as a result what's left in the portfolio doesn't have longer average duration but again importantly the overall duration of the assets out of our balance sheet did not change materially quarter-over-quarter.

As those -- we did have a higher amount left in cash at the end of the quarter. So again I would expect that there would be no material change over the remainder of the year in terms of our philosophy but we will continue to make these tactical changes to work towards balance sheet optimization particularly under the new regulatory requirements..

So does this also mean that the -- that the time line that you provided at analyst day for NIM to reset to higher levels remains unchanged..

That is correct Ashley. At this time no change to those longer-term expectations. So obviously there is a lot going on in the environment in terms of how long will it take to get there between market interest rates and the regulatory environment but no change at this point in terms of our long-term expectations..

Final question here.

Can you just give us an update on your efforts to bolster your European ETF business? And also to drive a focus on return on capital from a compensation standpoint?.

Let me start that one Ashley, the ETF business is present in North America, Europe and Asia although as you I think pointed out we’re much more heavy in the U.S. than in Europe and we've been focusing on the European ETF business.

It's been really in two dimensions, one is adding distribution wholesalers that largely sell into the private bank and banking networks on the continent in Europe that’s going well. We've made several hires over the course of the last six months. So from a standpoint of feet on the ground distribution we continue to ramp up.

Actually the second place that our efforts are going is in the product development side which is a kind of a two key elements of successfully to add franchise. And as I noted in my comments 45 new products introduced so far this year, some portion of those are in Europe.

So I would say the effort is underway, we think it's a robust opportunity for us, one of the key opportunities for SSGA.

Your second question Ashley was our efforts to improve our return on equity?.

First from a compensation standpoint, when you look at new business?.

Look at new business, I'm still not sure I got the source of the question. Let me try. Maybe you are referring to is that recently as return on capital has been a more prominent part of how you look at us and how we look at our business.

We've turned to looking at return on capital from a customer standpoint and we will have by the end of the year, I think our top 200 customers all calculated out with regards to what the return on capital is, and those statistics end up with client relationship people and their challenge is to improve that return on capital.

And I think the closer we get that to our top customers the better shot we have at rebalancing mix whether it's product mix or client profitability in order to drive improved return on capital for initially that 200 customers.

And we think between what we’re doing at the top of the house principally on the balance sheet and in excess deposits and then what we’re doing with those 200 customers that’s the right blend of strategies in order to make sure that we consistently improve our return on equity over time..

Ashley it's Mike I would just add two other points. One is we have incorporated that same discipline in terms of looking at returns at the client level on prospected new business as well. So it is both a new business initiative as well as the existing customers that the Jay described.

And the second point I would do is just to reinforce something that Jay said and that is in the near-term the most important thing we can do to improve the company's ROE is to reduce the non-operational deposits and or get those price that they are going to stay on the balance sheet get those price to pay for the required capital that’s associated in, and I can assure that the entire management team is aligned around that effort..

And your next question comes from the line of Glenn Schorr with Evercore ISI..

Curious, on Slide 24 you gave us the ex-currency impact on both revenue season and expenses. I guess my question is with the operating expenses up 7.4% year-on-year ex-currency, a lot of that’s driven by the other line and that’s legal and regulatory.

Are you able to pars that out on what’s legal and what’s regulatory because obviously going forward we’re going to just be able to strip out what’s the bottom-line there is a lot of moving parts here. Fees we get are still growing, currencies impacting but it seems like expenses is just still keeping pace with the revenues..

Sure Glenn its Mike. It is the case that the major driver on the year-over-year increase in other operating expenses is the regulatory compliance expenses. And in particular the outside consulting expenses we had communicated to you at Q1 that we thought those were seasonally low and they have certainly rebounded here at Q2.

Basically the work that we have underway right now is number one, over time to reduce those outside consulting expenses by completing the projects, completing and getting up to fully acceptable regulatory expectations but also second over time replacing those outside consultants with full time staff.

And so I do expect that we will see a reduction in the second half of the year in terms of the other operating expenses related to both of those, I would rather at this not put a precise number on it because it depends upon a number of factors not the least of which is our success rate in terms of hiring full time staff to replace these people.

But it is the case of the big driver is the regulatory compliance expenses. Now I would point out just to be completely balanced that we're still on track to meet our full year expectation and that is to have fee revenue growth outpace our overall expense growth by at least 200 basis points.

And we view that as a positive accomplishment in this environment. As I've described to you before that's a better result than we had in that metric in 2014 so again in light of the regulatory situation we view that as a positive step forward..

Just one other follow up. On the securities finance revenue is up I guess 5%, a lot of it is new business and the environment.

I'm just curious, what's enhanced custody and if you're seeing any pressures on either rates, spreads or fee splits?.

Sure Glenn, in terms of enhanced custody, enhanced custody was a little less than a third of the securities finance revenue in Q2 so specifically was $48 million of revenue out of a 155 in Q2. In terms of the spreads and fee splits I would say no material change in that environment.

I would note that the seasonal trade was in fact less valuable than it's been in prior years. So there wasn't as much benefit from seasonality given the European economic situation. So that in fact was a modest headwind in Q2 versus what it's been in prior years..

Just a tiny follow up on the expense commentary we just had.

Does that mean the second half on the other line stays at this level given that you know you're still building out the BSAML systems and things like that, should we look for that to on the year-on-year basis still grow but on an absolute dollar basis be level?.

Glenn, relative to Q2, I would expect the other operating expenses to be lower in Q3 and Q4 subject to the caveat that that does, it does assume that number one we are effective in executing the initiatives that we have on the table right now.

And number two, that we are successful in hiring additional full time staff to replace those outside consulting expenses. And again neither of those are trivial but my expectation at this point is that 338 will not be the run rate going forward to the second half of the year that it would be something lower..

And your next question will come from the line of Ken Usdin with Jefferies..

Mike if I could ask you a question about balance sheet leverage on deposits.

First of all can you try to help us understand how much you're going to try to move off the balance sheet on those excess deposits? What kind of effect do you think you can have on the leverage ratio and whether the impact of those deposit outflows is reflected in your outlook for NIR?.

Sure Ken, good morning. First on the on your specific question on how much do we expect to get off the balance sheet. At this point Ken I'd really prefer not to put a precise number on it, we are in the midst of client communications as we speak and it is a sensitive issue. So we're really looking for a win-win with our clients.

I mean just to give a couple of examples, several of our 40 Act fund clients for example are feeling more pressured to hold more liquidity as a result of their own regulatory pressure. So again it's not just a question of basically demanding that that liquidity comes off. So instead we're really looking for the win-win there.

Another example would be in Europe where certainly with all the turmoil going on economically there we have been viewed as a safe haven by several of our important clients now we're obviously charging more for European deposits than we were earlier this year and we recognize that given the economics of having to issue additional prefs to ultimately pay for these deposits that ultimately we need to earn something in the 60 to 70 basis point range of interest margin to pay for the prefs.

It is important either to charge enough to make the economics work or to get the deposits off the balance sheet. And the latter we think could occur either through us charging more or through finding a different win-win with our clients or in fact we think it will naturally happen as interest rates rise.

So again I at this point really not commit to a number but I'd rather tell you that we are expecting a reduction in deposit levels in the second half of the year. As it relates to your question around NIR what I would remind you is that on average right now for excess deposits we estimate that we're earning a spread in the high teens.

So based on that you could conclude that a $10 billion drop in our average excess deposits would reduce near term NIR by $4 million to $5 million in a quarter. And that is built into the updated NIR range that I gave you in the prepared remarks. So I'd rather not give you a specific number but that is the thinking that is in the overall range..

And then just as a quick follow-up.

How do we understand the go, no-go decision on timing and magnitude preferred potential?.

Sure, Ken regarding prefs, it really will depend upon a number of things including the overall environment and will include our success rate; both that we're seeing to date but also our expected continued success rate on reducing the level of non-operational deposits.

It will include our analysis of our balance sheet for the next CCAR period which is Q4 of this calendar year. So again I'm confident that we could issues prefs if we need to but at this point I would not tell you that we've drawn specific conclusions on a pref insurance plan..

And your next question will come from the line of Brian Bedell with Deutsche Bank..

Maybe just on the excess deposits. Can you just give us some number of what they currently are or what the range that you view for excess deposits and then the deposit levels in Europe and UK..

Regarding our current level of excess deposits if we look at Q2 average in particular we estimate that our Q2 average excess deposits were approximately $62 billion which is an increase relative to Q1 of approximately 8 billion.

Now importantly I would add for completeness, please remember here that the LCR rules are now in effect and therefore because of our interpretation of those rules and the regulatory expectations related to those rules.

Some of the deposits that we've historically thought of as operational deposits don’t in fact qualify under the LCR to be operational deposits. So specifically for example, our hedge fund clients and private equity clients just as part of their normal operations is part of us being the custody service provider.

We have viewed those historically as operational deposits but there is specifically excluded under the LCR regulations to be included as those. So the round number is 20 billion deposits from those are clients, a portion of those need to be ultimately added to the 62 billion as we calculate LCR over the future.

So it's another example of the regulatory environment forcing us to be more conservative than we've done historically. So again 62 under our traditional method and let me -- look at this as TBD, as the LCR further unfolds.

As it relates to your question around European deposits we did see an increase in deposits in Europe, specifically Q2 average European deposits were $40.5 billion. So call that 36 billion to 37 billion of Euro balance and that was up about 4$.5 billion. relative to the Q1 average levels..

Brian, just to give you a little -- this is Jay, maybe provide a little bit of nuance color. I was just in Europe a few weeks and I was directly involved in some of these discussions with customers and we're for the major customers who have meaningful excess balance.

We're speaking to all of them and I would say a couple of things that to me you're encouraging, I'm convinced we'll make headwind against those. I don’t how much, but when -- but one day we acknowledge the issue, it's a broad based issue. There's even some pressure on the European Banks finally to shed some of these deposits as well.

So it's become a more broad based issue. I think the discussions -- I reading to some creative alternatives for suites and another approaches to move these deposits off and Mike mentioned that average quarter-to-quarter we've actually seen some progress in some of these specific customers.

So, it helps so we're out in front of it, I think the discussions are going well. I think we'll find ourselves with lower excess deposits we end the year. It's hard to say how much..

And the period ended up much higher but we should probably ignore the -- sincerity and the period numbers that we are assuming.

Your idea has really has the direction of the deposit good [ones] and for an average basis is it correct?.

That is correct -- we typically see spikes at quarter end but I think the average is more relevant because in fact the capital ratios for example our calculated based on the average..

And then great just my follow up would be as you were talking before about to look into top 200 customers and trying to assess the return on capital from assessments and then I think you also mentioned you're using this framework for new business and maybe either Jay or Mike you could comment on -- I know banking Europe -- that large middle office deal with Euro that something in the -- you would typically win since you're by far the leader in middle office.

How maybe you could frame sort of the view on assessing that for new customers in the go forward dynamic of middle office whether you think you might be more competitive or more disciplined going forward?.

So I think broadly Brian when you put the return on capital and on a prospective customer, the places that get accentuated are things like any loans that we might have, securities lending particularly indemnified REPO within the product set from services to foreign exchange to securities lending to fund accounting they all have slightly different return on equity calculation.

So by looking at it through a return on capital lens you do get a more holistic view. I would say relative to middle-office it's really a profitability equation.

It doesn't draw any capital necessarily it's really-- can you drive sufficient profitability in order to make a middle-office deal make sense in the construct of a piece of a larger relationship.

So I deal with probably more as a traditional accounting and custody relationship as far as its return characteristics but the key component is can you money? As you know we have -- we think it's over 10 trillion in assets that we administer in the middle-office and have been have at this for 15 years maybe.

We've learned a lot through the 15 years about what makes us a successful middle-office deal. And for me it's largely about the complexity factor whether it involves lift outs, the degree of customization on the system side.

So we continue to have handful of middle-office prospects out there and we look pretty closely at whether or not we can make them a creative rate return over the reasonable period of time..

And so you are still favorable on this business I assume..

Yes. And I would say just from a broader trend basis Brian you have no doubt heard more than you probably want to hear about us on our regulatory compliance challenge here it's hitting asset managers, it's hitting asset owners and so middle-office will continue to be a very important incremental product that we sell.

We just need to make sure that it's done well with good pricing discipline..

And your next question will come from the line of Luke Montgomery with Bernstein Research..

Another stab at the securities portfolio, I know you have been realigning the mix of securities for the LCR and then fine tuning the balance sheet overall for the SLR.

But in dollar terms what’s driving the shrinkage of the portfolio and should we expect that to continue? Is that part of managing the overall duration of the balance sheet?.

Sure, Luke its Mike. First in terms of what’s driving our optimization work, I would really put it in the three different buckets. The first is that, overall we want to improve our capital ratios and then includes the risk based ratios as well as the leverage ratios.

Second, we’re looking to improve our mark-to-market sensitivity as measured at the next CCAR cycle, so that’s a consideration and then third of course is the meeting the heightened liquidity expectation.

So specifically if we look at for example the sale of our folding rate ABS that’s a good example where we’re getting a relatively low printed spread that we viewed it as having a relatively high mark-to-market sensitivity during the CCAR cycle and of course it doesn't count as HQ away. So that would be an example of something to shrink.

I would not characterize the changes in the securities portfolio as part of an overall change in the duration of the assets on our balance sheet, as I said in one of the earlier answers the overall duration of the assets of our balance sheet did not change materially sequentially.

So in fact what we did was we decreased the folding ABS securities which meant that the remaining duration of the remaining portfolio got longer, but that money for the most part is sitting in cash. I would expect that we would be deploying over the second half of the year round number is approximately 5 billion that at June 30th was sitting in cash.

So I would not expect that, again it's based on whole lot of different factors but I would not expect additional shrinkage in the overall investment portfolio in dollar terms over the remainder of the year. But again importantly it is optimization is somewhat of the rubik's cube there is a lot of different consideration.

So it will be work that we’ll continue to for a while..

This is the fourth quarter in a row you provisioned for legal contingencies; I know you can't talk about particulars but just any sense of how far along you are on the need for further provisioning.

I don't take this as combative but you excluded from operating basis results, but it's getting to the point of kind of usual or unusual or recurring non-recurring and I think it has an impact in your capital ratio. So any help there will be helpful..

Let me take a cut at that Lukas, JV. This is the provision relates to the indirect foreign exchange issue that predates 2010 just to put a box around it. And as you noted over the last couple of quarters we've been taking incremental provisions. We believe that we've reached financial terms with the counterparties that we have this deal with.

What we haven't done is complete the terms and conditions of the agreement and specific language. We would expect that not only financially but relative to all the agreements that we can reach a conclusion shortly and that we can put this behind us.

So I don't know if that helps but we hope that this is from a financial standpoint the end of that issue..

And your next question will come from the line of Betsy Graseck with Morgan Stanley..

Two follow ups, one on just what you're going through Jay, I noticed there was an update to the operational risk model and you know that putting the pieces together it seems like that's probably due to the fact that you're close to an end in FX charges, is that an accurate read across?.

Betsy its Mike. It is the case that we did update the operational risk capital model as we typically do once a year, that was updated in Q2 and that was part of the divergence between the improvements on the standardized approach risk based capital ratios and the advanced approach risk based capital ratios.

However that is not driven by our own FX settlement discussions, it's driven by a number of other factors including what the industry experience has been historically..

And then is the conclusion when you do conclude the FX legal situation there's no further update to the risk model, the operational risk model..

Betsy, the operational risk model in particular has a lot of different moving parts so I wouldn't try to speculate on future updates to that level. But I would remind you that at this point our binding constraint tends to be the standardized approach and I would expect that to be the case for a while..

And then just separately follow up on the non-operating deposits.

I guess I'm wondering if we could get a little bit of color Jay from the kind of things that clients could do with you to potentially either reduce or bring on, I'm not sure if this is what you're referring to, but bring on new business that would enable you to potentially change some of the definitions from non operating to operating.

For example if it's a broad set of businesses that their folks are doing with you..

Yes, no, it's really less the latter Betsy, it was, let me just give you a few things.

One, I think I mentioned this last call and Mike referenced the SEC is very focused around you know liquidity management and 40 Act and the broader based asset management world and we've introduced a pretty sophisticated tool that allows asset managers to stress their liquidity and so the one way we're helping is we're helping them optimize their own liquidity stress testing which sometimes adds to their liquidity sometimes reduces their liquidity needs.

But with regard to the conversations it's usually around can we sweep some of the deposits, can we use repo facility. It gets into that level of how do we move deposits out of pure cash which end up on our balance sheet.

And there are handful of approaches and depending on the customer and their view of required liquidity in capital we have different outlets.

Probably the most important thing that I would leave you with is these are constructive conversations where you know our customers as we would help them, they're looking to help us so it's not contentious it's just how can we do, how can we move these deposits and do it on a sustainable basis.

So at period ends we tend to get spikes in deposits we want to manage those down but we're really looking for some more durable sustainable solutions which will allow us to manage these things and control them over time.

The last point I would make is that you know pricing has always, usually a pretty good way to create behavior and in Europe around the Euro we've introduced pricing, I think we've moved it up three times, it feels like we're reaching that point of equilibrium where it has a cost associated with using our balance sheet and therefore our customers are more sensitive to the cost so we're thinking about not only cost on a ongoing basis but also think about kind of surge pricing that you know if deposits were to go past a certain point the cost of using our balance sheet would go up by a lot and so those discussions and those mechanisms are starting to give us, one we're having better conversations and I think that we are you know likely to improve our situation with regard to excess deposits..

And your next question will come from the line of Mike Mayo with CLSA..

Hi. Can you just reconcile two thoughts on the one end you are the port in the storm, your source are strength in Europe, your earnings assets were up 3% every three months, and on the other end, NIR declined and you expect that to perhaps go lower.

Is that all due to the excess deposit issue or is there something else going on to?.

So Mike its Mike. Related to Europe, yeah it is the case that we are viewed as a safe haven in Europe and that certainly is a significant contributor to the increase in the deposit base that we saw in Q2 relative to Q1.

I mean another issue though is just that the lack of good alternatives for our European clients which relates to your second point and that is that the interest rate environment they are generally along with the credit environment is not particularly attractive.

So there is downward pressure on our own NIR related to the assets that back the European deposits.

One another point I would note, Jay was talking earlier about a specific client discussions in Europe, I would note that where we've had additional success with some clients in Europe relates to encouraging them through discussions but also with the implied lever of pricing to move out of cash deposits on our balance sheet into for example short-term government bonds and I would expect that over time we'll see more of that movement in Europe for all the reasons that I just mentioned..

I mean your peers also had earnings asset growth but NIR was higher whereas Euro was down.

Is it relates just the degree that you are in Europe that's the difference? Or anything else?.

Yes, again Mike I don’t like to really speculate on our competitive results. My interpretation of the comparison that you are drawing here is more from the starting point as oppose to some fundamental difference in mix. And therefore our outlook has really remained relatively unchanged throughout this year in terms of NIR.

And I -- it's for all the reasons that we've talked about. We expect that excess deposits to come off in addition until we do get a meaningful improvement in market interest rates. We're going to continue to be negatively impacted by this grind of the turnover in our portfolio. Those dynamics have not changed..

And that you lowered your NIR upper end of your range just a little bit.

Is that right?.

That’s correct, that's mainly driven by our view now that it is unlikely that the Bank of England will raise rates in August. If you recall that was one of the assumptions that we had applied in the rising interest rate scenario at the Investor Day.

We think that is unlikely to happen at least in August and that’s really the primary reason for the drop in the very upper end of the positive -- environment range..

And last one, NIR, so you have 62 billion of excess deposits you plan on reducing that. That reduction is in the updated NIR guidance.

You're just not telling us how much excess deposit reduction you expect to have for competitive end client?.

That is correct Mike and again we have a range built in there as you can imagine because we don’t have a crystal ball and exactly how much they're going to decline but we do have a decline build in there. Operator Your next will come from the line of Alex Blostein with Goldman Sachs..

Question for you on expenses.

So, maybe just there is a couple of moving pieces obviously, but help us understand how we should I guess think about dollar terms for the back half of the year given the fact that second quarter expense growth was a little bit 20 basis points year-over-year versus the revenue growth which is obviously below kind of your 200 basis points.

I get the fact on a year-to-date basis you guys are still looking pretty good.

But just kind of curious to see where is their flexibility in the model on the expense front into the back half of the year to help you achieve that 200 basis points plus?.

Sure, I mean the short answer is that it really does depend upon a handful of important factors. One is of course the overall level of net new business that we add in the second half of the year that will directly tie the level of expense that we need to add to service that additional revenues that would be one.

Second as I mentioned earlier we do have work underway on the existing regulatory initiatives to work to replace outside consulting expenses with full time staff to the extent of possible and so our success rate there will be a key factor.

And then lastly, importantly we are looking at some additional expense actions literally as we speak and I would expect to be in a position to provide a more public update at our Q3 earnings call but we are looking at some additional expense actions to see what else can be done improve the overall productivity level beyond the regulatory piece that I mentioned..

And I guess the comments you guys are making around replacing consultants for full-time staff. When you go through the analysis on and are much spending on consultant versus how much it would cost you bringing in full-time headcount.

What’s the net benefit to pretax earnings from doing so?.

I'd really prefer not to try to give you a specific number at this point. Again it's fair to say that we do have some of that benefit built into our overall second half of the year expectations but I'd rather prefer -- rather not disaggregate specific number from our overall thinking..

And your next question will come from the line of Jim Mitchell with Buckingham Research..

Just a quick follow-up I's sorry to be the dead horse on the balance sheet, but ABS was down 7 billion period end that’s a pretty significant increase versus the sort of 2 billion a quarter that you have been doing in the prior year so is that are we getting closer to the end of the rebalancing for the LCR or is there still lot more to do in the ABS side.

I am just trying to get a sense of as the NIM compression going to start to be slow a little bit if that is done?.

Jim its Mike. First, at this point I expect that it is unlikely that we would have another material transaction that would shrink the ABS portfolio along the lines of what we did in Q2. I think that’s unlikely to happen in the second half of the year. But as I mentioned this optimization work is going to go on for a while.

So I wouldn't at this point foreclose the additional actions for example in 2016 along those lines.

Again remember that you've got these longer-term objectives it's not just the 2015 objective, we've got these longer-term objectives of strengthening our overall capital ratios and reducing the mark-to-market sensitivities that impact CCAR from as part of just our overall ROE improvement both of those objectives are important and really are somewhat separate from the near-term needs for LCR compliance..

But can you give us any help on timing and amount of additional mix shift?.

Again Jim I think that the mix shift will continue for several quarters, and again importantly that is factored into the NIR range that we gave in our prepared remarks..

And then maybe just a quick follow-up with the guidelines from the Fed and they said SLR will not be part of the next CCAR.

Does that some of the pressure off in terms of give you more time to think about how entire potentially higher interest rates effects deposits and takes the pressure off on the comfort side, can you give it another year to see how things progress or do you still have to kind of build in a glide path..

Jim you are absolutely right that was helpful to us probably to helpful to others as well that the NPR that was released around the 2016 CCAR indicated that SLR would not be part of the process for this year that is in fact helpful.

I would point out though that tier 1 leverage was to constraint at this past CCAR and that remains an important consideration for the next CCA, so it's certainly means to that it's still very important that we pay attention to the non-operational deposits as it relates to the capital for next year and any potential pref issuance in particular..

And your next question will come from the line of Adam Beatty with Bank of America..

Question on the pipeline and backlog in asset servicing, it looks like the backlog were to be installed came down somewhat in the quarter.

Does that create kind of a natural bias for higher servicing revenue subject of course to markets and currencies and also looks like the win rate ticked down a little bit do you expect that to normalize?.

Sure, let me take that one, this is Jay.

On the pipeline more broadly nothing really has changed its robust, its diverse, there is activity I just gone through over the last six weeks I've been on all continents and visited 15 different offices and there is a lot of activity that I think is stimulated by constrained environment compliance and regulatory. So pipelines are solid.

For the quarter we committed I think it was 143 billion and massive, that was a little low relative to what we've been running probably last couple of years we've been in the 200 billion to 300 billion range. I wouldn't read into it, I think just some other stuff this timing. So no read through there.

With regard to I think at the beginning of your question, we've got 174 billion I think that sounds right of assets that has committed that have not yet installed and I'm looking around the table, I think that’s about where we've been historically.

So the relationship between pipeline, kind of a funnel what we win and how we implement seems pretty steady. I would say in the 174 and in the 143 there aren’t big lumpy two year implantations, which will delay revenue, so we should expect a pretty steady stream of service fee revenue that would trickle out of those kind of few factors..

Adam its Mike, the only other thing I would add is you noted our GS revenue was strong in the quarter relative to both Q1 as well as a year ago and certainly we've gotten good contribution, we got contribution in Q2 from the net new business piece of it..

Also, on the asset management in terms of some of the redemptions in past, we've heard a couple of times this quarter about international and sovereign clients maybe having some liquidity needs based on lower commodity prices.

What's your outlook on that given where things are right now and given what you're hearing from your clients? Is there a potential for an additional draw down there or is that pretty much over in?.

I think that if you look at oil prices as probably maybe the biggest single driver of that, you know the, I don't know what your outlook for you know, crude is but it feels to me like was an adjustment from over a $100 a barrel to $50 a barrel as opposed to months and time kind of adjustment.

So I wouldn't expect there would be big additional outflows, I don't know I mean I think it's unlikely oil will go lower and therefore it feels more like a one-time adjustment versus something that we're going to see every quarter..

And your next question will come from the line of Brennan Hawken with UBS..

So first question on FX, revenues looked light versus peers and just wanted to, I don’t know whether there's a connection here but we saw the FX revenues come in a bit late and then we continue to see these FX charges ratchet and the discussion is ongoing.

Is it possible that there's a connection there?.

No, no connection at all Bren, you know if you look at -- we track as you'd expect pretty closely the indirect FX, the direct FX, the platform FX and all pretty steady as she goes, I think the -- you know it's hard to make any judgment on a quarter, I think if back at Investor Day I don't know if you recall this, but we showed our FX performance in absolute terms versus the near end peers both electronic and directly traded and it's quite a bit higher than on an absolute basis.

And I think if you stretch back over a couple two or three quarters and look at trends you would see our FX performance is good as if not better than the peers.

So nothing really in the quarter and certainly no connection between these litigation discussions which are historical and our customers understand that, have had no influence on indirect FX which is where if it had influence it would have influence..

And then maybe a bit more of a broad or strategic question on expenses. You know certainly this is not easy times for large financial services companies and GSIBs but you could argue that higher regulatory expense pressure is not really environmental but now it's just part of the new operating landscape rather than being a transient factor.

And I know you referenced that you're looking to do a few things, later in the year, so clearly that's not lost on you but you know, I sense from conversations with investors that there's increasing frustration on a lack of push on the expense front.

The revenue kind of is what it is, expenses are bit more in your control, why is it, can you help us understand why there hasn't been more movement on the expense front..

Yes, let me start that one and then Mike can maybe jump in.

So first off I agree with your point of view that the regulatory compliance is a structural shift and I think most firms are trying to deal with the immediacy and then the ongoing nature of, how no idea comply with these things but how do you comply with these things in a highly automated way which is the kind of way we would look at anything at State Street.

So we've got a combination of addressing that with you know manpower, consultants, individuals but ultimately want to apply technology and drive down the cost of complying not only for ourselves but as a service to our customers. But let me just introduce another front which is maybe what the comment that Mike made few cycles ago.

You know we went through the five year IT and Ops transformation plan and I think it was, it set us up nicely.

You've heard me talk about the fact that we’ve had great core discipline around core systems, we haven't drifted to multiple systems and we’ve taken those common systems and improved the processes and we've leveraged work sites, China, Poland at all, we continue to do that.

There's an ongoing opportunity now that we've moved in that direction to continue to apply technology to replace labor and so you know part of what has underpinned the last year have been the regulatory and compliance cost offset by some of the operational improvements that we're making which is really a fine technology to reduce labor.

There is much more opportunity to do more there, so what we're thinking about is the way to accelerate some of that activity to do more assistance to accelerate the minimization of the labor content and the work output, if I can say that way.

And we view that and we have viewed that as something that's ongoing because we don’t believe among that the regulatory compliance pressure lets up and we don’t know when the top line environment gets better.

So the thing we can control is the expenses, so we've in the background been continuing to invest in technology to improve our operational efficiency but the question is can we do more; can we accelerate some of that activity.

If that helps?.

And our last question will come from the line of Geoffrey Elliott with Autonomous Research..

Starting with some of the regulatory type issues that is being going on with BSA, AML and then with the Wells notice but you received I think relating to still lobbying around the pensions business.

Are those having any impact on growth and that new generation you kind of have to focus a bit more internally rather than externally and going out and winning new business?.

Yes, fair question Geoffrey. I would say no, pretty directly the AML, BSA activity is -- we were criticized for not having the level of process that the regulators expected and wanted us to have so we have -- and we've been at this for 18 months.

It's a pretty segregated activity that we're conducting country-by-country, business-by-business and so it's pretty content, it's got project plans, it's managed separately from the business line.

So I really don’t think this going hinder our ability to grow the revenue line and on the Wells notice reference which again is kind of pre 2012 reference to acquisition of pension retirement plans using consultants and again we are working through that.

We've got a different point of view than others on that but it doesn’t, it hasn’t and shouldn’t affect any revenue generation..

And then just a quick follow up on something you said earlier. You mentioned the [GSIP] buffers as a fact that it feeds into the walk around non-operational deposits.

Is it all that to come down from 150 bps to 100 bps and so how much you need to do get yourself into the lower bucket?.

Geoffrey, its Mike. There are a number of different nuances with the final rule that just came out on Monday.

So I think it's a little bit early to give you a specific number but it's not lost of us that the increased excess deposits over the last couple of years is the single biggest factor driving our [GSIP] surcharge up and therefore I just -- it's a really -- it increases what was already a priority. It increases the importance of reducing those.

Now again, some of that will happen from our actions. We think some of that will happen naturally as market interest rates rise but it does increase the importance of that work. I think it's the most important thing I wouldn’t leave you for this way.

I think that a 150 basis points [GSIP] surcharge by itself is manageable but again there are -- number one, we would obviously like to have reduce the as the piece that's related to the excess deposits and just more of an incentive to get that accomplish..

And just to be clear for everybody on the call that it's our expectation as if we do that and 150 or whatever it is vary. So there will be recalibration of that. So there is a motivation incentive to draw deposits down..

Thank you and that was our final question. I'll turn the conference call back over to management for closing remarks..

Yes Holly just a quick thanks to everybody for their attention and we look forward to speaking you after the third quarter. Thanks..

Once again we'd like to thank you for your participation on today's State Street's conference call. You may now disconnect..