Anthony Ostler - SVP, Global Head IR Joseph Hooley - Chairman & CEO Michael Bell - EVP & CFO.

Glenn Schorr - Evercore ISI Ashley Serrao - Credit Suisse Brennan Hawken - UBS Securities Ken Usdin - Jefferies Jim Mitchell - Buckingham Research Brian Bedell - Deutsche Bank Alex Blostein - Goldman Sachs Betsy Graseck - Morgan Stanley Gerard Cassidy - RBC Vivek Juneja - JP Morgan Brian Kleinhanzl - KBW Geoffrey Elliott - Autonomous Research.

Good morning, and welcome to State Street Corporation's Third Quarter 2016 Earnings Conference Call and Webcast. Today's discussion is being broadcast live on State Street's website at investors.statestreet.com. This conference call is being recorded for replay. State Street's conference call is copyrighted and all rights are reserved.

This call may not be recorded for rebroadcast or distribution, in whole or in part, without the expressed written authorization from State Street Corporation. The only authorized broadcast for this call will be housed on State Street website. Now I would like to introduce Anthony Ostler, Senior Vice President of Investor Relations at State Street..

Thank you, Amy. Good morning and thank you all for joining us. On our call today, our Chairman and CEO, Jay Hooley, will speak first. Then, Mike Bell, our CFO, will take you through our third quarter 2016 earnings slide presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.com.

Afterwards, we'll be happy to take questions. During the Q&A, please limit your questions to two questions and then re-queue. 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 3Q '16 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 3Q '16 slide presentation under the heading Forward-Looking Statements; and in our SEC filings, including the Risk Factors section of our 2015 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. As with the past few quarters, we are continuing with the new pattern of releasing our financial results on the fourth Wednesday of the month following each quarter end.

As such, we expect to hold our fourth quarter earnings call on Wednesday, January 25, 2017. Now, let me turn it over to Jay..

Thanks, Anthony. Good morning, everyone. I'm pleased with our performance in 3Q '16 and our ability to deliver positive fee operating leverage for the first nine months of 2016 compared to the same period in 2015. Our results reflect continued momentum in fee revenue and our ongoing commitment to expense management.

Our new business results remain strong with $1.3 trillion in new assets servicing commitments year-to-date including $212 billion in the third quarter.

We're making good progress in the implementation of State Street Beacon, our multi-year program to digitize our business, deliver significant value and innovation for our clients and lower expenses across the organization.

Importantly, through the execution of State Street Beacon we are differentiating our capabilities by providing enhanced analytics and insights to our clients to help manage their enterprise data and enhance their operational performance and risk management.

The integration of our recent acquisition of GE Asset Management is going well with over 260 employees successfully on-boarded and client retention exceeding our objectives. This acquisition extends SSGA's core investment management and alternatives capabilities, and enhances the value add solutions to our clients.

I'll turn your attention to Slide number 5 to highlight our continued progress against our 2016 strategic priorities. We continue to advance our objective to become a digital leader in financial services to execution of State Street Beacon.

Throughout the third quarter of 2016 we continue to improve client service and advanced our goal of creating a digitally enabled platform to improve the breath of product offerings and efficiency. Our platform is providing data quicker, better and with more transparency than ever before.

For example, we have delivered a number of new solutions including net asset value oversight, creating more line of sight into the composition of a fund's net asset value at the end of the day, and enhanced asset owner strategy providing support to asset onus as they in-source asset management in enterprise pricing web which prices our clients' funds faster than ever before.

We also have a solution to meet the new SEC modernization rules that were finalized early in October, and we are already seeing strong interest from our clients. In terms of driving growth from our core franchise, we continue to achieve strong asset servicing wins with approximately $212 billion in the quarter.

Our new business is yet to be installed at quarter-end; it was just over $500 billion. An example of our efforts to build on existing relationships is that we were recently appointed by our long-standing client PIMCO to provide investment manager services outsourcing in support of $1.55 trillion in assets.

Separately and a mandate that we have one pending final contract negotiations, PIMCO has selected State Street to provide accounting custody, fund administration, and transfer agency services for an additional $140 billion in offshore funds which is a high growth market segment.

State Street's industry leading offshore fund services business, an operating platform with key considerations and PIMCO's decision to consolidate their business with State Street. In our asset management business, we continue to generate new business in our higher yielding product lines with $12 billion in 3Q '16 ETF net inflows.

We did experience overall outflows of $36 billion during the quarter, driven primarily by reductions of the cash invested in securities lending, and also money market reform making prime funds less appealing for certain investors, as well as institutional net outflows.

Importantly, these outflows were primarily in our lower-based fee institutional products. Separately, our State Street Global Exchange Group recently launched State Street Media Stats, a quantitative investment insights tool that draws from digital media and other large consumer data sets.

This platform allows clients to quickly and efficiently collect large volumes of data, analyze it, and assess impact on the price risk and liquidity of individual assets. We have now achieved positive fee operating leverage for the first three quarters of 2016 relative to the same period of 2015.

State Street Beacon has been a key factor in this progress and is ahead of our original schedule for 2016. We now expect to generate at least $165 million in estimated annual pre-tax expense savings in 2016 with a full effect felt in 2017.

Returning capital to our shareholders remains a strong priority and we declared quarterly common stock dividends per share of $0.38 in 3Q '16, an increase of 12% over 2Q '16. We also bought back $325 million in common stock.

We are focusing our attention and efforts on these strategic priorities which we expect will allow us to generate positive fee revenue growth and to achieve our objective to generate positive fee basis operating leverage this year relative to 2015.

And we would also like to let you know that in line with many of our peers that we will not be hosting in Investor Day in 2017 given our focus on executing our multi-year strategy that we laid out during our 2016 Investor Day.

We expect to provide a detailed update at our 2018 event and of course we'll provide updates on progress as we always do each quarter. Before I turn the call over to Mike, I want to note our announcement in September of the appointment of our new CFO; Eric Aboaf. Eric will join us in mid-December.

He served as the CFO at Citizens and prior to that spent a dozen years at Citi, including the last six as Treasurer. Eric brings a wide range of expertise in global banking regulation, treasury, and finance to the role of CFO which he will assume in March of 2017.

We truly appreciate Mike's hard work and efforts through the transition and he will continue to be our CFO through the end of 2016 fiscal reporting. We look forward to having Eric join the team to further execute the finance and treasury initiatives in support of our strategic priorities.

Now I'll turn the call over to Mike who will review our financial performance for the third quarter, and then we'll both be available to take your questions.

Mike?.

Thank you, Jay, and good morning everyone. This morning before I start my review of our operating basis results, I'd like to note that our GAAP basis results for the third quarter include two notable items; first, on July 1, 2016, we completed the acquisition of GE asset management.

Third quarter results included estimated revenue of $65 million, estimated ordinary business expenses of $57 million and approximately $29 million of acquisition-related costs. Second, we reported a pre-tax charge of approximately $42 million related to previously disclosed investigations by U.S. governmental agencies concerning our U.K.

transition management business in 2010 and 2011. Now refer to Slide 6 in the slide presentation for a discussion of our operating basis results for 3Q '16 and for the nine months ended September 30, 2016 which I'll refer to as year-to-date. 3Q '16 results reflect continued success managing our expenses and generating fee revenue growth.

Operating basis EPS for 3Q '16 increased to $1.35 per share from $1.15 in 3Q '15 and decreased from 2Q '16 which included the benefit from seasonality associated with securities finance. Year-to-date EPS increased 3% compared to the same period a year ago driven by a decrease in expenses and additional share repurchases.

Notably 3Q '16 pre-tax margin increased 190 basis points to 30.7% from 28.8% in the year ago period primarily reflecting strong expense management, particularly the continued execution of State Street Beacon, our multi-year program to create cost efficiencies and to digitize our business.

On the capital front, in 3Q '16 we declared a common stock dividend of $0.38 a share representing an increase of 12%, and we purchased $325 million of our common stock. Moving to Slide 7, we're pleased to achieve significant positive fee operating leverage in 3Q '16 compared to 3Q '15.

In addition, as you can see on Slide 8, continued progress in managing expenses has resulted in slight year-to-date positive fee operating leverage compared to the year ago period.

Now turn to Slide 9 for review of our 3Q '16 operating basis revenues; servicing fees increased from the year ago quarter and from 2Q '16 primarily due to net new business. Measurement fees increased from 3Q '15 and 2Q '16 primarily reflecting the contribution from the GE asset management acquisition.

Foreign exchange revenue decreased from 3Q '15, primarily due to lower volatility and client-related volumes. Securities finance revenue increased from 3Q '15 primarily reflecting growth in enhanced custody and higher spreads in our agency business.

Processing fees and other revenue increase from 3Q '15 due to higher revenue associated with tax evasion investments. Moving to Slide 10, net interest revenue decrease from 2Q '16 primarily reflecting lower investment portfolio yields, a temporary increase in wholesale funding in 3Q '16 and small number of discrete security prepayments in 2Q '16.

Now let's turn to Slide 11 to review 3Q '16 operating basis expenses. Notably expense control continued in 3Q '16, primarily reflecting strong progress for our State Street Beacon program and effective management of our other operating expenses.

Excluding the impact from GE asset management, total operating basis expenses decreased from the year-ago quarter driven by Beacon-related savings and a significant reduction in professional services costs, partially offset by higher regulatory expenses and cost of supporting our business. And then move to Slide 13 to review our capital highlights.

Our capital ratios remained strong which has enabled us to deliver on a key priority of returning capital to shareholders through dividends and common stock repurchases.

Compared to June 30, our common equity Tier 1 ratio increased under the fully faced in standardized and advanced approach, primarily driven by lower risk weighted assets, partially offset by the acquisition of GE asset management.

The September 30 fully phased in supplementary leverage ratio at the corporation and at the bank decreased modestly, primarily due to the GE asset management acquisition. We repurchased $325 million of common stock in 3Q '16 and our common stock purchase program announced in July of 2016.

Moving on to the next slide, I'll briefly discuss our recently completed acquisition of GE asset management. The acquisition of GE asset management supports our plan to allocate capital to higher growth and return businesses.

In 3Q '16 GE asset management contributed $65 million in estimated operating basis revenue and $57 million in estimated operating basis expenses. We continue to expect the acquisition to be accretive to operating basis EPS for the 12-month period beginning July 1, 2016.

We expect 4Q '16 fee revenue and expenses from the acquired business to be similar to 3Q '16 levels. Importantly, as the integration progresses we expect further revenue growth and expense synergies in the first half of 2017. Moving to Slide 15, I'll update you on where we stand regarding our financial outlook.

Please note that all of my comments relating to 4Q '16 and full year 2016 outlook exclude the impact from the acquisition of GE asset management. 3Q '16 results reflected strong expense management, as well as fee revenue growth.

We expect 4Q '16 results to support our target to achieve positive fee operating leverage for full year 2016 compared to full year 2015 assuming current market conditions. We now expect operating basis fee revenue growth for full year 2016 to be approximately flat versus full year 2015.

We expect full year 2016 operating basis expenses to be slightly lower relative to full year 2015; and 4Q '16 operating basis expenses to be slightly higher than 3Q '16 as we increase investments in State Street Beacon and are expected to incur regulatory related expenses.

Importantly, we now expect to deliver through the execution of State Street Beacon, at least a $165 million in estimated annual pre-tax savings for full year 2016. Moving on to net interest revenue; we expect 4Q '16 operating basis NIR to be slightly lower than 3Q '16.

And for full year NIR to exceed the high-end of our prior full year 2016 static scenario of $2.025 billion to $2.125 billion. In summary, we're pleased as the third quarter positions us well to achieve our 2016 financial objectives. And now, let me turn the call back over to Jay..

Thanks, Mike. And Amy, we're now available for questions..

[Operator Instructions] Your first question comes from the line of Glenn Schorr with Evercore ISI..

First question is, is the 165 up from 140 for the full year.

Should we think of that as a pull-forward of 2017 Beacon-related costs or is that incremental cost found throughout the process?.

Glenn, I would characterize it is a general acceleration in savings, I mean we're still targeting $550 million for the total program but importantly, the $125 billion of savings that we expect for 2017 has not changed.

So I really think of it as an overall acceleration, probably some '18 and '19 savings coming into '17 and then some of the '17 savings coming into '16. But importantly at this point, we haven't changed the 550..

No problem, we'll still take it. And then in terms of the -- just a lot of moving parts here, so any color would be great. You have decent asset under custody growth but the servicing fee was up 1%.

Can we talk about the dynamics of the asset, the type of business you're at because you're winning new business but what's rolling off and what kind of fee compression we're seeing underneath the covers?.

Yes, let me start that one Glenn. So you're right, the AUC quarter-to-quarter was up pretty nicely, the service fees are up 1%. I'd encourage you not to look at just a quarter, I think if you look at full year, we're up 5% which seems kind of in line with our assets over revenue metric that we use.

But I'd say in the third quarter specifically, we were -- you had markets mixed, if or down, domestic markets up, the strong dollar pushed back a little bit on service fees. So that's -- as opposed to 1%, if you look three quarters to-date, the 5% I think is probably a better reflection.

The business that we're winning as is typically the case is all over the place. Year-to-date, the EMEA business, largely Europe, has contributed over 50% of the new business wins.

Highlighted by -- we talked earlier in the year about the Allianz win and then more recently the PIMCO deal which is a big deal, $140 billion of offshore assets in a place that -- because of Brexit and other things I think will continue to see growth in those offshore domiciles of blocks.

And in Dublin, I guess the one other point I might make from a highlight standpoint as you've seen some trail-off in the hedge fund performance, so we've seen some outflows in hedge funds; my view is that that's more likely cyclical, I think performance recently has improved, I suspect the flows may have backed the other way.

But the money is going to go somewhere so we've seen more money move to other alternative categories, private equity, real estate which we view as a positive situation from the standpoint of opportunity. So pretty well balanced globally, little bit more of an emphasis on the U.K., on the European markets given some big deals.

And a little bit of mix out of hedge but moving to some of the other alternative asset classes is how I kind of characterize the story..

Great.

Between is the 140 PIMCO included in the 212 for the quarter of new wins?.

No..

Okay, great. Thanks guys..

Your next question comes from line of Ashley Serrao with Credit Suisse..

Good morning. Jay, did the asset management consolidation has been a theme and you've been active at GE.

And it looks like segment margins are moving in the right direction but when you think about the future of the investment franchise, do you think you had the right mix of active passive products or the right European footprint? And would you look to add more capabilities via M&A?.

Yes, Ashley, let me -- I would say that the GE acquisition was a big step forward and providing a more diversified and frankly, active oriented asset classes, not only in traditional equities in fixed income but also in the alternative classes.

So that was the biggest gap that we had and I think we've nicely filled that gap, you've heard from Mike's commentary that we're off to a good start with GE asset management.

I think where we've got a pretty decent balance when you look at our passive which still dominates the AUMs in the active business; increasingly we're investing as we talk about in ETFs and we had a good ETF quarter, not just ETFs but higher revenue yielding ETFs which is I think what drove the 5% year-to-date and the 5% quarter-to-quarter revenue uptick.

Multi-asset class solutions was another category where solutions generally -- but we can combine passive and active strategies to produce outcomes. It was also a good statement in the third quarter, we had good uptick and flows in the multi-asset class.

So I don't -- from an asset class coverage standpoint Ashley, I think we're -- there weren't any huge gaps. Again, I think GE is a -- plugs a big gap and we have high expectations that the GE Group who have good track records and a lot of their strategies can be leveraged against the distribution prowess of State Street.

I would say that -- the other last point I would make is that from a geographical standpoint, we're still focused on ETFs in Europe and I would say that's an unfolding story as we build up some of the distribution into the private banks and continue to enhance the product line up but your starting point was the consolidation in the asset management industry and I happen to think that we're probably at -- we're at the beginning of that phase and the end but we feel pretty good with regard to the competencies that we have to compete active, passive and solutions market, globally..

Okay, thanks for all the color there.

And Mike can you talk about tactical usage of wholesale funding in 3Q? Just walk us through the puts and takes for your 4Q net interest revenue guidance please?.

Sure. So Ashley first in terms of a wholesale funding, we did expand our use of wholesale funding in 3Q relative to 2Q by approximately $2.5 billion and we did that basically to accelerate some of the CD issuances that we otherwise would have had in 4Q under a normal operating environment, just given all the uncertainty in the turbulence.

As a result of our money market reform, we just thought it was prudent to go ahead and essentially advance finance the -- with higher levels of wholesale CDs in the 3Q. And so that cost us obviously some NIR but we expect that to be really relatively temporary because I would expect to get back to normal in 4Q.

So as we think about the role forward from 3Q to 4Q, it really -- Ashley it's mainly the story that we've talked about previously, we -- the portfolio turnover particularly in Europe continues to see maturing securities at higher yields than what we're able to reinvest those funds in at today, and so as a result of that grind in the rates we would expect to see modestly lower NIR in 4Q versus 3Q.

There are lot of moving parts in any given -- in a given quarter but those are really the headlines..

Okay, thanks for taking my questions..

Your next question comes from the line of Brennan Hawkins with UBS..

Good morning, thanks for taking the question. So just a question on Beacon for next year, I know Glenn touched on it but just to dig a little deeper, initially I think that the profile for cost savings on the program was to show an increase in 2017 versus the savings you initially expected in 2016.

Normally when these programs are devised, the second year -- it works out better than the first. Why shouldn't investors believe that that general profile and trajectory would remain intact despite -- and the idea that you had better savings this year would only lead to even better results next year..

Sure, Brennan, it's Mike. In terms of a Beacon, first off, maybe just stepping back from your question for just a second; I would emphasize -- I really feel like we've done a very good job in terms of project Beacon, not just on the expense side but also some of the improvements that have helped our overall service levels for our clients.

So overall, we're feeling really good about the program at this point.

In terms of your question specifically around the savings, the net savings in 2017 versus 2016, at this point Brennan we expect that there will be a continued uptick in investments that we're making around Beacon and we believe that those investments will pay-off handsomely in 2018, 2019, 2020; but as a result of accelerating some of the savings into 2016 and given just a track record that we're on right now, we think it's also a good idea to work to accelerate some of the investment so that includes investments in IT, development spending, testing, infrastructure all things that we believe will position us with even more confidence for 2018 and beyond savings..

Okay, great. So in that number and there is a lot going on beneath the surface..

That's exactly, right..

Thanks, Mike. And then a follow-up, pointing back a little bit, when we think about the pressure that's expected to come to bear on -- particularly for the asset management business, the broker sold active side and your clients therefore deal well.

Is there a way that you are adjusting your services or offerings or positioning yourself to provide further and more enhanced support for those clients as they work their way through this significant changed and how can you basically make sure you're well positioned to capitalize on potential opportunities as they come out..

Yes, Brennan, let me handle this -- handle that question and I'll take in two dimensions.

I'll first take it from an asset management dimension which maybe was where you were initially headed but from a fiduciary rule the impact of that on product and distribution, I think it leads to a more model based product and as Jay just recently in last couple weeks announced a distribution agreement with RBC where they are using -- we've got an investment and a robo advisor which will use the robo advisor to provide asset allocation among ETFs sold through the RBC distribution channel.

So I think that model which in this case happens to be sponsored by SSGA is one of the things that you'll see going forward given the impact of the fiduciary rule.

I think if you flip over to the asset servicing side, the fact that we have invested heavily in the ETF servicing platform to provide a lot of online metrics to not only authorized participants but to distributors position us well as ETFs and other more were quantitative model driven products are packaged in order to satisfy the needs of the fiduciary rule.

I think you could also say and this isn't a direct link, but the work we're doing in Beacon, which has the effect and we're already seeing some of this from a service provider standpoint of giving our clients kind of full transparency into the calculation of net asset values and all the things that result, and end of day pricing for a product, or a group of products.

I think it vantage the distributors from a standpoint of being able to pull out -- all that together in a timely manner in order to price products at the end of the day.

So, I would say in sum that would be on the servicing side, I think ETF and other quantitative model different products will be a key contributor to how distribution, really how a product evolves to suit the fiduciary rule.

And I think some of the work we're doing in Beacon the speed, the turnaround, the transparency of pricing will also advantage the product manufacturers, who are key clients in order to provide effective packaging of product, to meet the new fiduciary role. .

Great, thanks for all that color. .

Your next question comes from the line of Ken Usdin with Jefferies..

Hi, thanks to morning.

might be a little bit of a subtlety but seems like a slight change in your outlook for full year fees, kind of coming in more flattish than modestly higher and you had a really good quarter in aggregate, so I am just wondering is there something that we should be thinking about third the fourth or just -- or some little conservative as built-in given the macro environment.

.

Yes Ken, its Mike. It's really the latter, a couple things. And again I view these as very minor tweaks as opposed to anything not wholesale, but if I look at the macro environment for a second, the currency impact particularly in the U.K. is a headwind for the rest of the year, as compared to where it was earlier in the year pre-Brexit.

So, as an example; the pound based revenue that we have is approximately 8% of our overall revenue, we get some benefit obviously on the expense side of that but the -- if I just focus on the fee revenue the weakness in the pound hurts the translation to it to U.S. dollars.

Second, as Jay talked about a minute ago there continues to be some risk off in the environment, and just even looking at some of the mix change for example from the outflows from hedge funds, is a mild headwind for example for the AIS fees. And then, I look at the SVP 500 this morning.

I think it was at 21.43 and that's off from where it's been, so again can I really view these as tweaks hopefully three months from now we'll look back and say it's it was conservative but that's the that's the base -- the basic thinking..

Okay, thanks Mike. And then similar question on the expense side cost came in pretty good again.

Can you help us understand how much of that Beacon 1.65 was already in the third quarter run rate as opposed to yet lingering pieces yet to come, and the type of magnitude of third the fourth quarter step up that you're expecting under the surface again, I know you get a little help there on the FX side, so just helping us understand the moving parts there too, thanks.

.

Sure. No absolutely. So you Ken, first of all on expenses the beacon savings we really have at this point captured the beacon savings that we expect for 2016-run rate.

So as an example we expect net investments in fourth quarter of 2016 to exceed the additional savings that will get in in 4Q 2016, now as I talked about earlier we expect those investments to pay-off very well in 2017, 2018, 2019 particularly in 2018, 2019 so we think given our track record.

We think that’s very shareholder friendly to make those investments at that level. Round numbers can -- we’re looking at approximately $10 million of additional investment spending for beacon 4Q versus 3Q.

So it's not huge but it's enough to potentially move the needle, and the other piece that just continues to be an area of pressure, is the regulatory expense, particularly the RRP spending to be focused on for the July 1, 2017 submission continues to be material.

But I think if we step back from the details in your questions, I would come back to the fact that I think we've done a very good job at managing expenses overall for the full year.

Project Beacon obviously has been a big piece of that but also just clamping down, on all of the areas and we're real pleased to be in a position to say that we expect a full year expenses to be below that, of 2015 XGE..

And Mike, just one quick follow up on the last point there, just do you think that's an achievable goal to look forward to again on the operating basis X.G.E type of thing, to try to keep that cost outlook a slightest possible as you look forward..

Yes, Ken I think -- First I'd say it's a little bit early to be giving 2017 expectations, but I think it's fair to say to your underlying point that regardless of the environment; expense management is going to be a very, very high priority for us next year.

And again as I said I'm in this difficult environment to be able to achieve positive fee operating leverage for the first nine months is a really good -- a really good accomplishment.

And next year we've got the Beacon 1.25, we expect to get some additional benefit from replacing the outside consultants with FTE's, which is a positive economic parade's, we will get some extra benefit from that in 2017.

We continue to focus on the margin target that we talked about back at the Investor Day of 31% for 2018, and we were really -- we continued to rivet on that. So I would say too early to give you specifics we'll give you more in three months but those are the areas that we're really focused on. .

Okay, thanks a lot Mike..

Your next question comes from one of Jim Mitchell from Buckingham Research..

Good morning. Maybe you could talk a little bit about in this stress test, you're finding the leverage ratio -- Troll [ph] had a speech where he talked about in the future stress test, maybe proposing keeping market based on assets flat.

How could you help with that for you in the stress to be -- It's so easy for us in the outside to see the moving parts inter our quarter, so, is it fair to think that could be a material help in future C-course..

Jim, its Mike. First of all a couple things broadly and then come back to your specific question. The first your cruel speech and the in the P.R. that came out that day at this point it is simply a proposed rule, so I think until things get finalized. I wouldn't I overweight them too much, but what you're underline point is an important one.

Yes, keeping the balance sheet flat as opposed to the previous Fed modeling which had the balance sheet growing, under the stress scenario is particularly helpful to us, because C-car leverage rather than the risk based ratios, has been our binding constraint historically.

So again I don't expect that will be a lot of impact on the next C-car because it sounded like most of the impact would come into play beginning with 2018 C-car, but that's certainly a helpful item and some of the other potential changes, which impact the riskiest capital ratios, again would likely have less impact on us because the Tier 1 leverage has been a binding constraint.

But I'd say it's early Jim, it's a positive but it's also it's an early days positive at this point. .

Okay, fair.

Just on an outlook on NIL with a rate hike potentially in December; how should we think about that in fact over the following 12-months, any thoughts?.

Sure, Jim. Well first of all, a rate hike if I just isolate on that causal factor first, I would expect a rate hike to be helpful, to be accretive for us.

I mean I would expect it will probably keep less of the benefit from the next Fed funds rate hike that we got from the last one, which almost all of it accrued to -- so I think will probably have some modest increase on the liability side for our clients, but I do expect net to be accretive.

First of all, it obviously helps us with our foreign [ph] rate securities here in the U.S. It helps us with our loan book; which is mostly floating rate; it helps us with obviously the central bank deposits. And so all of that I would expect to be greater than the impact on the client deposit rates.

The other piece just to be balanced though, it would likely translate to a little bit higher wholesale CD costs and also our senior debt significant portion of that is floating rate. So it's not all gravy but it would definitely expected to be accretive. Just to be balanced though. That's -- your question was focused on the U.S.

As I mentioned earlier we do continued to see the negative impact of the portfolio turnover in Europe, the combination of negative rates, and also depressed spreads because of QE over there. So we want to balance that out and in obviously as we talked beginning in January about 2017 outlook, will get some perspective on that. .

Okay, great thanks for taking my questions..

Your next question comes from the line of Brian Bedell from Deutsche Bank..

Great. Thanks for taking my questions. Jay, maybe if I can ask about middle office business, I mean do you see at this through stage of the game, where we're moving into a more competitive environment for active asset managers.

Essentially more outsourcing of net Office asset managers, I guess you could you expect more big contracts coming from large asset managers and it's huge.

and then it sounds like Bank of New York is also getting a little bit more aggressive obviously with the TRO-DO [ph] and also on even within their more standardized, if you could sort of differentiate yourself in that space and talk about whether you think just change and the growth outlook and in pricing dynamics in net office..

Sure Brian, let me take that. The short answer is yes, as there is more pressure on returns which translates into more downward pressure on the asset management industry and there's been an acceleration I caught in the last couple of years towards outsourcing more.

And some of the deals that we spoke about, being probably the most prominent one is anchored in not only back office but middle office. I would say we've -- we're probably seeing more demand for more comprehensive solutions than I can recall in the past several years, and I think it's a direct result of your comment.

So I do see middle office, back office, comprehensive outsourcing deals, transfer agency and more and more coming at us in a bundled way, or even in the form of and I say that PIMCO and Allianz are separate transactions, both reflect consolidation of more work with a single provider.

So I think all that's in play and all that should accrue to our benefit. If I isolate a middle office for a minute, you're familiar with the league tables. We have over 10 trillion in metal office assets that we support on our technology, and like most of the activities that we conduct in the servicing business scale matters.

So it was over ten trillion and in scale, we have the ability to drive down unit cost, we have the ability with best disproportionally in our unit in our middle office platform. So I take you back to Beacon, which is as we automate create more straight through processing as we on the back of the middle office, have a data GX aggregation product.

The scale should provide a significant advantage for us. I think product for product we compare very favorably from a middle office capability and standpoint, because of the breadth of services that we support.

And I do think and I'm going to this is a pivot if you go from middle office to what the next frontier, it’s who is going to win the data aggregation war.

And we've got just short of 10 clients who are committed to us, to allow us to be the data aggregator not just for the information that we hold in our back and middle office, but for all their other custodian activities as well.

And to me that ties directly into beacon but the long game here is if you can be the date aggregator you get the preferred look at data and analytics capabilities, we referenced a few in my prepared comments.

A drift on your question, but I think it's a good one which is there is continued and there will be ongoing pressure in the asset management industry, all of which should position us to provide more services, knowing more services but more value added services as we were up to the data aggregation and Global Exchange level. .

Okay, that’s actually good follow on. Maybe just one more mid Office and then on the data aggregation and that would be in mid office you mentioned using scale as a competitive advantage.

Would you think that would translate into lower pricing for the industry -- you feel you can compete more on price rather than improve the margins in a business that you can question, and the you just mentioned on and on data aggregation and I guess I usually ask you to sort Investor Day about the revenue potential impact for that.

So, I don't know if you can give better data if you provide any sort of big picture idea about whether you do think there will be some revenue traction in 2017, from the data aggregation initiative..

Sure. So let me take the first one, first middle office pricing scale effect, margin question. I think that convinced that because of the scale we have, we have lower unit cost to perform in the middle office, we've done a good job of standardizing that. But we don't sell it that way.

I mean what we sell is middle office deal is usually transplanting something that's done internally to an outsourced model, so we're selling the value not the price advantage, and I think that people that's that evaluate our middle office they view it against their own in-house capabilities, and they view us making the investment in technology; usually in more contemporary platforms to be a big advantage.

So I say the scale of fact is to our advantage. We work hard not to lead with price but yet lead with value and preserve the margins and the point is obvious, but as the asset management industries under pressure, we're feeling that pressure too.

So the ability to differentiate and show collectively how we can provide a more effective, a more efficient model when we combine our customers front office, our middle back etc. is really the way we look at that.

With regard to data aggregation and global exchange; I think it's a slow building opportunity, The I'll just pause on data aggregation for a minute, the more you do it the very you get the greater advantage you have which is once we wired together not only our digital back and middle office but we start to wire other custodians back in middle office.

There's a huge advantage to somebody bringing business to us, because we've already pre-wired those relationships and so we're making a pretty big investment and what we call data G.X. which is the aggregation layer of information not just for State Street, but for other institutions.

I think that you've seen some of the media stats and other data, and analytics products that sit on top of that. And I think that's when you really start to see some revenue momentum.

So, I'd say it's a slow burn but a steady upward bias on the revenue side and as we get into 2017 we'll see if we can find a way to provide some dimension around that for you. .

That would be great. Thanks very much..

Your next question comes from the line of Alex Blostein with Goldman Sachs..

Good morning. I want to follow-up on the asset management, just a couple questions. So, I guess just on GE business, clearly the margins are pretty low. I guess like in a low teen's right now. As you guys think about integrating this business, what are you guess the margins can -- I guess ultimately go to? That’s part a, and I guess part B.

I recall when you announced the deal there was a piece of business that hasn't closed as part of the transaction, maybe an update on kind of where that revenue stands and one of the probability of that revenue chunk kind of coming in over the next few quarters as well..

Let me take that, Alex.

As you point out that GE Asset Management margins at the beginning are not what we'd like to see and part of the synergy opportunities which is inherent in the deal, and which is late likely to unfold over the next two or three quarters, should get that margin at least up to where SSGA is but we have margin aspirations that far exceed what SSG is today and that's part of -- Part of that mix that leads to the 31% and 33% margin targets out in 2018 and 2020.

So I think that at least the first couple of steps that are well-understood and we're well on our way and I have high confidence that what would achieve those synergy opportunities. With regard to the incremental GE business, other GE affiliates that we could bring into the mix, making great progress.

Huge and helpful support by GE and I suspect that we will bring most of that incremental opportunity into this next; which is our office and CIO kind of business, which is just makes us bigger and more impactful in that segment..

Yes, make sense. And then Mike, quick question for you on the balance sheet or really around the deposit pricing; you guys have been able to successfully flex from us on last couple quarters, stepping down a little bit, I guess again in 3Q, how much room I guess is there to continue to charge for deposits outside the U.S.

because an thinking been helping you guys off on a cost..

Sure Alex, we'll first appreciate as the kudos and you're absolutely right.

I think we've done a very good job of that in 2016 and say a couple things, first this continues to be a work in process and as we look at 2017, as I mentioned earlier on the headwinds that we have overall for NIR is the portfolio turnover particularly in Europe with the negative rates and the very well credit spreads, that the grind is truly material for NIR for 2017.

So one of the things that we're looking at is, what can we offset that by additional actions on the liability of pricing side, and I would say at this point we're simply looking at various options not the point at this point, ready to announce some additional actions but that is an area that we're keenly focused on.

And then second, obviously if the ECB cuts further, we have to look harder ourselves at following at least any document that the E.C.B. would make, so early days of this, but this continues to be a huge area focus for us, Alex, both here in Boston as well as our R&M [ph] management team..

All right, thanks. .

Your next question comes from the line of [indiscernible]..

Hi can you talk about the CFO transition, you're 30% done with Beacon, 70% more to go and you have one CFO passing the baton to another CFO. In the midst of a major restructuring and digitization program, and also I wasn't clear, so Mike, will be leaving December, and then you have a new CFO.

Coming in March or just can you explain how that handoff works..

Sure, happy to do that. Mike, first let me talk about the baton handoff. Eric Aboaf joined mid-December, and so, he will observe the year-end close, Mike will be with us through year-end through the close of the 2016 books. And then Mike will transition out, Eric will be on board.

I might take this opportunity just to talk just for a minute about Eric's background, I think you know some of it, but he, in his most recent six years with Citi, he was the treasurer of the before that, but like an equivalent period ran the financial planning and analysis part of Citi, and within that also oversaw the custody business.

So importantly, he is -- he comes to us not just with the financial expertise but with very direct experience in the asset servicing business. With regard to your opening point Mike the beacon activity, well, Mike certainly reports on it and has some visibility to what it was largely centered in the operating environment.

So Mike Rogers who's the President's Chief Operating Officer is really on point with most of the Beacon activity, some of that would affect the corporate support groups, but it's primarily in the-- asset servicing custody middle office back office, so I would see no blip in transition, and we only hope that Eric with his knowledge of this business might bring a fresh set of eyes and new insights to what more we can do.

And I think to an earlier point, and you've seen it this year we started out with a plan for Beacon we accelerate that plan, and nobody here is expecting the sun to shin on the environment, so we are working hard to find new opportunities in order to accelerate beacon, expand beacon and I would hope that Eric would be nothing, but a fresh set of eyes to see what things you might have missed..

And just one follow up year-to-date pretax operating margin of 29% is flat year over year and it's below some of your peers, and I know your target is 33%, so in simple terms like if you're explaining it, your elevator pitch, why and how can a margin improvement 29% to 33%?.

Mike, it's simply through the probably the execution of a project Beacon, I mean we do expect the expense saves from Project Beacon to drop to the bottom line, and ultimately by the combination of the program in year 2020, to be at that 33%, I would also suggest to you that you have an even earlier milestone to what can’t give that we're focused on the 31% margin in 2018, so they'll be a report card coming up on that Mike, quite a bit sooner..

And let me not lose the opportunity to, I know with, in this -- with this audience in this discussion we tend to focus on the cost effective Beacon, but I can't overstate enough how impactful it is when our clients start to see the impact of better data, better information, they now have transparency into how we make the sausage with regard to the net asset value calculation.

When your client start to see the positive impact of this effort, it just energizes everybody to go faster do more, and we've started to see that just in the last couple quarters..

Thank you. .

Your next question comes from the line of Betsy Graseck with Morgan Stanley..

Hi, good morning, a couple questions on the balance sheet, just wanted to understand if you feel like there's any opportunity to be pulling down non-operating deposits from here, or have you done everything that you think you need to do on that side, just thinking about the balance sheet side and how you think it’s going to reject over the next couple quarters..

Sure Betsy, its Mike. I think it’s fair to say that particularly with money market reform and the turbulence there, that there is likely to be some upward pressure on non-operational deposit levels in in Q4.

Now I feel good is we were back in 2015 we did a really good job at managing that mainly focused on client pricing and really just working with clients to figure out other alternatives for them, but that's an area where you know there's certainly the potential for upward pressure.

Beyond that I really would go back to some of the earlier discussion around Europe. I think that's the area that we're also focused on in terms of tighter ability pricing, some of that may also push down excess deposits which would be just fine. But the liability pricing in Europe will also be a high priority for us over the next several months..

Okay, then we obviously had one rate hike, we're expecting another one in the not distant future, as these rates have gone up.

Is there anything that you can point to suggest that maybe some of your non- operating deposits should be classified as operating, because you talk us through what the timeframe is and the fact pattern that you need to see in order to do that.

I am asking a question with the background of trying to understand if theirs is an opportunity to a potential extent duration the securities book can pick up some that way over the coming quarters. .

Sure. So Betsy, first it's early days but we do have work under way, and really it's an ongoing initiative not a onetime episodic event, to look at and carefully characterize our deposits, as operational or non-operational.

I would expect that work will continue through 2017, and at this point I would expect that we'll probably get some benefit as a result of that. This points way too early; I wouldn't try to quantify the NRI benefit for you, or the overall level of deposits but I do think that's an area of the upside opportunity..

Okay, but new change to construction investments at this stage?.

Not at this point and certainly no change in philosophy, and if in fact we didn't see the some of the deposits that historically been characterized as non-operational, if we saw them being more sticky then that's something we would certainly look at it at that point time..

All right, thanks..

Your next question comes from Gerard Cassidy with RBC..

Thank you. Good morning. Jay, can he share with us the -- obviously the GE deal is close now on stage three historically over the years has done acquisitions.

What are you seeing in terms of the outlook not asking if you're going to do a deal next quarter, but can you give us some color of what's going on in terms of potential further acquisitions that either in custody or Asset Management. .

Yes, Gerard. I would say we just came through a cycle of three-year strategic planning with the board and acquisitions weren't a big part of that conversation, so I would say that [indiscernible] this is unlikely the little A is more likely. And when I think of places where we could perhaps use little help on, and it's probably more the product side.

The two places I land would be an asset management, and not contrary to my earlier point, I think we've got a pretty comprehensive set of capabilities and asset management but if there was a team or there are a couple of narrow gaps in the asset classes, that could be in scope.

And then the other big place that I would talk about potentially growth or expansion through acquisition would be in the business that we call Global Exchange, which I referenced earlier in the data aggregation and the more importantly on top of that, data analytics business or the data analytics opportunities which I think is significant.

It is a real battleground for a number of different financial firms.

It would be my expectation that we would; if you take data analytics and first and separate those two things the data is the one part, and I think in some respects is the harder part, which is aggregating and providing real time data insights to the front office, but on top of that is analytics; whether it's risk analytics, whether it's some of the things we do with Big Data.

I could see smallish acquisitions on the data analytics side, which would it take advantage of the data position we have to provide more robust analytics. So those would be the two places that potentially we would be advantaged by smallish acquisitions versus organic development. I don't see in a pure cussedness basis to state the obvious. .

Okay, if the pure custody and episodic event happened where is some of these large portfolio came up with no interest or you would have to always consider something like that. .

I think that two things I would say; one I think that the regulatory hurdle would be high for the big asset servicing firms, to be further concentrated in the in the custody business.

And then I would also say that traditionally whether it was the Deutsche Bank acquisition or IBT or even in Sao Paolo [ph], it filled the gap to reach a Bank in Europe and Tesa [ph] in Italy; and I don't see real gaps, if I look at our geographic coverage.

we'd love to be doing more in China or India we’re all over it acquisitions not likely the way to get there.

Other than that we're pretty well developed and most of the markets that would be attractive asset servicing markets, and if you look at them -- looked at through a product lines, Gerard, I think if you look at a fall away from beta where we have over 60% share on the ETF servicing to the traditional asset classes to the alternatives.

Again we're pretty well positioned. Now we think there's a meaningful opportunity in the real estate asset class, which is going to brimming with assets to do more outsourcing there, but so, I just don't see -- I don't see big gaps and I think it would be a high hurdle for a regulatory standpoint..

Great. And then shifting to the balance sheet; Mike, I know the securities portfolio to watch your senior secured bank loans as you show on page 12, the $3.5 billion portfolio that you have, can you give us a flavor for where you see that going over the next 12-months, relative to this balance sheet, is a going to grow or stay that size.

And second, what do you guys assuming for through the cycle loss rate from that portfolio. .

So Gerard, first in terms of the overall loss size; again no change in an overall law philosophy, so I would expect that our leverage loan block would continue to be a relatively small portion of the overall balance sheet, perhaps modest growth from where it is today. We have a yield on that block currently of approximately 3.7%.

So it's an attractive book, and at this point we've had and would of very good credit experience there. I feel like we're doing a good job of under-running and managing the credits there.

But I really wouldn't put it just point Gerard, a long term expectation out there again, I would expect to beat the overall portfolio averages, given our credit underwriting and our bias towards being at the higher end of the scale, so at this point I wouldn't try to put a long term estimate on it, but it's something that will continue to manage and we're very sensitive to the changes in the credit cycle.

.

Thank you, appreciate the answer..

Your next question comes Vivek Juneja with JP Morgan..

Hi, I have a couple of question, especially on servicing, I'm going to go back to the first question if I look on page 12 of your supplement.

And I look at year-to-date '16 versus year-to-date '15; servicing fees are down 1.1%, sometime to reconcile that with the earlier comment and even if I adjust that for the FX fee revenue, let's assume we give all of that tip to servicing, it's basically flattish year-to-date '16 versus year-to-date '15 and I'm comparing that with your AUCA 3Q '16 versus 3Q '15; it's up 7% and in fact if I do similar rough FX adjustment, probably up 8%.

So can you help explain; A) but year-to-date you're down 1.1% in your operating servicing fee revenues; why that application, why such a big gap versus your AUCA?.

Sure Vivek, its Mike. First of all, a couple things are very important here. Number one, as we talked about earlier, we've seen a challenging change in the business mix here in 2016, relative to 2015. It was talked about this on prior calls. We've seen for example more pressure on emerging markets than what we've seen here in the in the U.S.

And so basically the impact of seeing rotation from emerging markets for example, to the developed markets particularly the U.S. is a real negative impact on the ratios that you're looking at there.

Second, as we talked about earlier we've seen some outflows in terms of hedge funds in particular, not all hedge funds but certainly that's been a negative in terms of our overall AIS revenue, and as we talked about previously our AIS revenue also tends to be a higher unit revenue per asset service, than the other books of businesses.

And then on top of that, if you do adjust for the currency and markets, that really is the story; all the more reason that I would strongly suggest you look at the overall margins on the business as opposed to looking at the ratios relative to assets because that the -- all the factors that I just mentioned play havoc with those ratios, particularly if you're looking at it in a short-term period..

Okay, got it. So it's a higher fee businesses that are really facing more. It's a mix shift there..

And importantly, you know, obviously we don't have a crystal ball in the future but as Jay talked about earlier we do expect over the long haul to get some help from things like additional outsourcing opportunities for private equity funds, as well as real estate funds; that would actually help the mix over the over the long-term.

In addition, I think it's fair to say that -- over the long-term we think emerging markets is in fact a very good place to be in and ultimately we would expect that the -- we'll see some rotation back there and we'll see some help on the currency side there relative to what has been a challenging environment; certainly caught over the last year..

Okay, got it.

ETF fees could either -- if you will talk a little bit about what you're seeing on EPS pricing as when more talk about so much your competitor is cutting pricing on those?.

Yes Vivek, let me take that. This is Jay. There has been and I think that we were part of that the next several quarters ago when adjusted some of the fees and some of our -- I call it commoditized type ETFs. We continue to focus our efforts on introducing ETFs that are more differentiated and therefore have a better revenue characteristics to them.

So we don't foresee although we always look at whether or not it makes sense for us to adjust fees in order to gain volume but again this is isn't the more commoditized market. I think they will continue to be put pressure in those commoditized one.

Mike, I don't know if we have a ETF yield for the third quarter; the $12 billion ETF?.

I don't have that off my head Jay, we can certainly with IR follow-up on that..

We can get you that, Mike gave you a sense of -- close to 10 basis points would be the yield on the ETF flows in the third quarter, just to give you some sense..

Great, and that thanks early, is the key driven last quarter or two after you sort of cleaned up the pricing couple of quarter go?.

Yes, I think those -- I think it is fairly sticky other than keep in mind spy which is the big S&P500, it can be -- can act like a trading security, particularly around quarter end. So if I isolate that I would agree with your comment, it's been pretty steady..

Okay, thank you..

Your next question comes from the line of Brian Kleinhanzl with KBW..

Just a quick question on the GE deal and potential expenses that you're looking for in the first half of '17? Can you just maybe outline not the number -- I know you won't give that but where you expect to see expenses coming from? I know you mentioned before that there were enough services client already but so I would imagine expenses there is just personnel or where else to be coming from?.

Yes, let me start that Brian, and then Mike can jump in. You know I think that if you look at the GE asset management deal, whenever you combine two asset management deals you should expect a fair amount of synergy in the course and the core -- corporate support kind of activities and so that's one big bucket of opportunity.

But another would be that while GE brought some capabilities that were not robust at SSGA, namely the alternatives; there were some alternatives at SSGA and maybe more importantly, they also brought a pretty significant fundamental equity and fixed income set of capabilities.

And shortly after the announcement we announced a reorganization which brought those groups together; so there is a fair amount of synergy just tied up and when you take your fundamental equity business at SSGA combine it with GE and get synergies off that.

So I would say from the corporate support areas, and also in the different asset classes where -- in many cases SSGA had some capabilities, just not as robust as the GE asset management.

Would you add anything to that Mike?.

Yes, the only thing I would add Jay; and Brian, to your question is -- while we haven't given you specific synergy numbers. I would remind you that we funded the GE acquisition through the prep issuance and as a result of expecting that the overall transaction will be -- we expect to be accretive in the first full 12-months beginning of July 1, 2016.

You can basically conclude that the earnings contribution we expect from the organization including the synergies that Jay just mentioned would be more than sufficient to pay for the cost of the prep. So that at least gives you a way to size what we're expecting from the expense synergies and the additional revenue that Jay mentioned earlier..

Okay, great.

And then just one quick one; I know you mentioned the ops servicing space a couple different times here; here is a source of fee pressure, but are you seeing greater pressure than what the overall industry is with regards to the redemption in the overall performance? I mean it's basically down X percent, are you seeing something a multitude above that?.

No, I would say now and probably even a little less, were anchored in some of the bigger, more institutional names; and I say they have weathered the storm a little bit better than the rest of the industries.

And we also -- it's a point of view but I think if you look at performance, performance recently has improved and so I suspect this is not a secular but rather a cyclical trend where assets flow in and out..

Okay, great, thanks..

Our last question comes from the line of Geoffrey Elliott with Autonomous Research..

Hello, thank you for taking the question. On the GE asset management acquisitions, what you talk about that before it sounded like you were expecting a ramp up in expenses and synergies to get started in 4Q and now it sounds like 4Q, the contribution is going to be similar to the third quarter and then the ramp up happens more next year.

So I just wondered if there has been any changes the way you're thinking around that timing there?.

Geoff, its Mike. No particular change, we do expect to see some incremental benefit in Q4 from the organizational changes that Jay mentioned a minute ago. The main point here is just to emphasize that we expect the bulk of the expense and revenue synergies to really kick in Q1 of '17..

Great, thank you..

Thank you, Amy; and thank you everyone for joining us on the call. We look forward to speaking with you in January when we discuss the fourth quarter results. Have a good day..

Thank you. This concludes today's conference. You may now disconnect..