Ilene Fiszel Bieler – Global Head-Investor Relations Jay Hooley – Chairman and Chief Executive Officer Eric Aboaf – Chief Financial Officer.

Brennan Hawken – UBS Glenn Schorr – Evercore Alex Blostein – Goldman Sachs Brian Bedell – Deutsche Bank Jim Mitchell – Buckingham Research Mike Mayo – Wells Fargo Securities Gerard Cassidy – RBC Geoffrey Elliott – Autonomous Research Betsy Graseck – Morgan Stanley Mike Carrier – Bank of America.

Good morning and welcome to State Street Corporation's First Quarter of 2018 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 also being recorded for replay. State Street's conference call is copyrighted and all rights are reserved.

This call may not be rerecorded or rebroadcast or distribution in whole or in part without the expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street website. Now I'd like to introduce Ilene Fiszel Bieler, Global Head of Investor Relations at State Street..

Thank you, Sam. Good morning and thank you all for joining us. On our call today are Chairman and CEO, Jay Hooley, will speak first; then Eric Aboaf, our CFO, will take you through our first quarter 2018 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. [Operator Instructions] Before we get started, I would like to remind you that today's presentation will include adjusted 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 1Q 2018 slide presentation. In addition, today's presentation will contain forward-looking statements.

Actual results may vary materially from those statements due to a variety of important factors such as those factors referenced in our discussion today. 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, Ilene and good morning, everyone. As you've seen in our announcement today, we started the year with strong business momentum across our asset servicing and asset management business, as we continued to deepen client relationships, win new business and advance our digital leadership.

First quarter results included strong EPS growth and improved return on equity. Importantly, we continue to see momentum across our core franchise. Strength in equity markets and new business lifted our asset under custody administration with growth of approximately 11% from first quarter 2017 to more than $33 trillion.

We announced record new servicing commitments of $1.3 trillion in the first quarter with total new business yet to be installed of $1.6 trillion. We're seeing strength across our pipeline, both geographically and by capability.

State Street Global Advisors finished first quarter 2018 with asset under management levels of $2.7 trillion, up approximately 7% from first quarter 2017, driven by strength in equity markets and ETF flows with continued traction in our low cost ETF products launched last year.

Furthermore, we continue to realize benefits from State Street Beacon, our multi-year program to digitize our business and drive new solutions and innovations for our clients as evidenced by this quarter's announced wins.

Beacon investments are enabling us to go beyond traditional custody services and provide greater speed, scale and quality declines globally.

Additionally, our ability to deliver new tools and functionality is proving to be a meaningful factor, and from a differentiation in clients decision to expand their relationship with us across asset classes and funds. But to conclude, I'm very pleased with our financial performance to-date.

Revenue growth was strong driven by both fee revenue and net interest income, reflecting higher U.S. market interest rate, continued market appreciation, new client business wins and higher trading activity.

We really focused on expense management, while calibrating investment in our business with the revenue environment and prudently investing in new products and solutions. We also purchased $350 million of our common stock and declared a quarterly common stock dividend of $0.42 per share in first quarter 2018.

And importantly, we continue to be well positioned to achieve our financial objectives in 2018, including delivering full year positive fee operating leverage. Now over to Eric..

Thank you, Jay and good morning everyone. Please turn to Slide 4, where I would like to remind you of a few items. Beginning this quarter, we are reporting primarily on a GAAP basis. We will continue to call out notable items such as restructuring cost to better provide investors insights on an underlying business trends.

As you can see in the right side of Slide 4, we did not have any notable items in 1Q, 2018. We have, though, listed the notable items for 4Q, 2017 and 1Q, 2017.

As a reminder, 1Q, 2018 results reflect the impact of the new revenue recognition accounting standards, resulting in an increase in both fee revenue and total expense by $65 million, which is EBIT neutral. Now let me move to Slide 5. Most of my comments will focus on 1Q 2018 results compared to 1Q 2017, the year ago period.

1Q 2018 EPS increased to $1.62, up 41%, reflecting strength in servicing and management fees from higher equity markets and new business, continued momentum in net interest income supported by the higher interest rate environment and the lower share count.

We continue to prudently manage expenses relative to the revenue environment, as demonstrated by an increase of 3.4 percentage points in 1Q 2018 pretax margin. We thus achieved positive operating leverage of 5 full percentage points. Fee operating leverage was negative six-tenth of a point.

The elevated impact of higher FX swap cost, which we would have preferred to book in net interest income, amounted to a 1% headwind to fee operating leverage this quarter. Notably, return on equity increased approximately 3 percentage points relative to 1Q 2017.

1Q 2018 results reflected a 14% tax rate, albeit lower than our full year expectation, primarily due to a seasonal benefit of approximately $0.02 a share attributed to equity compensation. Now let me turn to Slide 6 to briefly review AUCA and AUM performance.

AUCA and AUM increased from 1Q 2017, benefiting both our asset servicing and asset management businesses. 1Q 2018 AUCA of $33.3 trillion increased 12%. Growth was primarily driven by a combination of market appreciation, client activity and new business.

Strong inflows continued in ETFs around the world in both on and offshore funds in EMEA and within our middle-office outsourcing business. Hedge fund outflows continued in 1Q 2018, albeit at more modest levels. Notably, as Jay referenced, we announced a record $1.3 trillion in new mandates for 1Q 2018.

In our asset management business, AUM increased 7% driven by market appreciation and higher-yielding ETF inflows, partially offset by outflows from lower fee institutional index mandates. Our new low-cost ETF offering continues to gain momentum and added $7 billion inflows this quarter, bringing us to $12 billion cumulatively over just 6 months.

Please turn to Slide 7, where I will review 1Q 2018 revenue compared to 1Q 2017. You will also find additional detail in the appendix with the sequential quarter comparison. Total fee revenue increased approximately 8%, reflecting strong performance across our businesses. Let me take you through some of the details.

Servicing fees increased 10%, reflecting higher global equity markets and new business, partially offset by some continued modest hedge find outflows. Adjusting for currency translation, which you can see at the table at the bottom, servicing fees were up 6%, which shows strong business momentum.

Management fees increased 24%, benefiting from higher global equity markets, as well as approximately $45 million related to the new revenue recognition standard.

Trading revenue increased 11%, primarily due to strong FX client volumes and higher electronic trading activity as well as approximately $50 million in related to the new revenue recognition standard. The breadth and depth of our FX capabilities and platforms continues to differentiate our offerings.

Securities finance fees increased from 1Q 2017, driven by higher lending activity in the agency business. Processing fees and other revenue decreased from 1Q 2017, largely reflecting the absence of a one-time gain in 1Q 2017 from the sale of the business and the impact of elevated FX swap costs, which I mentioned earlier.

We would expect lower FX swap cost going forward here, as more swaps qualify for hedge accounting and as we ship the currency mix of our balance sheet. Moving to Slide 8. NII was up 23% and NIM increased 26 basis points on a fully tax equivalent basis from 1Q 2017. NII and NIM benefited from higher U.S.

interest rates, disciplined liability pricing, higher client balances. U.S. dollar, interest-bearing, client deposit betas floated up during 1Q 2018, in line with our expectations.

Relative to 4Q 2017, average non-interest bearing deposits declined only slightly, while interest bearing deposits increased $5 billion on average, which demonstrated good client engagement.

Relative to 4Q 2017, NIM improved 5 basis points driven by higher market rate and disciplined deposit pricing, partially offset by a smaller tax equivalent adjustment for our municipal bond portfolio and a modestly larger balance sheet.

As we said previously, we are comfortable – we are comfortable with modestly growing the balance sheet to accommodate client demand, and have even created more room to do so by adjusting our investment portfolio this quarter, which I will cover in a few minutes. Now I will turn to Slide 9 to review 1Q 2018 expenses.

Expenses were up 6% adjusted for currency translation, though this included $65 million in higher expenses related to the new accounting standards for revenue recognition, partially offset by the absence of restructuring cost this quarter. When considering these two effects, underlying expenses increased only 4% for the year ago quarter.

The components of the 4% underlying growth in expenses include, 3 percentage points of new business and volumes, 2 percentage points of merit and incentive compensation and 2 percentage points in technology spent, partially offset by a net 3 percentage points in Beacon savings.

From a GAAP line item perspective, compensation and employee benefits increased primarily due to increased costs to support new business as well as annual merit and incentive compensation, partially offset by Beacon savings. Transaction processing increased relative to 1Q 2017 driven by higher sub-custody fees.

Information systems cost increased relative to 1Q 2017 as a result of additional technologies spent. Occupancy costs were up compared to 1Q 2017, but have been relatively flat for several quarters. Finally, as compared to 4Q 2017, expenses were up primarily due to the seasonal deferred incentive compensation cost, which are described in the footnotes.

Let me now move to Slide 10 to review our progress on State Street Beacon. On the left side of the slide, you see some of the achievements which are enabling us to win with clients. We continue to digitize how we receive and process data from clients, using speed and scale as a way to differentiate service.

Key accomplishments include improving efficiencies from enhancing our global accounting platform and upgrading the functionality of our information delivery platform to better meet client needs. We're also continuing to realize enterprise-wide efficiencies as we automate internal processes through Beacon initiatives.

On the right side of the page, you can see that we achieved $58 million in net Beacon saves this quarter, through optimizing our core servicing business, transforming our IT infrastructure and by gaining efficiencies within the corporate functions and SSGA.

We continue to expect $150 million in Beacon savings in 2018, including the $58 million achieved this quarter. Now let's turn to Slide 11 to review our quarter end balance sheet and capital position. On the left of the slide, you will notice that we reduced the size of our investment portfolio from year-end 2017.

We sold approximately $12 billion of non-HQLA securities during the quarter. Those portfolio sales reflect our strategy to prioritize capital efficient client lending, while prudently managing OCI sensitivity. We chose to rotate out of thin spread credit securities and we will reinvest into interest earning assets over time.

Trimming the portfolio, especially the dollar portions, will also have the benefit of reducing the size of our FX swap balances and the associated cost which I mentioned earlier. Moving to the right of the slide, our capital ratios remain healthy and all of our ratios are flat to up, year-on-year.

As compared to 4Q 2017, the only significant change was a decrease of 80 basis points in the standardized version of a common equity tier 1 ratio due to an increase in client overdraft balances, which has since been recovered by our clients and the impact has reversed.

While we are mindful of our leverage ratios, recent regulatory developments make us even more confident, we can put our balance sheet to work for our clients. To recap, moving to Slide 12, we saw strong business momentum, resulting in headline total revenue growth of 13% and servicing fee revenue growth of 10%.

Our pretax margin increased by 3.4 percentage points from 1Q 2017, and we delivered EPS growth of 41%. Before turning the call back to Jay, let me take a moment to provide you with some additional color relative to our quarterly outlook. We expect business momentum within asset servicing to continue.

Although, there may be some variability within quarters as new business is installed. We expect securities finance, which includes the agency and enhanced custody businesses, to experience some 2Q seasonal uptick in relation to 1Q, albeit at muted levels relative to last year.

As I mentioned earlier, we expect swap cost to moderate as we adjust the currency mix of our balance sheet. As such, a typical quarterly range for processing fees and other revenue should be around $35 million to $45 million in 2018. We expect momentum in NII to continue in 2Q, consistent with our full year target range.

In summary, we believe that our strong first quarter business momentum positions us well to execute against both our financial and strategic priorities, including positive fee operating leverage, in keeping with our full year 2018 outlook range that we provided in January. Now let me turn the call back to Jay..

Thanks, Eric. And then Sam, we should now – I'd ask you to open the call to questions..

[Operator Instructions] Your first question comes from Brennan Hawken with UBS..

Good morning, thanks for taking the question. Eric, interested to hear a little bit more about the plan to shift up the investment and the earning asset portfolio. What types of loans are you looking to grow? And how should we think about that as far as a change, proportionally? I think it might be helpful to sort of base a little bit of that. Thanks..

Hey, Brennan. It's Eric. Let me describe a little bit of our intentions here. Clearly, as we enter this market with rising rates, it's a natural time for us to consider how much to keep on non-HQLA assets versus other interests earning assets. We've made a choice to continue to optimize that part of the balance sheet.

And what you'll see us doing over time is shifting some of that into interest earning assets for clients, right? And I'll – some of that will be lending, as you've asked about come back that in a moment. Some that'll be support the enhanced custody business, some that'll support our other activities.

And then another portion, just we reinvested in interest earning assets that HQLA qualifying, and thereby, balance out the balance sheet. So I think you'll see us continue to design the balance sheet in a way that supports multiple objectives. In terms of lending, our lending growth, and you see mid-teen lending growth over the last year.

It's been consistent over the last couple of years. We lend to 40 Act funds, we lend to the parent companies of some of our large clients, we do capital call financing for some of our private equity client. And so, that's the kind of, I'll call it, near end lending that will be – that'll continue to be the core of what we do.

And our perspective is that some of that lending is remunerative on its own. Some of that lending is actually positive, because it gives us an extra way to interact and to connect with our clients. And that's something that they value. And sometimes actually ask for as part of the servicing mandates for others that we participate in..

Yes, thanks. That makes a lot of sense actually. And it seems like a good way to expand out the relationship. So another question on the balance sheet. And it seemed like you implied it in your prepared remarks, Eric, but please correct me if I'm wrong. It seems like the balance sheet and the average deposit balances grew here similar to the peers.

But seems as though there is sustained appetite there.

And so am I correct in implying that we shouldn't necessarily think about that reverting from what was a pretty strong growth rate here this quarter? And you think that, that could sustain, or at least the indication so far looks like it's pretty durable here?.

Brennan, yes, I think the way to think about our balance sheet growth is that you dial back three years, we needed to compress the size of our balance sheet and kind of focus of the most valuable part of the funding of the deposits that we had. And we did that like many other.

I think last year, we felt like we had also seen another tick up in balances and some currencies and some overall balances. And we felt like we had to continue to trim and make it more compact and kind of more higher NIM generating.

I think we've gotten to a point over the last couple of quarters where we're comfortable with the size of our balance sheet and we signaled, as part of January outlook, that we're comfortable with modest growth. And so you saw a little bit of that, quarter-on-quarter. The trimming of the investment portfolio gives us an ability to do that.

Deposits now, in dollars in particular, come in at healthy margins. And it's just another way to engage with all of our clients, whether it's the asset managers, whether it's the alternative providers, whether it's some of the FX kind of parties. They all value the ability to leave their cash with such a highly-rated counterparty.

And our perspective is, that's part of what we can do and should do. And if you come full circle, that's a good service for them and provides good earnings and earnings growth for us..

Great. Thanks for all the color..

Your next question comes from the line of Glenn Schorr with Evercore..

Hi, thanks. If you could talk about the new business wins.

Talk about what they're engaging you on? Is it new versus existing clients, fee-rate relative to overall maybe you could go through a little bit of that?.

Sure, Glenn. This is Jay. I'll start and then Eric can jump in. Obviously, an outsized quarter, this quarter for new business commitments, that the $1.3 trillion. And not surprisingly, there's a couple of big deals embedded within that. I would say, general themes, our clients consolidating with fewer providers.

So if the two big deals, one represented that, a global player that operates in many different geographies and chose to consolidate with State Street, which is terrific. The other big deal represented a large client that decided for the first time to outsource fund accounting to the administration.

Which I think just speaks to the ongoing challenge that the asset management industry is having and looking for ways to get more efficient, outsource more activities. So that represent a little bit of the outlier growth in the quarter. I would say, maybe more generally, Glenn, the pipelines and the new business that we committed is pretty diverse.

Little concentration in Europe, which continues to be an outperformer in the offshore marketplace. ETS, as a service provider to ETS, we think we have a very differentiated proposition. So ETS continue to be a theme. But across the geographies, well balanced.

Final point I'd make before I give Eric a shot is that in the two big deals that we – that were embedded in the quarter. They both went very deep in their diligence looking at, as you'd expect, State Street's capabilities. And Beacon featured very positively.

As people get in and peel back the covers and understand the investments that we're making and how we view a future around consolidating back, middle, front office, it's really a differentiator. So in one of those in particular, I don't remember being examined the way we were examined by that perspective client.

And the deeper they got, the better we looked. So I'd say that it's reinforcing, to me, the efforts of Beacon, not just to create more efficiencies, but when clients take a look at us, they've been – really understand that we are investing for the future. And we do have a vision about how this business is going to look over time.

Eric, would you add anything?.

Yes, Glenn, I'd just add that, it showed some real positive momentum in the business. I'd just be careful. It's hard to model how and when that this. Some new business comes in right away. Some of the simpler activity. Some of the more complex stuff takes time.

We're not going to, in any particular quarter, give guidance as to when stuff is going to get installed or not. I think we're just going to overdo it then. But there is a range, right? Sometimes you bring on an alternative mandate and you get 5 or 6 bps because of the fee structure.

Sometimes it comes on as custody accounting administration, so you get what might be typical in terms of fee yield. And sometimes, you might just get custody because there may be other activities in discussion or possible down the road. And so you start with your foot in the door, so to speak.

And that comes at a fraction of the typical or the average fee rate. So there is a mix there. I think it's a nice positive momentum from a business standpoint, which makes us feel a little good about the progress and successes today..

Okay. One tiny follow-up, Eric, on the balance sheet. It seems like it got more fixed rate versus floating. As rates are rising, just not as intuitive as I would've thought. I'm sure it's much more involved than that..

Yes, Glenn. Good observation, what the – the immediate change that you noticed, which is really just a quarter-on-quarter change on the asset side of the balance sheet. So we'll come back on the liabilities on the asset side as we sell down the Non-HQLA securities. You know the bulk of those were credit instruments.

Credit instruments tend to be floating rate. So the mix changes just in kind of a percentage nature, not in a dollar amount. We've continued to maintain, though, the asset-sensitive balance sheet that we've had. And we feel good about that.

That's paid out nicely over the last two years and – so our asset sensitivity still remains in the range where we'll – where we're positioned for a rising rates, in particular, in this short end of the curve..

Okay. Thank you..

Your next question comes from Ken Usdin with Jefferies. And Ken your line is open. Your next question comes from Alex Blostein from Goldman Sachs..

Hi guys, good morning. I want to start off with just talking about the operating leverage dynamic in the quarter. So I understand the FX swap dynamic. Obviously, Eric, you point tracked it about a 1 percentage point from operating leverage on the fee side.

So adjusted modestly positive, but again albeit, very modest especially in the light of pretty strong equity markets and improving volumes. So maybe go through a little what's going on there? Anything that drove, in particular, sort of muted operating leverage on the fee side this quarter.

I don't know, which is the sizable wins that might've suppressed some of that a little bit. So just help us understand how to think through the fee operating leverage through the rest of the year..

Yes, Alex. Fair question. There's always variability quarter-on-quarter on both the revenue side and the expense side. You saw that on the revenue side with the FX swaps. And in that processing other line that we have, it's really the kind of all other line. Every bank has that somewhere in their books. And so you have the swaps.

And then we had slightly better results from that a year ago. Slightly below average this year. And so the year-on-year actually got accentuated. You have other stuff in there. Small stuff. You have the mark-to-mark on the seed capital for a new asset management fund, which was positive a year ago.

You've got the tax advantage investments and how much they run through revenue. On the negative side, that was less negative a year ago. So you kind of have those puts and takes.

And that's why in addition to the FX swap, we saw lower than typical processing in other line and that impacted the top line part of operating leverage by one point for FX swaps. And then there is another point but it's small stuff, which we don't like to get into, but just tends to play through.

On the expense side, if you think through expenses, you keep an eye on currency translation, keep an eye on the accounting, the revenue recognition accounting standard and then the absence of restructuring, underlying expenses were up 4%.

That's the [indiscernible] given the revenue momentum in the business, but came in just a little more than it may in a typical quarter. So we had some of the ramp-up cost, as you mentioned, of new business, right? And that kind of has some ebbs and flows.

But as you imagine as you bring on new business, before you bring it on, you've got to run in parallel. Before you run in parallel, you got to set up. Some of that is technology cost, which is typically expense. Some of that is people, some of that is underlying processing.

And so there are periods where one quarter or even two quarters, we can pick up expense in advance of the revenues..

. :.

Okay. So no real change there. And then the second question for me, I guess, just around some of the NIR dynamics. I guess one, maybe you would – could hit on the deposit betas. Obviously, costing can be pretty well controlled in the U.S. side. For quite some times frankly as well. So Maybe talk a little bit about what were the deposit betas on the U.S.

side and why they're so much lower than for your peers? And then maybe just to kind of round up the whole conversation around processing fee versus NIR. Do I hear you correctly that, I guess, if the FX cost go away, roughly $10 million-ish drag this quarter, so processing fees steps up about $10 million but then NIR goes down $10 million..

Let me take those questions in the order that you asked. So betas came in reasonably well relative to expectations. So we've been signaling that they've been floating up. We had betas in the U.S. in the low 40% range, which is kind of right where we had thought they would come. That's up from last, I guess, the last rates hike we had. We had it about 25%.

So we're kind of in – we've been moving up in line with our expectations. The part of the balance sheet that performs better than expectation was actually that transition from non-interest-bearing to interest-bearing, was actually slower than we've continued to model.

And so if you think about interest-bearing betas are at expectations or even though a bit better. But total deposit betas, right? Because that's what really matters, that's come in better than expected. And I think if I step back, I think that's in the range of what we've seen in peers.

I think you see some types of deposits are – that corporate deposit money, very high beta. Or the well management money, very high beta. The retail is very low beta and we tend to be in the middle as a custody bank. And so we've been pleased with those results. And finally, just on the FX swaps, that's – you've got it right.

They – instead of being in NIR, that FX swap cost, that ended up in processing fees. If they had qualified for hedge accounting, they would've been in the other line. I think going forward, we – our intention is certainly to put as much as possible into the NII line by making sure they qualify for hedge accounting.

But even more importantly, our perspective is, we should bring down the volumes of FX swaps. They were up at the – the kind of $15 billion to $20 billion level. They're now in the $10 billion to $15 billion level. And actually trending at the lower end of that range. Our intention in the coming quarter is to bring down even further.

And as we've trimmed the investment portfolio by trimming the dollar portion of the investment portfolio on non-HQLA side, that actually, on a dollar-for-dollar basis, can actually bring down the swaps further. So our perspective is to align the balance sheet over time, so that it's as currency matched as possible. That'll bring the swap cost down.

And in fact, it'll give us, over time, the ability to take advantage of swap dislocations and actually do a little bit better depending – one way or the other..

Got it, great. Thanks for taking all the questions..

Your next question comes from Brian Bedell with Deutsche Bank..

Maybe just to go back – one more on the balance sheet. The end of period balance sheet, obviously, was a lot higher. As a big step – I mean a big difference from the average balance sheet. I know there's always a lot of quarter end noise.

But maybe, Eric, if you can comment on whether you think that reverts and we should look at the sort of the trend line on the average balance sheet. And also on the non-interest-bearing side, that spiked up. It looks like about – by about $10 billion. So just want to make sure we're normalizing that.

And then on the swap, I think that's out of the non-U.S. deposit side, the $22 million if I'm not mistaken.

And would that make it more like an 18 basis point core rate instead of a 7 basis point core rate on that?.

Let me start on the balance sheet. And then I'd – actually to clarify the swap question a little bit more. On the balance sheet, we do get, on a daily basis and then a end of quarter basis, we do get higher deposit balances. And if you think about the very largest of our asset management and pension clients, that is quite typical.

I don't think this quarter was any different than the other quarter ends other than it ended on a Good Friday. And that, in some cases, creates a little more cash on our balance sheet. But there's nothing – there was nothing unique about the quarter end which signals any changes really on the average balance sheet.

The average balance sheet, as I described, I think is moving in the right direction. I think we've got good client engagement. We've got a good sharing of the benefits of the rate rises with our clients and we continue to engage them in making sure that that's fair on both sides. And as I said earlier, our perspective is our balance sheet.

If there is something we can put to work for the benefit of our clients, we're going to keep doing that. That's a nice way to supplement the fee revenue that we have in this business.

Do you want to just clarify a little more on your second question?.

Yes, all I did was added the $22 million of the swap cost to the non-interest, I'm sorry, to the non-U.S. deposit line. And that would take that rate from 7 basis points I think you published in your average balance sheet to that 18 basis points to sort of establish a core rate.

Is that accurate? Is that – am I – is the geography correct in where I'm putting now?.

Let me – why don't we have the IR team follow up off-line. I think you're – there is a two parts of the answer to that question. First, the FX swap cost were $15 million this quarter and they were a $7 million benefit a year ago. So the $22 million I called out, the delta year-on-year. So you've got to adjust for the absolutes.

And then we can work with you on the line item part of the balance sheet. I think directionally, it should go against the non-U.S. domicile depositors. I'll remind you, this is a domiciled view of depositors, not the currency view. Sometimes, those are similar. Sometimes, those are not. So you've got to be careful there.

And we do have some extra footnotes at the bottom of that average balance sheet page of the supplement to try to help. But why don't we just do that offline with you and help with the modeling..

Yes, sure. Perfect. And then the follow-up would be on backup to the wins, what the $1.3 trillion, sounds like the bulk of that is in two clients, Jay. Sometimes I know you – I don't know if you've announced the actual clients. It'd be great if you could say those. If not, the – just understanding, once again, the nature of that business.

I think you mentioned one is a mutual funds accounting administration.

And I forget, did you say the other was a mid-office? And effectively, from an AUC level or AUA level, it looks like it offsets the BlackRock loss and should we be thinking of this coming in, overall, as a higher yield than the BlackRock was?.

Yes, let me take that, Brian. We – we're not in a position to name the names. But you have it right that there are a couple of meaty transactions which make up the bulk of that $1.3 million. And they're both kind of multidimensional. I described one as multi-geographic of full custody, admin, middle-office.

Both existing clients that we had a small piece of. And then the other really represents more of a custody fund accounting fund admin. Mostly U.S. And these will feather in over the course of the next year with component parts along the way till we get it fully implemented.

But I think, I would go back to my point, they do represent what I've been saying all along, which is the – we're getting more clients that are consolidating with fewer providers. And increasingly the pressure felt by the asset management industry on multiple dimensions, the active to passive, the regulatory pressure they're feeling.

Both of these clients, by the way, took advantage of our new capabilities and liquidity, monthly liquidity reporting, which is a new SEC requirement. So I think it's more outsourcing. It's more consolidation. All good news. And we also had our typical range of new business as, I mentioned, across hedge, across ETF, offshore domiciles.

So a really good momentum. You mentioned the BlackRock offset, I mean, they – all of this kind of offsets, generally, the BlackRock outflow, which I think we said will kind of commence somewhere mid-year and that'll take a year to roll out as well.

So it all – collectively, it gives us greater confidence in our ability to meet the guidance that we provided on service fee growth rates for 2018..

And is it fair to say it's a richer revenue yield than the BlackRock loss?.

It's a real mix, Brian. It wouldn't be sensible for me to try to break that down..

Okay. Fair enough, thank you very much..

Your next question is from Jim Mitchell with Buckingham Research..

Hey, good morning. Maybe just following up on that. I guess, Jay, what's your sense of sort of your active discussions or pipeline right now? Do you feel like it's stronger than it has been? Just kind of get a sense of the environment. Obviously, you had a very good quarter today on a couple of big wins.

So how do we think about your pipeline and thoughts on it going forward?.

I would say, Jim, it's been steady and quite positive. I don't – these two transactions maybe a little bit of an outlier. But we continue to see opportunities across the spectrum. And we'll continue to be positioned, whether it's the alternative world, the ETF world or traditional fund world. Folks consolidating, doing more.

The more outsourcing piece, which Brian's question got into a little bit. There's more middle-office activity. There is increasing interest in having us wire together the back office and the middle-office. Through DataGX, we're offering new database analytics services. I mentioned the liquidity stress testing.

So the environment is such that not only asset managers but also asset owners, big pension funds – our craving more outsourcing, more analytics, more ability to respond to regulatory requirements. So you might say at, one level, it’s may extent that there is a lot of pressure in our client set. And that with normal pressures back to us.

But it's also – it also comes with pretty steady opportunity to do more for them. And some of the referenced spend on technology is designed to stay ahead of the new product opportunities, which are pretty vast as well. So strong, broad environment for new business. No real change. I don't see it leading up be there..

Okay, that's really helpful. And then maybe for Eric, to be a dead horse on the balance sheet. But you guys were the only one of your peers to see deposits grow and grow pretty significantly quarter-over-quarter at period end. You're sort of signaling maybe continued growth in average assets when others are signaling declines.

So is it – are you competing on price? I mean how do we think about what you're seeing and how you're attracting those deposits versus what your peers are seeing?.

Yes, Jim, there is some, I think, part of – there are a couple of things going on. There is the quarter-end spikes versus the averages. There is a natural seasonality in the deposits as well that I think some of the others have referenced, January, February, tends to be higher. And then March a little lighter.

So there is that trend, which I heard mentioned outside and we obviously see some version of that are custody books are similar enough. So I wouldn't read too much into the end of periods or the monthly, I mean deposits tend to have and flow. The discussions we've had with clients are not strictly on price.

I mean they shouldn't be and we don't want them to be and in fact clients – if that's not the client that we are looking for and vice versa. Because that it ends up being hot money, I mean, we do tier pricing, right? Appropriately for larger clients versus smaller ones, we differentiate dollars and other currencies.

There are relationships there that we engage in, but it's part of the relationship. It's part of all clients have immediate cash that move them around all the time. They have cash that’s somewhat stable. There’s some cash actually sleep into some money market funds, so we support to our asset management arm.

They all have a waterfall of cash and cash availability and our perspective is we should engage with them on that, but prices are result of a lot of other things. It tends to not be something we need it with and we won’t need with it. And in fact, if you look at the underlying pricing and betas and so forth that we described in the U.S.

market, which is easiest for all of you to take a look at it, we've actually been disciplined on that deposit pricing and our view as we should continue to do that..

Okay, you're saying it's really just incremental demand for you guys. No change in how you're pricing the business? So that's great. Thanks..

Yes..

Next question is from Mike Mayo with Wells Fargo Securities..

Hi, I think, I’m going to state of cognitive dissonance over your results. If you can help me out. On the negative side, I mean, you had project Beacon for a few years. And Jay, you've had restructuring all decade. And it's great to hear Beacon savings. But then you have all these expenses for the new business wins and compensation and tax spend.

And I thought on purpose of Beacon was to able to put more business on more efficiently and headcount is up 7% year-over-year. That way surpasses its peered, experience growth, certainly at more than I think some had expected this quarter. So that's the negative feeling I have.

I guess on the other hand, the positive feeling is double-digit organic client growth in the first quarter, which is great. So I'm trying to reconcile those two thoughts, and I think the answer comes in what you said about the lag between adding new business and getting all the revenues from that.

I can't remember when that's had this much of an impact before. So if you can at least quantify the extra expenses this quarter, what kind of revenues you expect or give a little bit of color on that, that would be helpful..

Sure. Happy to do that, Mike. This is Jay. And I'll quickly wrap this to Eric. We don't measure life by a quarter. We're confidently investing. We're bringing on new clients. Beacon is a multi-year journey. We're tracking against operating leverage goal as we said a few times, we are determined to achieve our fee operating goal in 2018.

So things can come and go in a quarter. But we're investing in this business. And we're investing to bring on new clients. We're investing to make sure we have those products that ultimately will differentiate and allow us to continue to grow. And that's not just an asset servicing, that's an asset management.

So as Eric referenced and he'll go over again, he can get some episodic revenue and expense situations in a quarter. But we're thrilled with the 5% operating leverage. We're thrilled with our top line. We're pretty happy about our market based activity and the revenues that that's driving.

And we're going to make sure that we spend what we need to spend in order to bring those clients in successfully and stay ahead of the pack with regard to completing in these businesses.

But, Eric, you might want to?.

Yes, Mike, I might just add to that, as I mentioned earlier in the prepared remarks both on some of the Q&A, right. The expenses do have a little bit of variability to them and we talk about the ramp up cost, those come and go and that's kind of the installation, right.

And some of that can’t be quiet, Beaconize the way, because it takes custom effort to plugs client in, and especially some of our largest clients, remember are acquired for spoke in unique, and so connecting them some effort.

I mentioned the sub-custard fees, which were higher this quarter as emerging markets as we sell more flows in emerging markets. We ended up with more volumes there and the market levels take fluent in. And as you say, we continue to invest carefully on the tax spend line, you see us float up purposely because we see headroom on the revenues.

We want to spend some on the – we want to spend some on for client functionality and product development and so forth.

I will remind you and the others that first quarter expenses typically are up relative to fourth quarter, right, by about $150 million because of that seasonal effect, the differed incentive comp which comes through, in one way, once a year.

So just keep an eye on that as you think about the modeling, right? This is not the new run rate this is exactly not what it is. And then finally, you mentioned the headcount. It's something we actively manage. Overall headcount is up, as you pointed out, 6% to 7% range.

High cost location headcount is actually down 3%, which is a purposeful movement from the – some of our geographies to others. We found the really strong capabilities in our global hubs, which we have around the world in China, India, Poland. And so that's another part of the Beacon effort.

But you won't see that in the nominal numbers because of the transition in kind of bubble headcount that you create floats up..

So one more attempt, can you size at all the disconnect between the extra expenses in the new business? I mean, is it bigger than bread box, is it material? And also, did any asset management business come along with some of the custody wins?.

I think there's always going to be some expense and revenue variability. I think one way to think about it, Mike, is we gave an operating leverage range for the full year, right? That we committed to, 75 basis points to 150 basis points on a fee operating leverage basis. So on a full year basis, you can imagine there is 75 basis points of variability.

On a particular quarter, there can easily be variability of 4 percentage point on expenses, right? One way or the other. And that's just the envelope in which we operate. And what we're trying to do is do the right thing by the business over time by quarter and by year. But we want to do that in a considerate manner..

And Mike, just on the – did any asset management business come along this. No, because most of these bigger deals were asset managers themselves as supposed to asset owners. They build us, applicable as a asset management prospect..

All right. Thank you..

Your next question comes from Gerard Cassidy with RBC..

Good morning, Jay, good morning, Eric. Jay, can you share with us on these business wins that you had this quarter, which of course, were outsized? And you shared already that, as the customers dug into the way you guys are operating, they like even more of what they saw.

Can you now extrapolate that to pricing? Are you able to price these types of products better or is it still – I know pricing has always been competitive for as long as you've been at State Street.

Or of us are just as competitive as always?.

Yes, let me try to unpack that, Gerard. I think that as a general theme, it's always been true that the more complicated the transaction is, the better the pricing. And that may sound counterintuitive. But I think when you have commoditized activity throughout the bid, there's a lot of people that can compete.

And when there is a lot of people, pricing gets more difficult. The – I'll just give you a couple of it been yet, the one deal that we talked about crosses three different geographies. And it's very complicated. It's a very involved service model where you've got a trading desk in the couple of different locations.

You've got product servicing capability in other three locations, it's middle office, back office. So that narrows the field as far as the number of folks that can compete. And as a result, pricing gets better. And I'd say that's the theme generally holds.

I think in other vignettes would be – when someone's doing this work on their own and they're making a decision through outsource it, which is another one of the situations that I had referenced. And that gets a little bit more complicated because try to understand what once internal cost are becomes a factor.

But I would say, in that case, it was really less about cost, more about the – they wanted to go with the risky business of doing fund accounting globally at scale across a number of different products.

So I think it still holds true that the more involved the activity is by geographies and bilayers of service moving back to front office, generally the better pricing gets. I don’t know if that’s helpful..

No, no. That is. Thank you. And then, Eric, you gave us some good color on your capital ratios and you mentioned about the RWA growth due to higher client overdrafts. A couple of questions of that.

Do you know what drove the client overdrafts since they appear to be pretty material since the CET1 ratio did fall sequentially by a fair amount? And then second, when you look at your net interest revenue numbers, the incremental growth that you saw, how much was due to those overdrafts?.

Sure, Gerard. The overdraft, that totaled about $5 billion on our undrawn committed lines. That’s not a large number. But it’s large relative to what’s typical. We’ve had spikes in overdrafts. You always have them when there are either – sometimes – when you have storms and weather events, when you have holidays.

This one in particular, if you remember we had Good Friday at the end of the quarter. The markets aren’t – half the markets are open, half are not open. And so what happens is you kind of have a little bit of a discontinuity for clients who end up ahead in one part of their funds, short on the other and so draw on their lines.

Which is why, to be honest, those lines exist. We’re there for our clients. And are there, delighted to help them as needed. It was literally two, three, four, five clients, so a handful. We know them well. We’ve supported them. And they’ve been good to us. So it’s the kind of thing that will just occasionally happen. We don’t expect it every quarter end.

But occasionally, when something is in the environment, like in this case, it was a holiday and a quarter end, you have an effect. In terms of NII, there is not a big effect, because remember NII is driven by average balances over the course of one quarter, right? So all 90 days. Not one day. So this wouldn’t have had a big impact positive to NII.

This is really a client accommodation that we’re doing. And we’re there for our clients. And one of the reasons we’ve got such a strong balance sheet is so that we can accommodate clients like that.

And that’s the kind of expectation they have, for example, on some of the – some of those larger clients that Jay described have, for a custodial banks like us..

Great. I appreciate the help. Thank you..

Sure..

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

Good morning. Thanks for taking the question. You touched on some of the proposed regulatory changes earlier.

Can you elaborate a bit on, if we get the CCAR changes plus the SLR changes as proposed, what you think your new binding constraints on capital would be?.

Geoffrey, it’s Eric. I mean that’s been a well studied and modeled endeavor. And I say that in a nice way, because it’s obviously important to us. It’s obviously important to many of you and I think your team and other teams have tried to take that the new CCAR, NPR, the one with the stress capital buffer.

And say look, if you had a reformatted stage 3 and all the other bank results back to the last CCAR, how would it laid out. I think as you know, our CCAR binding constraints or let me step back our binding constraints today from a capital perspective start with Tier 1 leverage then depending on kind of where we’re it could be either CET1 or SLR.

But that’s kind of core Tier 1 leverage is the binding constraint.

I think the early modeling that that we’ve seen and I think the modeling that the industry has done is not particularly different than ours, is that with the FCB and the implementation FCB across the various those five core capital ratios, it seems like the binding constraint will move from the standard Tier 1 leverage to CET1.

That should create some amount of capacity. It’s hard to model it precisely, but it seems to create some amount of capacity. And I think others have observed it kind of does the right thing for banks, which is risk related assets should actually be the dominant capital constraint for any bank, right? That’s what a bank is about.

The leverage ratio, so there is Tier 1 leverage or SLR should be the backstop. And I think the proposal is both well-intentioned, well designed. There are obviously some refinements that I'm sure we will suggest now there is we'll suggest, but clearly going in the right direction..

Thank you. And maybe just another quick one. No outlook slide this time. I know you kind of touched on the outlook in the comments. It feels like there's always been an outlook slide in the State Street deck. So I would love to hear, while you decided not to include that in this time..

Sure. There's really no messaging at all. I think the full year outlook that we gave in January is fully operative. It was operative in February when we went to an industry conference that was – it’s operative now. I think what we’re going to do is keep it simple when the outlook changes, will do a new slide and thereby, kind of adjust our messaging.

What I will do and I did verbally this quarter is if quarter-on-quarter there are always some seasonality or other swings, I’ll signals those verbally, but no message at all.

We're just trying to keep the slide deck compact save an extra tree in the process and – but the full year outlook commitment that we've made in January, in our minds is a commitment. And our intention is and – and we have confidence that we'll deliver that..

Thank you. Taking one slide off is definitely appreciated. Thanks very much..

Your next question is from Betsy Graseck with Morgan Stanley..

Hey, good morning..

Good morning..

I just have two questions. One is on the proposed changes that you just discussed. It seems like you have two potential options, obviously, you can do a mix of each, but two basic options. One is, you have more capacity to take in deposits, grow the balance sheet even further or the other one is reduce the press outstanding.

And you've got some of the callable press that are out there today.

Do you have a preference for either one or could you give us a sense of percentage that you'd want to do with either one?.

Betsy, it's Eric. I think at this point, we will pretty mature to make a choice there. I think the rules are – the rules as they stand are obviously constraining in a certain way. I think the actual be the CCAR CV proposal and SLR proposals move in the right direction. There's also the TLAC proposal, which we think is constructive.

I mean, not huge amounts, but at least constructive directionally. I think what we'll have to see is how they all come together and remember they may come together little differently in each CCAR period, right.

Because the notion of the stress and how the stress impacts us will be different and also, we don't know the Fed models are still fairly opaque, right. We don't know, how the really modeled the balance sheet, how they really model the PPNR given that the signal they're going to change and not grow the balance sheets as much.

And so every one of those – I don't mean to avoid the question, but I think you've got the right levers, which is we could add to the deposit base or other balance sheet kind of leverage balance sheet in terms of activities like some sec lending or enhanced custody qualified.

We could reduced the press and some of them are callable today, some of them will be callable next year and then year after and so forth. If that one is the binding constraint, right, will be disciplined around disciplined around RWAs right.

And depending on how much capacity want to create there with as we did this quarter with the changes in non-HQLA in the investment portfolio, which have RWA will be under consideration.

So in a way, I think there’s a lot of optionality that this would create and help from views at this point, but in my mind, it’s the kind of thing we’ll optimize again it’s a better set of – I think it’s a better designed set of rules.

And we’ll have a view of how to do that from – I think from a shareholder perspective, which is how do we turn that optimization to higher earnings and earnings growth, how do we turn that into capital and capital return, that’ll be the lends that we’ll use..

And so, your point you just made, okay, actions taken in the quarter are shifting some of the mix in earning assets from securities to loans, for example.

That’s CET1 positive? Is that your point?.

It’s not dollar-for-dollar, right, because some of those securities are 50% risk-weighted, some closer to 100%. But I’m saying that, that is another lever that we have and in fact if we have the opportunity to trade off client lending right or non-clients securities. There’s clearly a privatization.

We have to make sure it comes with good returns or good wallet – share of wallet from the client. But those are absolutely opportunities that we see and I think what we’re – because we have we still have non-HQLA in the investment portfolio that always be up to grabs as we optimize for our clients..

How much left is that, non-HQLA in the investment portfolio..

We sold down about $12 billion on a base of $35 billion. So there’s still $20 billion plus..

Got it. Thank you..

Yes..

Our next question comes from Mike Carrier – our question indeed from Mike Carrier with Bank of America..

All right. Thanks guys. Eric, just one quick one. When I look at the fee revenue growth year-over-year you guys had the percent like 5% ex-FX. And then I think ex the revenue recognition accounting that’s 3%, so maybe around 2%. And I know the processing other that kind of add like 3% – like that could take that 2% to 3% or 4%.

It’s seems like that still maybe on the later side just given the market strength that we saw over the last 12 months and then also the volatility that we saw in the quarter that helped the trading side.

So I guess, I’m just trying to figure out, is there anything else that maybe we’re missing – maybe muted the growth? Or is it really just all that processing and other? Because it still seems maybe a little bit later than you would have expected..

Yes, Mike it’s Eric. Let me – I mean, I think Page 7 of the earnings deck that you all have is probably good one to take a quick look. And I think the – we’re quite circumspect and how we show fee revenues.

We show with and without currency translation, we actually do it on the slide so you can find them and I just encouraging to make sure all the comparisons are apples-to-apples and you’ve got enough footnotes here to adjust for revenue recognition.

I think the single biggest driver of our revenues is the servicing fees, right? That’s half of our total revenues, $5 billion a year, and $11 billion, $10 billion to $11 billion of revenue. So I think we’re quite pleased with the 10% normal growth there, the 6% adjusted for currency translation. There is no meaningful revenue recognition in there.

So that’s quite solid. And that last year, right that’s half our revenue, last year was up 4% adjusted for currency on a full year basis, and been in about that range. So we’re pleased with that. Every quarter will be a little different there. But that’s a good performance.

I think some of the other roles management fees, trading, securities finance came in more less with expectations and I do think processing other is the biggest disconnect remember year ago, we had a gain on sales $30, so that cost up 1.5%. You had the FX swaps delta, which was 22.

And then if you still do the comparison between the year-on-year, there is another, in 20, 25 of just small ins and outs that tended to add a positive last year and negative this year. So I don’t think you’re missing anything. I think there’s just some variability here on that line.

And when against this quarter it will tend to neutral in other quarters and positive in still others. So overall I think we feel like there is good momentum in the business. We’re pleased with the results, I think the line item geography was a little bit unfortunate on the FX swaps.

But nice way in our minds to start the year, a good step-off and we’re obviously working on the second quarter, third quarter and fourth quarter..

Okay. Thanks a lot..

Sam, that’s it..

There are no further questions..

Okay, great. Thanks everybody for joining us this morning. We look forward to getting together at the end of the second quarter. Thanks..

Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect your phone lines..