State Street (STT)

Q3 2011 Earnings Call

October 18, 2011 9:30 am ET

Executives

Edward J. Resch - Chief Financial Officer and Executive Vice President

S. Kelley MacDonald - Sr. VP, IR

Joseph L. Hooley - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Risk & Capital Committee

Analysts

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

Brian Bedell - ISI Group Inc., Research Division

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

Howard Chen - Crédit Suisse AG, Research Division

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Michael Mayo - CLSA Asia-Pacific Markets, Research Division

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Presentation

Operator

Good morning, and welcome to State Street Corp.'s Third Quarter 2011 Conference Call and Webcast. Today's discussion is being broadcast live on State Street's website at www.statestreet.com/stockholder. This call is also being recorded for replay. State Street's call is copyrighted. All rights are reserved. The call may not be recorded for rebroadcast or distribution in whole or in part without expressed written authorization from State Street, and the only authorized broadcast of this call is housed on State Street's website. [Operator Instructions] Now I'd like to introduce Kelley MacDonald, Senior Vice President for Investor Relations at State Street. Please go ahead.

S. Kelley MacDonald

Good morning. Before Jay Hooley, our Chairman and Chief Executive Officer, and Ed Resch, our Chief Financial Officer begin their remarks, I'd like to remind you that during this call, we will be making forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in State Street's 2010 annual report on Form 10-K and its subsequent filings with the SEC.

We encourage you to review those filings, including the sections on Risk Factors concerning any forward-looking statements we may make today. Any such forward-looking statements speak only as of today, October 18, 2011, and the corporation does not undertake to revise such forward-looking statements to reflect events or changes after today.

I'd also like to remind you that you can find 2 slide presentations: one regarding the corporation's investment portfolio, and the other about our progress in executing our Business Operations and Information Technology Transformation Program, as well as our third quarter 2011 earnings news release, which includes reconciliations of non-GAAP measures referred to on this webcast in the Investor Relations portion of our website

Now I'll turn the call over to Jay.

Joseph L. Hooley

Thanks, Kelley, and good morning. Before reviewing our earnings results for this quarter, I'll briefly address the recent white paper released by Trian Fund Management, a shareholder of State Street's, on Sunday, October 16. Trian's white paper suggested ways we could improve shareholder value, many of which have been underway at State Street for more than a year. We continually search ways to drive value across our operations and always listen to ideas and shareholders. In that spirit, members of State Street senior management have met with representatives of Trian on a number of occasions to discuss our business.

Despite the challenging operating environment over the past several years, our business has remained resilient. We have continued our track record of profitable growth and have maintained the strongest capital position among our closest peers. With the approval of the Federal Reserve and within the context of growing our business, we intend to continue to return capital to our shareholders. We believe our third quarter earnings results underscore the underlying strength of our franchise.

With that said, I want to emphasize that the purpose of today's conference call is to discuss these results. We will not be taking any questions on Trian. I'd like to now return the focus of today's call to our earnings results.

I'm pleased with what we've achieved in the third quarter of 2011 in the face of volatile equity markets and continued uncertainty in Europe. Compared to the third quarter of 2010, revenue from our fee-generating businesses increased 18%, and our total operating basis revenue increased 12%. Compared to the second quarter of this year, our fee revenue declined about 3% due primarily to a decline in Securities Finance revenue from the seasonally strong second quarter. We added about $245 billion in new assets to be serviced in the asset servicing business and had negative $15 billion in net flows at State Street Global Advisors, excluding $35 billion of planned asset sales and accounts we managed for the U.S. Treasury.

This morning, I'll provide more detail behind the wins we achieved in the third quarter, as well as the installation timing. I'll also comment on our outlook for the global economy with an emphasis on the situation in Europe, our progress in executing against our Business Operations and IT Transformation Program, as well as our capital plans.

Let me turn now to provide some highlights of the third quarter and recent trends we've observed. Of the $245 billion of new servicing mandates won in the third quarter, we've already installed about $65 billion of the business won and expect to install about $180 billion during the fourth quarter of 2011. We continue to enjoy a broad range of wins in terms of clients, services and geographies. Of the $245 billion we won , $42 billion or 17% were from the U.S. and $283 billion or 83% were non-US mandates, $156 billion from Europe and Middle Eastern clients, $32 billion from Asian clients and $15 billion from Canadian clients.

Volatile markets have made U.S. consumers nervous due to concerns about Greece, European banks and the pace of the U.S. recovery. As a result, they have continued to move out of equities over the past 5 weeks into bonds and municipal funds. Similarly, in Europe, investors are avoiding equities that have been selling out of emerging markets after having been overweight in both 2010 and 2011. In both Europe and Asia, investors are investing closer to their home countries and are limiting their cross-border investing. Cash continues to collect in bank deposits as investors stay on the sideline until the eurozone reaches some decisions on the sovereign debt crisis, as well as the recapitalization of the banking systems.

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