State Street Earnings Call Nuggets: Equity Flows and Tax Advantage Investments
Howard Chen – Credit Suisse: Jay, you led your commentary noting the recent re-risking that you have seen across the business. I realize we are probably early in that process. But can you help us size how much you believe that cumulatively maybe weighed on your servicing fees last year and how much you potentially have kind of recapped through it so far with what you have seen?
Joseph (Jay) L. Hooley – Chairman, President and CEO: Yes. I would say it’s probably harder to size it Howard but I would just directionally we started at the back end of the fourth quarter kind of into December there was a noticeable move of clients rotating from fixed income or lower risk assets into equities as well as some cross-border assets. Europe was at a fair amount of that focus. Then you have seen this, we have turned the corner into 2013, you have seen some industry stats with regard to equity flows. That trend continues. I think your question is really pointed towards that effect in the fourth quarter of 2012, fairly moderate, not a big factor given where it fell in the quarter.
Howard Chen – Credit Suisse: Then separately, I wanted to clarify the expense commentary on the additional workforce actions that you announced today. What do you anticipate the savings relating to those are, and I wanted to confirm that that’s incremental to the business ops and IT Transformation program that you’ve all been working on for a few years now?
Edward J. Resch – EVP and CFO: Yes, it is Howard, it is absolutely incremental. The savings are in the range of $90 million annualized. So the paybacks are about 18 months on it and as I said, that’s driven by largely the timing of the departures of the employees.
Howard Chen – Credit Suisse: So, just a quick follow-up on that Ed, if we put everything together, your rate and market outlook for the year, the acquisition that was done, I know you don’t want to guide to a comp ratio, but how do we think about the puts and takes of overall expenses 2013 versus 2012?
Edward J. Resch – EVP and CFO: Again, it’s largely driven by the – first of all, operating leverage is paramount, right? So our thinking coming into 2013 is we are driving towards a year where we have positive operating leverage. Related to that though is the issue of how robust or not the market-driven revenues may or may not be in the year. So that will largely drive the expense performance I would say, but we are not planning on robust market-driven revenues as I hope I’ve noted in my comments. So our expectation is that we’ll be able to drive, our plan is to drive positive operating leverage, notwithstanding that. Okay. Now, there are puts and takes, but we expect to achieve $220 million on the ops and IT. We expect to achieve some benefit as I said on the reduction in force, but I’m not in a position to give you a number for the full year on expense growth overall Howard.
Tax Advantage Investments
Kenneth Usdin – Jefferies: Ed, I was wondering if you could just kind of walk us through the changes in some of the stuff and where it’s located relative to the improvement on the forward tax rate that you’re expecting. How does that all net out versus just kind of a re-showing and restating, was anything incremental or is this just a logical restatement and they’re showing it differently?
Edward J. Resch – EVP and CFO: Well, couple of things I think to your question Ken. One, in terms of the of the way in which we’re presenting the tax advantage investments, we think that’s a more meaningful presentation, so we’re just presenting them similarly to how we present municipal securities, i.e., grossing them up to present on a pretax basis, okay. So the effect there is, for the year them to increase the processing fee and other line by $126 million and the related impact to the tax lines, a known net effect. In terms of the tax rate for the year and moving forward, we expect 2013 to be broadly similar in terms of the effective rate to 2012, that is driven by an consumption of relatively the same mix and if the market opportunities present themselves, an increase in tax advantaged investment activity during 2013.
Kenneth Usdin – Jefferies: So the 22%, 25% guidance that was definitely lower than you had been thinking about previously though. But part of that’s presentation and part of that’s what you’re investing in differently.
Edward J. Resch – EVP and CFO: I’m sorry Ken, can you repeat the beginning part of the question.
Kenneth Usdin – Jefferies: I’m just trying to understand the tax rate of 23% to 25% going forward is definitely lower than you have had expected it previously and how much of that is just the presentation change versus any incremental investments that you’re making that it affects it incrementally?
Edward J. Resch – EVP and CFO: I mean if there is an incremental effect in 2013 it’s because of an expected increase again assuming the opportunities are presented to avail ourselves of more tax advantaged investment opportunities.
Kenneth Usdin – Jefferies: Then the second question I just want to come back on the net interest margin outlook and understanding that the range that you gave is a little broader but it’s certainly in line with how you have been talking about it versus the full year 2012. What I am trying to understand is at what point do we get to a event and all things equal on rates, how much closer are we to the bottoming of the margin? So on full year we are presuming you are still exiting ’13 lower each quarter but are we closer by the end of this year to getting flattened out on the margins?
Joseph (Jay) L. Hooley – Chairman, President and CEO: Closer but again assuming the low rate environment persists for the next couple of years our estimate is that it would bottom out at around 120 of net interest margin and that’s toward the end of 2014.
Kenneth Usdin – Jefferies: So the same context of the annual roll overs will still happen unless there is a meaningful change in the rate environment?
Joseph (Jay) L. Hooley – Chairman, President and CEO: Yes.
Kenneth Usdin – Jefferies: Then the last thing for me is securities finance everyone is seeing the challenges in the business. With regards to activity and spreads can you just give us a little more color on what’s going on within that business line? How quickly does that business – or could that business react to a change in improvement on the broader side? Does it lag, does it lead and any color there will be helpful?
Joseph (Jay) L. Hooley – Chairman, President and CEO: Let me take that one, Ken. I think it probably lags a recovery in the economy and re-risking and that business is really a byproduct of leverage put on by hedge funds and the demand for borrowed securities. So, I would say with recovering economic environment, re-risking, I think you’d see a greater demand for borrowed securities. The business can ramp very quickly. The customers that have committed their securities to the program continue to have their securities committed and it’s really just a matter of demand in the market, which can change quickly, spread as you know, get influenced by the market. So the volume can flip very quickly.
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