Good morning, and welcome to State Street Corporation's First Quarter 2020 Earnings Conference Call and Webcast. Today's discussion is being broadcasted 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 of this call will be housed on the State Street's website. Now, I would like to introduce Ilene Fiszel Bieler, Global Head of Investor Relations at State Street.

Good morning and thank you all for joining us. On our call today, our CEO, Ron O'Hanley, will speak first. Then Eric Aboaf, our CFO, will take you through our first quarter 2020 earnings slide presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.com. Afterwards, we will be happy to take questions. During the Q&A, please limit yourself to two questions and then re-queue. Before we get started, I would like to remind you that today's presentation will include results presented on a basis that exclude or adjust one or more items from GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our 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 and in our SEC filings, including the risk factors in our Form 10-Q. 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 Ron.

Thanks Ilene and good morning everyone. You will have seen that today, we released our first quarter earnings results. I am pleased with our performance during such turbulent times, and I am proud of our team members worldwide who achieved these results. The COVID-19 health crisis has necessitated a rapid curtailment of economic activity, which in turn has driven significant financial market volatility and a lack of liquidity in some fixed income markets. The markets in general and State Street specifically, have withstood the volatility well. Central banks moved quickly to help alleviate market stress and State Street's long-standing business continuity planning, supplemented by rapid innovation, has enabled us to operate, protect our employees, and serve our clients exceptionally well. Throughout this period, we have continued to execute against our strategy, which is reflected in our strong performance. Before discussing our quarterly financial performance, I want to review some of the actions that we have taken in support of our clients and to protect the safety of our global workforce, all while remaining focused on State Street's operational excellence, resiliency and business performance. Turning to slide three, I will outline some of the key aspects of State Street's response to the pandemic. As a global company operating in 29 countries, we have been addressing the coronavirus since its very inception with significant operations and approximately 3,000 employees in China, we had somewhat of a head start on adapting our global operating model to the rapidly changing needs of our clients as well as to the safety concerns of our approximately 39,000 employees across the globe. Our actions in response to this global health crisis have centered on maintaining employee safety and business continuity and resilience, while concurrently supporting our clients, the financial markets, and the broader economy. Let me start…

Thank you, Ron, and good morning, everyone. To start my review of our first quarter results, I'd like to go to slide five, where you can see, we reported EPS of $1.62, up 37% year-over-year. On the top left panel, I would call your attention to two items. First, our FX trading business had extraordinary quarter, generating revenues of $459 million of record volumes and increased client demand, which I'll spend more time discussing shortly. And second, we had a $36 million provision expense with a sequential increase driven largely by the effects of the COVID-19, on our economic forecast. On the top right panel, we had $11 million of expected pretax acquisition and restructuring charges, primarily related to Charles River as well as $9 million of after-tax costs associated with the redemption of our Series C preferred securities. On the bottom left panel, we show our quarterly results, ex-notable items for those of you who want to see some of the underlying trends. I would also note that we were able to generate positive operating leverage in the first quarter, helping to improve our first quarter 2020 pretax margin year-over-year. Turning to slide six, period end, AUC/A levels decreased 2% year-on-year and 7% quarter-on-quarter. Year-over-year, AUC/A were affected by a previously announced client transition that had a deminimis effect on year-on-year revenues. Quarter-on-quarter, the AUC/A decrease were mainly due to lower end-of-period equity market levels. As a reminder, approximately half of our AUC/A is reported on a one month lag, so some of the impact of the equity sell off seen in March has not yet reflected the year. AUM levels decreased 4% year-on-year and 14% quarter-on-quarter to $2.7 trillion, driven largely by lower end-of-period market levels, partially offset by strong net inflows over both time periods. Amidst the…

Thanks, Eric. Operator, we can now open the call for questions.

[Operator Instructions] Your first question comes from Alex Blostein with Goldman Sachs. Your line is open.

Great. Great. Good morning, everybody. Eric, thanks for the updated detailed guidance. I guess first question maybe around deposits. So below March levels, but above, I guess, you said fourth quarter, obviously, it's a really wide spread there. So, maybe just give us a flavor for where deposits currently stay in April, sort of on average? And then importantly, as you guys think about the capacity to absorb any additional deposits or sustain the current levels, how should we think of that with respect to your capital leverage ratios? How much lower you guys would be able to take that?

Alex, its Eric. Let me start on the deposits and just give you a little bit of texture on the trends, because I think that, that would help you. And obviously, the deposit levels move quite a bit. If you recall, back in fourth quarter, our deposit levels were about $165 billion in aggregate. And in January and February, they were literally just spot on to those averages. What started to change was the surge we saw at the beginning of March. And so, if we just think about the first half of March, we're running at about $185 billion of average total deposits. The second half of March spiked to $235 billion, and that together is what got us to a -- drove the higher averages for the quarter. And I think you saw our end-of-period print was north of $250 billion. And we literally operated at that level of deposits for about a week at the very end of the quarter. In terms of today, they’ve been running somewhere around $200 billion, $210 billion, so still hefty and I'll call kind of risk off levels. We're seeing that flight in [[h] quality and we're certainly there to support our clients. We do expect them to ebb down. And I think the question is, what's the pace of that? Do we get a resurgence or not? But there's a range of scenarios. What I would say is that the deposits now are a facilitation, a way for us to facilitate the needs of our clients, right? We're there for them on overdrafts, we're there for them on deposits, we're there for them on repo, we're there for them on supporting them at the Fed facilities, and I think we're delighted to do that as much as possible. In terms of the capacity, as I said in my prepared remarks, I think we've got ample capacity at these levels of deposits to support our clients. You see our capital ratios, whether it's the SLR, post the April 1 change is quite high. And that can -- that's at -- on a reported -- on the new basis were about 7% against the 5% level. You see Tier 1 leverage. We still ran well this quarter, and that's against a 4% minimum. So, there's certainly some range. There's not unlimited range, but our perspective is that, if deposits stay in the asset levels that they are at today, the kind of $200 billion to $210 billion that's quite comfortable for us and we're here to do what we need to for our clients.

Got it. That's helpful detail. Thanks for that. And then my second question is around CRD. So, revenue is about $100 million in the first quarter that's up only 1%, I guess, year-over-year. I think that business has been growing in the kind of high single-digit range, and you guys are obviously hoping to increase that further. So, is that sort of the impact of COVID-19 already playing out in the first quarter results? And that's really kind of the slowdown? Or is there something else going on? And I guess, as you look at the pipeline and the front-to-back wins that you guys have been highlighting over the last couple of quarters, any way to help us frame kind of the revenue backlog in that part of the business in timing to recognize it, understanding that, obviously, the current events could move that timing up and down, but just hoping to get some flavor there? Thanks.

Alex, let me start on that, and then I'll turn it over to Eric. We remain very pleased with the impact that CRD is having on our business. The front-to-back pipeline continues to grow, and it's having CRD as part of that toolbox, if you will. And as I've mentioned before, in some cases, we don't end up, in the end with a full front to back, but we end up with a built-out relationship or even a relationship that we didn't have before. For example, the one front-to-back win that we had this quarter -- that we announced this quarter. It was not even an existing client of either CRD or State Street. So, from an overall enhanced State Street value proposition that's working well. As Eric noted, the reported revenues are very, very sensitive to the accounting rules and the accounting treatment. And we did -- it's very sensitive to when we're delivering things and if delivery gets changed or if the contours of something gets changed, it does affect the timing of reported revenue. So, strategically, this remains a very important and integral business for us. It's driving a lot of new activity. It's driving activity into the profitable back office for us. So, we remain unchanged, and it's important to us strategically. And Eric can talk about the actual financial impact that you're -- in your question?

Sure. Alex, its Eric. So the quarterly revenues are always lumpy, and I'll just remind you that for a midsized client will bring in when it's on an on-premise basis, potentially $5 million, $10 million in a potential installation when it goes live. The smaller clients obviously, are $1 million, $2 million, $3 million. And so you can see, on a base of $100 million, you've got -- we could see big swings in growth rates, positive or negative. So I wouldn't read too much into that. What we have done is started to think through the likely revenues for the business this year. And this business in contrast to our servicing fee business, has more on-site kind of work that needs to be done. If there's on-site sort of co-development to integrate our platform within asset managers, there's professional services billings that also go with that. So, between the professional services billings just being slowed down with work from home, and then the go-live dates likely to be pushed out. I don't think there'll be -- we don't expect them to not be there, but we do expect some lengthening of those go-live dates. We're now looking at revenue growth at about 5%, 6%. We said mid-single-digits as opposed to the low-double-digits that we had expected this year. And we think that's mostly going to be around timing as opposed to underlying performance. The pipeline in CRD specifically is healthy. It's continued at the levels that it had been just a few months ago. And the interest in securing mandates from our clients, we think, it's actually as strong as ever.

Great. Thanks for taking the questions.

Next question comes from Glenn Schorr with Evercore. Your line is open.

Hi, thanks. Quick question on the loan book. So, I heard you loud and clear. Thank you on -- what the environment you underwrote to and what it could be in a worse environment in second quarter. So, it's -- I'm trying to think through -- if you look at the composition of loan book, fund finance and overdrafts, they don't scare me much. And my gut is not much of the reserves are focused on that. So, is it correct to say that most of the reserving goes towards the $4 billion levered loans and the $2 billion commercial real estate? And I'm just curious if you can contextualize a little bit more about quality of those portfolios. Specifically because what you said looks good, but 36%, 50%, it starts adding up in terms of just reserving. That's all.

Glenn, its Eric. I think you've got the right frame of mind on the loan book, so a modest-sized loan book which is 10% of our total assets. And it's pretty diversified both across categories and then within categories. So, fund finance, as you mentioned, is primarily capital call finance loans with recourse to some of the largest in premier investors in the world, where -- that's a pretty attractive business area for us and one that's grown nicely. Leverage loans is an area that we -- obviously, in this environment, we'll spend a little extra time and I'll come back and talk about that in a moment and then commercial real estate overdraft munis are pretty straightforward. You are right to hypothesize that more than a majority of the reserves for our book is for the leverage loan book. And the reason we're reasonably comfortable with this book, do not have to say that things won't happen on an individual name here or there, is that it tends to be an upmarket book. Average rating is about BB as opposed to the average in the index is single B. And it's -- literally, the center of gravity is quite different. We've been tracking the market prices for this book. This book tends to have market prices as we've seen some change in the market to be six, seven points better than the typical -- than the average leverage loan index. So, it's performed well so far. And it's pretty well diversified. There aren't any particularly unusual exposures. There's not much oil and gas in it. So, we're -- we think it'll operate well during this time period. But I guess at the end of the day, it's a relatively high-grade version of leverage lending, and it's only $4 billion. And so we think it's -- it'll perform well and will just be a piece of the broader picture for the company.

Cool. I appreciate the perspective, one follow-up on just NII, overall. So keeping it at down 10 as the thought process for the year, but deposit book is a lot more. I'm just curious a lot of the deposits come in, in non-interest bearing. And so we'll see how long they sit there, but they're going to hang out for a little while, at least. I'm just curious, I know rates think, but we knew the rates were interesting. I'm curious why NII, with a greater deposit base wouldn't be a little bit less bad?

Glenn, its Eric. I think you said it right. I won't repeat the five-letter word you use. But prevailing interest rates at the Central Bank, if you think of IOER as a benchmark are remarkably low, right? They're at 10 basis points. So, if you think about it, whether we taken a deposit at zero or taking a deposit at one, there's very little spread there. And so the value of the deposits, while they're there for -- they're there on our balance sheet, and we can lend against them, we can use them to support our other books, they're transient, by and large. And the value is small relative to what it's been. If you think back to the first quarter, on average, first quarter deposits were worth roughly 100 basis points. Just think about the cost of funds versus the IOER rate. In the second quarter, we expect deposits across the spectrum to be worth a fraction that closer to 10 basis points. So, it's just in an order of magnitude difference. And so, while we'll have -- we may have a surge or higher levels of deposits, we'll not be particularly renumerative this time around.

I got it. I appreciate it and thanks for all the guidance. Thanks.

Your next question comes from Brennan Hawken with UBS. Your line is open.

Good morning. Thanks for taking my questions. Just wanted to dig in a little bit on your expectation on trading revenue. I know you referenced Eric that you expect it to subside. But can you help us with magnitude? How should we think about the potential decline from what you did in 1Q? Are you really just sort of expecting it to revert back to what we saw kind of like last year run rate? Or how should we calibrate? And what should we watch for as the year progresses?

Brandon, that's a really good question and a real hard one to answer with any conviction. But let me share with you how we're thinking about it from a forecasting standpoint and then some of the possibilities. From a forecasting standpoint, our view is, by May and June, absent any other dramatic changes to the environment, the FX volumes will normalize back to what they were pre-crisis. And then that those levels, pre-crisis, will be what we should expect in third quarter and fourth quarter. Now, I'm saying all that, assuming that we have stability in equity markets, bond markets, global markets, and that's hard to predict. And, obviously, any further deterioration of the health situation or the economic situation is going to push us right back to where we were. So, -- and we're not hoping for that, we're hoping just for the opposite for the quieting of the enormous disruption that we've seen. All that said, there is a range of outcomes here, not just from the pandemic and its economic impact on markets like we saw in March. If we have a repeat of that in the coming months, and we could see some higher volumes again. But there's also a set of, if you think about the rest of the year, set of events, right? We've got Brexit continuing in some ways. We've got U.S. elections. We've done a series of different elements, I think, political, economic, global, world trade is going to come back at some point, and we'll have -- we may have tensions there. And so it's hard for me to really predict. And so, we tend to try to be careful with our forecast in FX, in particular, knowing that there certainly could be some upside. But I think we'll all see it when it happens and can probably factor that in.

Okay. Okay, great. Thanks for that. And then circling back as a follow-up to one of Glenn's questions on the loan book. Thanks for the additional disclosure there. The two biggest pieces are the fund finance and overdraft. Can you talk about any exposures that you might have in the fund finance book to mortgage REITs? What in that book makes you or your risk managers nervous, when they go to sleep at night? And obviously, it's not -- when we go into a market like this, it's not necessarily the stuff you always think that you need to worry about. Sometimes you get hit by surprise. So how can we -- how is it that you think about that book? How is it that, you risk managed? And how do you ensure that we don't end up in a situation, similar to what we had to a cycle where what we thought was good, like with the liquidity stops for the asset-backed commercial paper conduits, all of a sudden have become assets that end up coming back on the balance sheet and big headache to deal with.

Yes, Brennan, it's Eric. Let me give you a little bit of texture perhaps on what's included in the $13 billion of fund finance, and how we think about it. And you can imagine, over the last month, between finance and our risk organization and our business teams, we spent extra time. And heightening our oversight and monitoring. But let me describe for you what we have there, and kind of how we think about the -- each of those books and maintaining the quality that we like. So, within fund finance, the largest piece is capital call financing. That's literally lines to some of the premier investors around the world, and that's done on a -- that's been allocated on a fund-by-fund basis. But the work that was goes on behind the scenes is that, each of those funds as a set of investors behind it. And what we need to do is maintain a diversified group of leads to those investors. And we want to avoid all concentration. So, there's a lot of work that gets done as we grow that book to make sure that there aren't any unknown concentrations or the concentrations are all within limits, on a literally an investor-by-investor basis, because that's where we have recourse. So, that's the primary approach on the capital call financing. The next piece within fund finance is the 40 Act liquidity funds that -- these are the funds that can have a certain amount of leverage. They're very well described, I think, in the 40 Act rules and they have limits on the amount of leverage they can. And there, the monitoring is what the asset pool? It's effectively a version of margin lending. What's the underlying asset pool? What are the line sizes? How do we constrain…

Yes thanks. That’s great additional color. Appreciate it.

-- comes from Ken Usdin with Jefferies. Your line is open.

Hey, thanks. Good morning. I was wondering if you could expand upon your comments you gave on CRD talking about that maybe the -- the cycle is a little bit slower there. Just in terms of your regular way servicing conversations that you're having with clients, giving the changes and how we're all working, how are those conversations going? Are -- does the -- how do you approach sales cycles? And moving forward with engagements that you've already been in process with in-sourcing new business? Thanks.

Yes, Ken, the -- I mean, the level of engagement remains high and has continued to be high, even during this last month, five weeks of -- with almost everybody in the world working from home. And in fact, a new very large situation developed right in the middle of all this that we've started to work through. I would say that the underlying themes remain the same with this idea of improving and lowering costs of the asset managers or the asset owners. Cost structure of improving their operations, trying to do an outsource of things that are not really critical to their investment, but critical to achieving better outcomes, both for their clients and for themselves. I think what's changed and what's been added to the consideration now is all of the operational stress that's been applied to these managers since then. Many, many managers were not prepared for work from home, and they certainly weren't prepared for a global work from home. So, we see that, if anything, providing another catalyst to these kinds of, what we consider, fundamental enterprise outsourcing. And you can see that it's playing through even in our new business. The line that we focus on is new business, plus business to be installed. And as you can see, the business to the installed number remains quite high. And that reflects the fact that the business, increasingly is less about just a single product and much more about multiple initiatives, multiple kinds of offerings that we have underway for our clients. And we think -- see this continuing. We see this -- the need and desire to outsource at the extreme. You'll have clients that just have antiquated systems or operations that need fundamental upgrading. At the other extreme and we've experienced this, too highly successful managers and asset owners that are saying, we can do this, but it's not a good use of our time, and we want to be able to scale and we want to work with a partner that could be there for us. So, we see this whole trend continuing and probably accelerating.

Understood.

I'd just add that we're also -- obviously, these -- the revenues this year are based on the of bookings and the wins from last year by and large, I think about the installation process. And so far, I think we've been pleased with the continued implementation. Our onboarding team has been active through the end of March on-boarding some sizable clients on schedule. April, we've -- we're halfway through April and have visibility of the rest of the month and are not seeing any unusual or major delays. And so for the time being and I think if we could get through March and April, the -- that will bode well. But the previously one business tends to be installed on schedule because it needs to be, right? You've got the previous provider who needs to come off. You've got a lot of preparation that's been done. And so, so far, we've actually seen good progress or good continuity on the onboarding side, which is important because that's when the revenues tend to begin to be accrued.

Understood. And the follow-up, just on the buyback side, you guys were part of the financial services form agreement to stop buybacks through the second quarter. But obviously, not being a credits -- as credit-sensitive of an institution. And just looking at the results this quarter, it would seem that you guys would have capacity to continue a buyback regardless of what the credit environment turned into. I'm just wondering just your thoughts on whether or not if the rest of the forum has to decide to continue to stop buybacks for longer than the second quarter, would you have to be a part of that? Or could you make -- start making your own decisions based on your own capacity to do so? Thanks.

Yes, Ken. We should be clear. We make our own decisions on this. We are part of the forum. We talked forum and we considered it actually a very good move to make to instill confidence in the system and to -- remember this happened at a time where people were questioning whether or not banks would be there. And we -- I felt it was not going to be useful for us to not be part of this and to have more time spent on, why are the one or two outliers as opposed to the banks are committed to being there during the crisis. But we make our own decisions. You're right. We are very different, and our results will play out differently than credit intensive banks. So, the good news is that with the new rules that are being implemented, capital planning can be much more dynamic than it has been in the past. And we'll take advantage of that as the situation plays out. I mean, the realities are that it's still highly uncertain. You heard that -- and the environment is highly uncertain. You heard that reflected in the assumptions upon which we based our guidance to you. One could argue that we've been very conservative, but one could argue also that the situation could get a lot worse than what our -- what we put out there as a point estimate. That's exactly what we've done. We've given a point estimate within a wide range of potential outcomes. The market level one is the biggest one. And there the assumption is, is that average markets will be what they were at period end March. I mean, that's -- we're already much -- the spot levels are higher than that. So, we really don't know here, which is why going back to your question on capital, if this all plays out as we see, we believe we'll be in a position to distribute capital, but we think it's wise to be able to make that decision dynamically quarter-to-quarter.

Understood. If I can just ask a quick follow-up, Eric, just on one of your prepared remarks. The 10 to 40 of the potential fee waivers, that's not dissimilar to what happened prior cycle. Is that just like an aggregate number, like what could happen on a full year basis as opposed to a quarterly basis?

Ken its Eric. Yes, that's for the rest of the year, primarily in the second quarter. I gave you a large range, because it's also highly dependent on short rates, right? If the overnight repo rates are one or two basis points or six or seven or 10 or 11, you literally -- you could go from zero to the -- to what could be the upper end of that range. But that would have been for the rest of the year, and it would be primarily in the second half.

Okay. Got it. Thank you.

Yes.

Your next question comes from Betsy Graseck with Morgan Stanley. Your line is open.

Hi good morning.

Good morning, Betsy.

I just wanted to dig in a little bit on the expense side. I know you indicated that you're looking at everything. And now we're anticipating that you're going to be able to bring expenses down 1% to 2% more than the prior commentary around down 1%. And I just wanted to understand where -- in an environment where you're not doing any redundancies, obviously, this year, could you speak to where there's some opportunity set to dig into that?

Yes. Betsy its Eric. The opportunity set is broad and it's a set of initiatives that we had underway. And in the spirit of -- when things are tougher, you've got to act more dramatically, is I think the theme that I share with you. So, if you think about the different areas of our expense base, the compensation benefits line won't be as much of a tailwind as we've, I think, made a very conscious and appropriate choice on protecting our people. But if you think about the expense base, that's only about half of the expense base. And even within the compensation benefits line, for example, there are contractors, there's significant amount of contractors that we employ. And if you think about it, if we're going to end up with a larger employee workforce than we expected, right? Contractors could be an area that we -- where we adjust. So, it's that kind of action. Occupancy is another natural one, whoever thought that you could run a company at a 80% or 90% work from home, but it does give us a real perspective as we have lease rollovers or where we might have been planning on taking additional leases, and there's always a role instead of either potential exits or ads that you're doing as you load balance. You can imagine, we've got lease ads on a complete moratorium. And where we had rollovers, you can imagine, we're now starting to move in the opposite direction and say, hey, why can't I let this space go? And when employees do come back, I want all my employees back, but we clearly have more flexibility than we ever would. So, that's another example. Third one might be around all the other expenses in technology, there's software, there's hardware purchases, et cetera. While our teams are spending time on supporting clients and literally hourly daily basis, it's also a natural time for us to slow some of our purposes of capital equipment or software, doesn't say we won't come back and naturally think about outspending some of that in the future, but it does mean that we can slow some of those purchases because it's -- we've shifted some of our time and energy to more immediate situation as opposed to some of the medium term investments. So, I think that's the other one, which is the -- kind of the reinvestment. We'll naturally slow to some extent. And if you remember the chart we did at the fourth quarter earnings call in January, we showed expenses down 1%. Now, we're saying down 1% to 2%. But within that, there was 3% or 4% increase in investments of expenses due to investments and 4% to 5% decrease going in the other direction. And so part of what we're doing is also, I think, being more disciplined about those reinvestments that we're doing now and pacing them.

Got it. No, it's interesting too on the occupancy side because while you might have people come back to work over time, you might not be as densely organized as you have been in the past. So, that's one of the reasons why I was kind of interested in can you actually reduce occupancy or not, but definitely makes sense on the lease rollovers and additional leases, at least for the near-term. Are you still -- go ahead.

What I would add to Eric's comments or a couple. We have had underway, as you would know, a lot of work on process redesign and automation, and that work is not stopping, right? How we -- how and when we realize the benefits of it may change and be delayed, but the work is not stopping. And so -- and if anything, we're redoubling our efforts there. So, I would just note that we've got this moratorium, and we absolutely think it's the right thing to do. But our work, both in IT and operations, and then how we connect with our clients that remains -- we're working full speed on that. The other point I'd make on the leases is that I agree with your point that we probably won't be as dense for a long period of time, at least until there's a vaccine. But I think it's surprised everybody, not just at State Street, but elsewhere, how effective one can be in work from home. And I would have to believe that over the medium and long-term, that you'll see us having less space than we do today.

Got it. Are you still going to be moving your headquarters?

We are. And that was always a natural financial benefit to us. So that's still underway for the end of 2022.

Got it. Okay. Thanks so much.

Your next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Great. Thanks. Good morning, guys. Maybe just focus on the average balance sheet in terms of the non-U.S. deposit rates of negative 20 basis points. If you could just go into that dynamically? What's driving that? I think that there may be FX swap expense against that. And then also just a commentary on the driver of the episodic -- or the net interest income that you described as episodic in the quarter? And then also, you mentioned 10 basis points on deposits in a prior comment. I missed what that deposit level was linked to?

Sure. Let me -- Brian, let me take those in order. So on the average balance sheet, you're right. The non-U.S. deposit costs fell, they were minus four basis points or minus 20 basis points. It's literally the effect of the FX swaps, which are diagrammed out in the footnote on that page. I think it's page seven of the financial addendum. And as well as some modest reductions in interest rates in foreign jurisdictions, right? Some of the European and Asian central banks drop rates, and so that will flow through that line as well. In terms of the NII that we reported in first quarter, we did note that there was about $20 million of higher-than-usual NII separate from the deposits. The deposits for welcome and additive NII. But away from deposits and loans and investments, the $20 million was really split into two. About half of that was literally the hedging effect that goes through. We hedge either debt or the rate coupons on some of the loans, and that creates a mark-to-market as you've got changes in the debt market. So it's worth about half of the $20 million. And the other half was actually some good positioning that we took in the quarter with the influx of deposits and in particular dollar deposits, we were dollar rich. Dollars were quite valuable. And so we -- the treasury team did quite well to invest those in either yen or euros. They're kind of one and two-day overnight basis swaps and that was renumerative to us. And at the same time, it was helpful to either clients or counterparties in those foreign jurisdictions who were $1 poor and needed some of the access to the dollars that we could provide. So those were the two components of…

Right. That's very clear. Okay. And then just on the CRD commentary on the delay. Obviously, that makes sense given what's going on at work from home. Is -- can you comment on whether you think you're still on track for the 2021 revenue and expense synergies and the net benefit of $75 million to $85 million on EBIT on the revenue side net of investments and, I think, $55 million to $65 million on the cost side. Whether you think that sort of gets also pushed out with delay in implementations? And then the timing of the $1 trillion left to install in the servicing business, is that also delayed by COVID-19?

Brian, let me take those two different, but related questions. On Charles River, we're still quite confident in the revenue and expense synergies. The expense ones are something we do as a matter of course. And you can imagine, we'll actually try to accelerate those a bit, but those are on track. And then on the revenue side, a good bit of those synergies are actually coming from some of our trading businesses as we plug-in our FX and securities lending and other markets activities into Charles River, and that's on schedule and moving along at pace. So, we're currently confident in our delivering on the synergies for Charles River. On the servicing side, as I mentioned, the client on-boarding has stayed on track in March and April and so as we think about the time line of that $1.1 trillion to be installed for the servicing business, we think that will play out during the year. If you recall, I've talked about those wins and some of those wins are fast to install, say something like custody. And others, where it's a mix of custody and accounting and, perhaps, some of the offshore cross-border products, those tend to take longer. When you add middle office, it takes even longer. And -- but those are all part of the standard course of business. And we don't, at this point, see a slowdown in the implementation on onboarding rates. And so far, our clients are eager to move forward. Because in some ways, remember that business that we won came with some fee adjustments. Clients are -- want to conclude on those and so they need to implement the service. And so those are now because they're paired up, I think we'll stay on track on both sides.

Great color. Thanks very much for all the detail.

Your next question comes from Mike Carrier with Bank of America. Your line is open.

Thanks. Good morning. Just two quick follow-ups. First, on CRD. Just in terms of the mid-single-digits versus double-digits, I just want to make sure from an understanding, like if we get to 2021 and, let's say, there are medical treatments and most people are back to work, would you expect like a pretty significant acceleration or from like a headcount or what like people can actually accomplish, would you just go back to sort of the low-double-digits? Like would you get that acceleration? Or is it just not possible just given like the timing of the implementation how much the people power that takes?

Yes, let me begin on that. I think that as Eric noted, we stand by the 2021 synergies that we laid out there. And I think what's happening here is that, the pipeline that Charles River would have seen versus the pipeline that it's seeing now is quite different. It tends to be larger, more complicated and sophisticated clients. It tends to be part of a multiproduct installation. So, what you're seeing is it's just taking longer to install and therefore for the part of the deal that gets credited to Charles River, it's just taking longer for that to happen. And in fact, you're seeing now in the current installations, two very large installations underway, one of which has been out there since before we acquired the firm and that's changed over time, and that's delayed the revenue recognition. So, over the long-term -- over the medium and long-term, do we believe that this business can grow faster under us than it was prior to us? Yes, we do.

Okay. And then just on FX. The comments that you made makes sense. Given some of the investments that you guys have made in the platform, when you've seen the uptick in volatility, has there been any kind of increases in like clients that the number of products that could be sustainable if we continue to get some level of volatility? Obviously, we'll get a moderation, but maybe have you seen anything in terms of traction on that platform at the new level could be at a higher pace?

Yes. We -- market share is a hard thing to measure in this business because nobody uses just 1 provider. But we have invested heavily over the past couple of years in this era of low volatility to build market share to show and demonstrate the clients, the capabilities that we have, and that really helped when it came time. And the team came through and the transactions occurred really difficult roles, period end roles that were going to be hard to execute, got done, and clients remember that. So, we think this market share that we've built will last for us. As Eric noted, what we saw was just immense volatility, an immense kind of move from risk-on to risk-off assets, including moves out of certain base currencies to others and all crisis driven. So if we see that again, then there's lots of bad news elsewhere. Will we likely see -- or could we likely see is maybe a better way to describe it, volumes higher than what we've seen in the 2018-2019 timeframe? Possibly, right? Because I think we'll be in an era of -- I mean, almost any forecast, one would have to believe has some level of heightened risk. The other thing too is, I mean, we saw our giant rotation out, particularly of emerging markets. I mean, at some point, there'll be a rotation back, and that tends to be also beneficial to us too. So, again, we gave you an estimate and we tried to be conservative here, recognizing the range of -- or the amount of uncertainty and therefore the range of possible assumptions. But there certainly is a case where one could expect to see not sustained levels, at least in our forecast that we saw in Q1, but levels above what we've seen in the prior four to eight quarters.

Thanks.

Your next question comes from Brian Kleinhanzl with KBW. Your line is open.

Good morning. Just one question -- maybe kind of an update on where we're at in April, if you look at the balance sheet, you had the overdraft that came in at the end of the quarter. You also had the $27 billion of investment securities from the MMLF that were on the balance sheet. And then maybe could you just give an update on where those stand? Those just roll back off now that things have kind of stabilized? And also the same with the money microphone flows? I mean, what are you seeing thus far in April?

Brian, it's Eric. The end-of-period balance sheet is a good starting point for -- to follow-up on that question. And here's how I'd frame it. I think the MMLF balance is, we're at about $27 billion at the end of the reporting period on March 31. And they've been in that range, I mean, plus/minus a few billion dollars has we've been in that range for the first two weeks of April. And then deposits, which had spiked to just over $250 billion or probably closer to $200 billion to $210 billion. So it's really the deposit -- the reduction in deposits that are adjusting the balance sheet down by call it, $50 billion end of period relative to what we saw. There will be a few other smaller movements. Overdrafts have continued to float back down to more traditional levels, the mark on the forwards and the FX books have started to revert. So, there's a few billion here or there and a couple of other areas, but the biggest one is the guidance, I gave on deposits coming down by about $50 billion from the end-of-period levels, will be the biggest change so far that we see.

Our next question comes from Mike Mayo with Wells Fargo. Your line is open.

Hi. Ron, can you talk about the trade-off of basically offense versus defense, the tone that you're sending to the company? When I think of offense, I think of long-term market share, helping out the government being part of the solution, like you're doing with the money market. Maybe more help as the Fed expands its balance sheet, gaining share versus smaller competitors by doing a little bit extra. When I think of defense, I think of short-term hunker down, live to quite another day, like what you're doing more for employees, you're not buying back stock. And then maybe even for clients, if they're not making you as much money, still kind of living with that. So how do you think about that trade-off in this unusual world?

Well, it's -- Mike, it can't be one or the other. But I would say that, particularly since we feel like over the last year, year-and-a-half, we've gotten a very good handle on our expenses, not just from an expense level, but how we manage those expense levels, how we manage the productivity. I think you will find that our tone and our actions are mostly around offense. Certainly, as it relates to clients, we have had unparalleled levels of client communication and client engagement. And if anything, the time in working from a home cause people to redouble and re-triple their efforts to be there to support clients. And that will pay off for years to come. So, we think that, in the short-term, we have to be protecting our employees, both their -- physically and mentally. And we think we've taken the appropriate actions there, but we don't think we've taken them at the expense of any kind of long-term opportunity creation for ourselves and our shareholders.

And as it relates to clients, you mentioned the rotation out of emerging markets, historically; an emerging markets equities fund would generate higher custody fees than a plain vanilla bond portfolio. So, if people move out of high-risk into lower-risk, wouldn't that hurt fees to assets under custody? And maybe you're doing a little bit extra for clients, even though you're not getting paid as much?

Yes. Well, my reference to emerging markets, I mean, that rotation was happening, and just if anything has played itself out even further over the last month. I don't believe that, that's makes sense over -- certainly, it doesn’t make sense over the long-term. It won't make sense over the medium term. And we would expect to see as the situation -- as the situation stabilizes and investors start looking at relative valuations around the world, they'll see the -- just the value opportunities in emerging markets. So, I wasn't suggesting even a greater rotation, rotations largely happen. The question is when will the rotation back occur?

I just -- then in terms of, if there's risk off, does that mean clients go to more plain vanilla portfolios where you get less fees?

Yes. Well, certainly, in the short-term, that's what they're doing, right? I mean, it's -- you're seeing a giant push into cash, but at the levels that investors are getting paid and the amount of stimulus, first, monetary and increasingly fiscal that's going to be put in. Again, one person's opinion. I think that the more likely long-term trend is for risk assets, particularly equities to continue to provide superior returns. And in a period of uncertainty like this, which is not only uncertain, but previously unknown, you're not going to see as much in the short-term until there is more certainty. But all of the ingredients are in place, low -- lots of monetary stimulus, lots of cash in the system, low interest rates, to see a return to risk on at the appropriate time.

And then, one more follow-up, Eric, were on. Just, look, do you -- anything you can glean from what's happening in Asia or outside the U.S. that gives you extra insight to the U.S., especially like what percentage of your workforce is the office in Asia at this point versus the U.S.? Or any other trends or like, I said insight since you are in more than one country, obviously?

Yes. So -- and probably China, our Hangzhou operation is a great example of what we can expect worldwide. We started -- we were given the go-ahead to start returning employees there back in the middle of March. And we're now back up to about 75% -- between 75% and 80% back to work. And we've actually metered that. We -- as we've noted earlier, we have not densified the office as much. We've put -- we've got testing facilities on the way in. Initially, people were wearing mask. And now you're seeing a much more normal working environment. And I think that will stay for as long as there's not another outbreak. What we're seeing elsewhere, in Asia is, not quite as fast to return to work. But -- but you're also seeing guidelines kind of ebb and flow, as you see periodic outbreaks. And I think that's probably what we're going to live with around the world. I don't think this will be a straight-line recovery, in terms of whether it's back to work or back to gatherings. I think that there will be periodic outbreaks. Businesses and governments will need to respond to those. They're not going to respond in the same way, if the lessons from Singapore and Hong Kong or anything they'll be very targeted guidelines. For example, in Singapore, they just recently limited restaurants, again, but they didn't send everybody home from work. So, I think that's what you can expect to see, if you will, a steady recovery back over time. But with some lumpiness along the way as there are outbreaks, until we get to a -- until we get first to testing, and then to widespread availability of vaccines.

That's great. And how many employees you have in China because that's a fascinating specific, 75% to 80% are back to work in China?

3,000 in China, the vast majority of them, 2,800, in our Hangzhou facility.

Great. Thank you.

Your next question comes from Steven Chubak with Wolfe Research. Your line is open.

Hi Eric. Good morning. So Eric, I wanted to ask a question on the securities portfolio. Just given your heavier mix towards fixed versus floating, I think in the 10-K, you sighted a longer duration of around 2.7 years for your book, relative to where some of your peers are managing it. I'm just wondering what causes the NII to stabilize by year-end, just given some of the reinvestment headwinds could persist. And maybe if you could frame what reinvestment yield or level you're assuming, versus the 200 basis points of the securities bookings earnings today?

Steven, its Eric. There are a number of factors that you've got to assemble to really predict the path of NII. And in our 10-K, we tend to assemble them all together. And the securities portfolio is just one of them. If you think about the average duration of our balance sheet, you are right. The securities portfolio has an average duration of 2.6, 2.7 years. But the rest of the asset side of the balance sheet is actually much more floating rate. And remember, the securities portfolio is ex the MMLF to keep it simple is call it, just shy of $100 billion out of a $250 billion typical balance sheet. So it's an important piece, but it's not the only piece. The effect of that is that the average duration of the asset side of the balance sheet that we have is about 1.3 years, so about half of the duration of the securities portfolio. And it's that -- and that shorter net asset or the lower duration of the total asset side of the balance sheet is what creates a re-pricing that tends to be a little faster than you would have expected by just thinking about the investment portfolio. So, as we've played that through our models and, obviously, in our models, there are a lot of different factors, but those two are important ones. You see a step down from first quarter to second quarter that's significant. I gave an indication of that. We see another step down, but not as large in percentage terms from second quarter to third quarter. And then starting in the fourth quarter, you see a fair amount of stability between fourth quarter and then our guesstimates of what we might see in the first and second quarter of 2021. And part of that is that you've got the interest rate effects playing out. Then you've got some natural balance sheet growth, which creates a bit of a tailwind. And so once we get through the bulk of the interest rate effect, which happens in the first couple of quarters, the headwinds and the tailwinds tend to roughly even out, which is why we think we'll see some stability from the fourth quarter onwards.

Okay. Thanks for that, Eric, really helpful color. The one piece you, I was hoping you could clarify is what reinvestment yield or level are you assuming on the securities book?

Yes, the -- I'm trying to think about a good way to describe that to you. So, our investment portfolio yield right now is about just over 2%. And that will -- that's been -- that floated down just marginally, but that's because rates fell quickly towards the very end of the quarter. If I think about reinvestment levels in the portfolio, I guess we could talk about new investments, what's rolling off. There's a lot of ins and outs of that. Maybe the better way to describe it is that the average yield on the portfolio is about 2% on average for first quarter. If we start to think about what's the average yield in second quarter and maybe in the third and fourth quarter, we're closer to about 1.5% kind of roughly if I eyeball what the averages will look like. And that will be driven by the new roles being added and the old roles coming off. But that's probably a good rough amount, a good rough estimate for you.

Thanks for that, Eric. And just one more follow-up, if I may. Lots of helpful detail in the loan mix and composition. There were provisions that you reported was a mealy a bit lighter than peers. If we compare your reserve levels versus DFAST losses, on that screen or on that basis, you look a bit under reserve. But if you look at your company run stress tests, it looks like you're being in line with the rest of the peer group. And so just given that a lot of investors are using the Fed stress test in the DFAST as a framework for forecasting provisions, I was hoping you could clarify or speak to some of the differences in what the Fed assumes versus what you guys are assume for your company run? And why you're comfortable modeling lower losses relative to the Fed?

Steve its Eric. So, a couple of perspectives there some of which you touched on and others, which I'll add. I think first, we added to a reserve about $35 million. So, the reserve was up about one-third. And I think when I scanned across peers, you saw reserve increases of anywhere between 30% and 50% on corporate books. So, I think we're -- we made the right upward adjustment just given what we do at the time and what our forecasts were as of March 31. In terms of comparing the reserves to say, the CCAR losses, either the Fed model or our own models or to loans, I think that's where the mix of the loan book is in -- at all those ratios is incredibly sensitive to the mix of the loan book. If you think about it, our fund finance loans and one could go back to the last crisis, the 2008 crisis, performed particularly well. And so we've got to factor that into our reserving. And what I would say is that the reason the fed both does its math on estimated losses under CCAR and then asks us to do our math, is not just to say, hey, there will be a natural bid ask, but it is to reflect the different nature of the books. If you think about it, I think the Fed spent an enormous amount of time as you would expect on what is the typical mid-market corporate lending book going to result in, in terms of losses? Or what's the typical credit card book that it's -- and how will it perform under stress? I would think that, while they have extensive modelers, they probably spent a little less time on our fund finance to capital call line book just because it's small and it's not widespread around the industry. So, I would at least say that in our particular circumstances, the company run stress tests that you've been referencing are in our mind is a good indicator of credit under stress and May. But I'll be sensitive to it because all models are informative, maybe a bit more indicative than some of the Fed models just because they tend to be much more averaged across more kind of a non-custodial set of banks.

Thanks so much for your helpful color. Appreciate it.

Your next question comes from Rob Wildhack with Autonomous Research. Your line is now open.

Good morning guys. In the slide deck, you called out some pricing headwinds contributing to both sequential and year-over-year declines in the servicing fee line. Can you just expand on what you're seeing there? And then more broadly, what are your thoughts on pricing from here given the shift in the macro? Thank you.

Why don't I begin--?

Hey, Bob, it's-

Why don't I start, Eric? In terms of -- I'll start with your second question -- on the second part of your question, Eric will answer the first. We have spent a lot of time with our clients. Remember, we've got a fairly concentrated book of business. Our 100 largest clients constitute a big portion of the total. And we're through 80-plus percent of that, we've gotten term out of a lot of them. But more importantly, we've just learned how to do this better than we have in the past. So, while, for sure, our clients will be under their own sets of stress as a result of this, we are not anticipating a heightened level of price compression. Part of it is that it's a given -- if you think about the way that we're remunerated in a client relationship, a part of that is NII and they can see as well as we can that that is -- that the source of return is going away. So, we think it's reasonable to assume that the pricing, as we've said before, will -- pricing pressure is abating, that it will continue to abate and level out at a normal level, which is -- it's not going to go away, but it will be a normal level as opposed to what it's been over the past couple of years and nothing that we've seen this year so just anything different on that.

Yes. Rob, it's Eric. I'd just add that pricing has been a natural part of this custody business for decades. And what we're doing in the disclosure on the slide deck is literally given you for servicing fees, what's the very transparent roll forward and net new business flows and client activity, which were up this quarter actually was a tailwind, market appreciation and depreciation and then pricing going the other way. So, it's just part of our natural disclosure now and on a going-forward basis. But as Ron said, we expected a certain amount of pricing to come through during this year at that kind of 3% level, so down from the 4% headwinds we saw last year. And we're -- everything we're seeing suggests that we're on track for that currently and it will be -- it will moderate from last year's levels, so in line with what we currently expect.

Got it. Thank you guys.

Your next question comes from Gerard Cassidy. Your line is open.

Thank you. Good morning, Ron. Good morning, Eric.

Good morning.

Eric, thank you for the detail on the loan portfolio, very helpful. As another question, on that leveraged loan portion of the portfolio, are you primarily a participant in those loans, the syndicated type loans? Or are you the lead? And then second, are they all subject to the shared national credit exam process?

Gerard its Eric. I think the answer is an easy yes to both of those. So we tend to be a participant in a set of syndicates with the other large banks and work closely with them. We'll occasionally, but we tend to be a participant at the table. And we tend to operate within syndicates of sister banks that we feel when they lead are very thoughtful about credit and credit appetite because it's not just a particular loan, but it's the covenants, it's the terms and conditions that matter. And so the choice we make of which syndicates to join, and which lead banks to partner up with is important. So -- but that tends to be our position to participate. And then absolutely, we participate in the SNC reviews and SNC tests. And so that's a way for us to, I think, for the industry and for our supervisors to make sure that we evaluate credit consistently. I think what's helpful about leverage loans is they're also traded in the marketplace. So, there's an external market benchmark, and that's -- they are external ratings. And oftentimes there are prices, but there's also the SNC review process. We participate in that. And so we feel like we've got a very good read into the quality and health and -- of our book. And as I mentioned, it tends to be double the average book with actually some BBBs and higher and just very few under the BB level.

Great. And then just a quick follow-up. You gave us good information on the positive flow and what you saw at the end of the quarter and what's happened since then. Can you share with us what were the customers, or who are the customers that were the primary drivers of that deposit inflow? And then are they the same customers that are withdrawing now or is it a different group that are actually withdrawing the deposits?

Sure. Gerard, let me give you a little bit of texture because if you think about our client base, it's asset managers, asset owners, alternative providers, insurance, a wide breadth. I think what we -- what we saw is that while they all tended to become more liquid and go to cash, and so we had some increase in deposits from across all those segments, the single largest area came from our asset managers. And sometimes, it was the asset managers who were running money funds and they were derisking those funds and then leaving the deposits with us. And sometimes it was just the asset managers running various funds that we custody for equity funds, bond funds, U.S., international, et cetera, where they were derisking within those funds and shifting to cash. And so those are probably the two different factors within asset management -- asset manager complexes. And it's that cash that's come back and sits on our balance sheet. And so I think part of what we're watching for is how quickly does that cash get reinvested versus how liquid do those managers want to stay, whether it's the kind of money market complexes they run? And so sometimes they stay in cash as opposed to even buying short and medium-term treasuries. Or how risk off some of the long players or even the alternative providers want to be. But those are the factors, and it was primarily around asset managers. And as I said in my prepared remarks, we're delighted to make our balance sheet available to them, both on the -- as they have these flight to quality deposits or even operationally as we support them with overdrafts, because that's -- both of those are important parts of our business. In addition, even to some of the off-balance sheet activity, the sponsored repo and other facilitation that we provided, let's get another source of liquidity as well.

Great. Thank you.

That concludes the questions at this time. I'll turn the call back over to Ron O'Hanley for closing remarks.

Thank you, operator, and thanks to all on the call. Thanks for joining us.

This concludes today's conference call. You may now disconnect.