State Street Corp

NYSE:STT

Earnings Call Transcript 2019-Q4

[Operator]

Good morning, and welcome to State Street Corporation's Fourth Quarter 2019 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 also 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 website. Now I would like to introduce Ilene Fizsel Bieler, Global Head of Investor Relations at State Street.

[Ilene Bieler, Global Head, IR]

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 fourth quarter and full year 2019 earnings slide presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.com. Afterwards, we'll be happy to take questions. During the Q&A please limit yourself to two questions and then requeue.

Before we get started, I would like to remind you that today's presentation will include results presented on a basis that excludes or adjusts 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-K. 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.

[Ronald P. O’Hanley, Chairman and CEO]

Thanks, Ilene and good morning everyone. Turning to Slide 3, we announced our fourth quarter and full year 2019 financial results this morning. Fourth quarter EPS and ROE were $1.73 and 11.6% respectively, while full year 2019 EPS was $5.75, and ROE was 10.0%. Ex-notables fourth quarter EPS was $1.98, and ROE was 13.3%. Relative to both the prior year period and the third quarter of 2019, I am pleased to report that our fourth quarter pretax margin improved, reaching 29.1%, excluding notable items. We also saw an improvement in pretax margin at Global Advisors relative to the third quarter of 2019.

Before reviewing our performance further, let me touch on some of the macro factors that had an effect in 2019. Following the dramatic global equity market sell-off in late 2018, our results over the course of 2019 benefited from the steady recovery of the U.S. equity market during the year. While international equity markets improved somewhat, average levels in 2019 were still down relative to the full year of 2018. Total industry fund flows were favorable to 2018, primarily driven by broad-based flows in Europe and strong money market flows. However, in North America, industry flows into long-term funds remain negative, albeit less so than 2018. We experienced three interest rate cuts and lower long end rates which impacted NII, as well as low market volatility for much of the year, which in turn impacted our markets businesses.

Our full year 2019 results also reflected the impact from the still elevated level of industry servicing fee pricing pressure, which moderated for us in the second half of the year. As a result of these headwinds, it was clear that we needed to take aggressive management actions to stabilize revenues and reduce expenses while keeping client satisfaction at the center of all we do. I am pleased with the progress we made and how that translated into results, particularly in the second half of the year.

Assets under custody and administration increased 4% quarter-over-quarter to a record $34.4 trillion. We saw a strong level of new wins during the quarter, totaling $294 billion, which took our total wins in 2019 to just over $1.8 trillion within touching distance of our record amount of wins in 2018. Assets yet to be installed stood at $1.2 trillion at quarter-end. At Global Advisors, assets under management increased 6% quarter-over-quarter to a record $3.1 trillion supported by higher period end market levels and strong U.S. and European net flows to our SPDR range of ETFs. During 2019, Global Advisors recorded over $100 billion in total net inflows driven by strong ETF institutional and cash net flows relative to 2018.

Relative to the year ago period, fourth quarter total revenue increased 1%, reflecting improved servicing and management fees, driven by stronger equity markets, partially offset by lower NII and markets revenues. On a sequential and year-over-year basis, fourth quarter total fee revenue increased 5% and 2%, respectively. Full year 2019 total revenue decreased 3% year-over-year as a result of lower fee revenue and NII, partially offset by the positive contribution of Charles River Development.

We are pleased that we were able to begin to grow servicing fee revenue again with our focus on client service. Servicing fees increased 3% during the second half of 2019 relative to the first half of the year. During 2019, we implemented a number of client initiatives to drive better service quality and deepen relationships. This included the completion of our senior executive client coverage model for our largest clients. We also implemented a new client on-boarding process that has enabled us to scale rapidly and take on large tranches of business while also meeting client service requirements. Further, we implemented changes to better manage client pricing decisions with the establishment of an executive deal review committee. We know that there is more for us to do. And as we begin 2020, reigniting total revenue growth remains a core strategic priority for all of us. We believe that building out our front-to-back Alpha platform strategy provides an attractive value proposition for our clients.

During 2019, we undertook significant actions to improve our operational efficiency and reduce expenses. This time last year, we launched a comprehensive firm-wide expense savings program to aggressively manage down expenses driven by new resource discipline, process reengineering, and automation efforts. Initially targeting $350 million of gross expense saves, we subsequently increased our expense savings target to $400 million, which we exceeded, finishing the year at $415 million in gross expense savings. Part of our efforts were aimed at tackling headcount growth, which have been too high for too many years. During 2019, we successfully reduced total headcount by 3% from year-end 2018 driven by automation and standardization as well as process reengineering, with high cost location headcount down by over 3,400. As a result, we reduced our full year 2019 expenses, excluding notable items in CRD by almost 2%, thus exceeding our initial target of 1%.

As we look to 2020, we remain focused on reducing our total expense base again. This past December, I outlined the outcome of the initial reassessment of our technology cost structure. In the coming year, we are targeting a change in the trajectory of our IT expenditure, aiming for it to be flat to down 2% during 2020, excluding notable items. For resource discipline and process reengineering efforts, we are also targeting a reduction of total expenses company-wide, excluding notable items, by approximately 1% during 2020.

During 2019, we were also particularly focused on balance sheet management. As a result of a number of deposit initiatives as well as improved client engagement, we have recorded a third straight quarter of total average deposit growth. In addition, as a result of an improvement of balance sheet under stress following the 2019 CCAR stress test, we increased our quarterly common dividend by 11% to $0.52 per share. Further, we returned $2.3 billion to our shareholders during 2019, including $500 million of common share repurchases during the fourth quarter.

To conclude, during my first year as CEO in 2019, we have faced a number of challenges but through our actions, we have made measurable progress towards our goals, particularly expense management and capital return. My focus for 2020 will continue to be on delivering a distinct value proposition and world-class service to our clients, enabling us to reignite revenue growth while generating further expense reductions with sustainable improvements in our operating model. We remain confident in the trajectory of our business. We expect that our global reach and expertise in servicing and data analytics, combined with our unique front-to-back Alpha strategy, will enable us to realize our vision of becoming the leading asset servicer, asset manager, and data insight provider to the owners and managers of the world's capital. And with that, let me turn it over to Eric to take you through the quarter in more detail.

[Eric Aboaf, CFO]

Thank you, Ron and good morning everyone. Before I begin my review of our fourth quarter and full year 2019 results, I'd like to take a moment on Slide 4 to discuss several notable items. In 4Q 2019, we recognized $110 million of pretax repositioning cost consisting of severance and real estate, which sets us up to drive further process automation and organizational rationalization in 2020. We also had $29 million of acquisition and restructuring charges, primarily related to Charles River as expected and in addition, we had a $44 million gain related to the tender of sub debt in 4Q 2019 and a $22 million after-tax costs associated with the redemption of our Series E preferred securities. Taken together, we recognized notable items of $95 million pretax or $0.25 per share. You'll find a bit more detail in the appendix.

Moving to Slide 5, on the top panel we show our quarterly and full year GAAP results. On the bottom panel, we show results ex notable items for those of you who want to see some of the underlying trends. I would note that we were able to generate positive operating leverage in the fourth quarter on both the GAAP and ex notables basis, helping to improve our 4Q 2019 pretax margin both quarter-on-quarter and year-over-year.

Turning to Slide 6, we saw end-of-period AUC/A levels increase 9% year-on-year and 4% quarter-on-quarter. The year-on-year move was driven by higher end-of-period market levels and client flows, partially offset by a previously announced client transition, which is now largely behind us. Quarter-on-quarter, the AUC/A increase was mainly due to higher end-of-period equity market levels, client flows and net new business. AUM levels increased 24% year-on-year to a record $3.1 trillion driven largely by higher end-of-period market levels and strong net inflows of approximately $100 billion, which were spread relatively evenly across our institutional cash and despite a range of ETFs. Amidst the challenging organic growth environment for asset managers, State Street Global Advisors realized AUM share gains during the year in both money market funds and across our low-cost ETF array. It's a reminder that our business is positioned to further scale its offerings and to improve margins in doing so.

Moving to Slide 7, servicing fees were up 1% year-on-year and 2% quarter-on-quarter. As Ron discussed, while industry pricing pressure persists, the pace of quarter-over-quarter servicing fee headwinds continue to moderate in 4Q 2019 with this quarter's results showing three consecutive quarters of stable to increasing servicing fees, primarily driven by higher average market levels and net new business. And while equity markets were supportive over the course of the year, we are confident that management actions taken since late last year, including the rollout of our new client coverage model and newly formed executive pricing committee, have had and are continuing to have an impact. Nevertheless, there is much more to do, as Ron mentioned driving higher servicing fee growth will remain a strategic priority in 2020. And we continue to see significant interest in our front-to-back Alpha platform. We now have four wins, all of which have expanded our scope of business with existing clients.

On the bottom right panel of this page, we've again included some sales performance indicators to provide a little more texture. As you can see, AUC/A wins totaled $294 billion in 4Q 2019 and approximately $1.8 trillion for the full year. The sizable wins this quarter and throughout the year again demonstrate the benefit of our scale and capabilities as we build new relationships and continue to grow existing client relationships by providing additional products and services.

Turning to Slide 8, let me discuss the other fee revenue lines, beginning with management fees. 4Q 2019 revenues were up 6% year-on-year, primarily due to higher average equity market levels and inflows from ETF and cash, partially offset by mix changes away from higher fee institutional products. Compared to 3Q 2019, management fees were up 4% driven by higher average equity market levels and inflows from ETFs, partially offset by outflows from institutional. FX trading services were down 7% year-on-year and 4% quarter-on-quarter as the business was negatively impacted by low volatility levels, partially offset by higher volumes. Securities finance revenues were also down 8% year-on-year and 4% quarter-on-quarter due mainly to lower industry volumes and spreads. Finally, software and processing fees were up 18% year-on-year and 54% quarter-on-quarter, reflecting higher CRD revenue and positive market-related adjustments.

Moving to Slide 9, you'll see in the top left panel a five quarter summary of CRD's stand-alone revenue and pretax income. For 4Q 2019, CRD generated $126 million of stand-alone revenues, which was up 4% year-on-year and 48% quarter-on-quarter. I would again remind this audience the lumpiness inherent in the ASC 606 revenue reporting accounting standards and not to read across any one quarter's results. On the upper right panel, we've also included a comparison of CRD's 2019 stand-alone revenue versus an estimate of 2018 revenue, pro forma for the ASC 606 reporting standard, had we owned the business for the full year. As you can see, CRD generated $401 million of revenue in full year 2019, up 8% versus $372 million of estimated pro forma revenues in full year 2018. On the bottom right panel, we wanted to provide you with a bit more texture on the momentum we're seeing in the business and how we've enhanced it since our acquisition last year. We remain confident in the revenue and cost synergy goals announced at the time of the acquisition.

Turning to Slide 10, NII was down 9% year-on-year and 1% quarter-on-quarter, with our NIM declining 19 and 6 basis points, respectively. The sequential decrease in NII was primarily driven by the absence of episodic market-related benefits seen in 3Q 2019, partially offset by increased deposit balances. Excluding the episodic benefits seen in 3Q, NII would have been up 2% sequentially. Our deposit gathering initiatives continue to generate benefits. Average total deposits are up three straight quarters and up 3% year-on-year. Interest-bearing deposits are up 9% year-on-year, and noninterest-bearing deposits have been steady for the third straight quarter at approximately $29 billion. On the earning asset side, we targeted careful growth in client lending and a modestly larger investment portfolio, with both the average 4Q loans ex overdrafts and the investment portfolio up 12% year-over-year.

On Slide 11, we're again providing a view of expenses this quarter ex notable so that the underlying trends are readily apparent. Year-over-year, our 4Q expenses, excluding notable items, were down 2% and flat quarter-on-quarter. You can see consistent improvement in the comp and benefits as well as several other lines. As you recall, we announced the 2019 expense program this time last year with an initial target of $350 million. And thanks to a significant company-wide effort, we achieved approximately $415 million in saves in the full year, exceeding our initial target by nearly $65 million.

And so let me provide some color on a couple of optimization initiatives that really helped us reduce costs last year. First, supplier negotiations and consolidation have been a big focus. We've made great strides in both telecom and tech infrastructure services while also consolidating the number of our IT vendors. Second, the organization has been focused on realizing greater productivity. Automation initiatives launched last year have now led to four consecutive quarters of total headcount declines, resulting in high-cost location headcount reductions of about 3,400 this year, more than double our original target of 1,500. More to come in 2020 as we continue to work on every line of the P&L.

Moving to Slide 12, during the quarter, we returned a total of approximately $686 million of capital to shareholders. And for the full year of 2019, we returned approximately $2.3 billion of capital, representing 108% of net income available to common, as we executed our 2019 CCAR plan and delivered on our priority of increasing our capital return to shareholders. Moving to the right side of 12, you can see that both the standardized and advanced approaches CET1 ratio is at a healthy 11.9% even with that level of capital return. We also consciously reduced our Tier 1 leverage and SLR ratios, primarily driven by the post-CCAR redemption of our Series E preferred stock, which is worth about $0.12 of EPS. We remain confident in our capital position and believe that we have incremental opportunities to continue to optimize our capital structure as changes to the capital rules are finalized.

Turning now to Slide 13, I'd like to cover our full year 2020 outlook as well as provide some thoughts on the first quarter of 2020. Before I start, let me first share some of the assumptions underlying our current views for the full year. At a macro level, we are assuming slow global growth interest rates based on the current forward curve, and a modest uplift from equity markets as well as continued low market volatility, which impacts our trading businesses. So beginning with revenue, we currently expect that fee revenue will be up 1% to 3% for 2020. This includes servicing fees growing modestly at the low to middle end of this range. Management fees growing at the high end of this range, and CRD revenue should grow at low double-digits.

Regarding the first quarter of 2020, we would expect fee revenue to be down quarter-over-quarter by low single digits, perhaps 2% to 3% given headwinds such as the expected asset mix shift by a single client in asset management as well as seasonally lower CRD revenue. Regarding NII, we expect it to be down 5% to 7% in 2020 versus 2019 driven by the carryover impact of lower market rates and some continued rotation in the deposit book. Regarding first quarter of 2020, we expect NII to be down about 5% sequentially driven by the full quarter impact of the October's Fed rate cut, lower day count, and the fourth quarter long-term debt issuance. On a positive note, we do expect that NII should largely stabilize in the second half of 2020, assuming of course, that there isn't a significant change in the interest rate environment.

Turning to expenses, as you can see in the walk, we will continue to be laser-focused on expenses and expect to achieve approximately 4% to 5% in savings driven by our continued focus on resource discipline and process engineering as well as our technology optimization plan. This will include a reduction in headcount of an additional 750 roles in high-cost locations in 2020, which is related to the repositioning charge I mentioned earlier. These expense saves will be partially offset by approximately 3% to 4% of ongoing business building investment scenarios like CRD, tech infrastructure, and the variable cost of new business growth. This should yield a net 1% reduction, excluding notable items, in 2020 total expenses.

Regarding first quarter 2020, we expect expenses to be largely in line with this guide year-over-year and consistent with the seasonal expenses usually occurring in the first quarter. Taxes should be in the 17% to 19% range for the year, but we expect first quarter 2020 to be at the high end of that range. And finally, given our strong capital position and recent capital optimization, we expect to continue to actively return capital to common equity holders in the form of payouts and returns, subject, of course, to the Federal Reserve scenarios and associated approvals.

So moving to our summary of full year 2019 results on Page 14, we were pleased to see fee revenue improve over the course of the recent quarters as management actions and moderating fee pressure helped drive total fee revenue up 2% in the second half of 2019 versus the first half. At the same time, we continue to navigate a challenging interest rate environment and enhance NII with deposit gathering initiatives with three straight quarters of total deposit growth. We also successfully executed on our full year 2019 expense savings program, significantly exceeding our initial savings and headcount reduction targets and helping drive down expenses, ex-notable items and CRD, by 2% year-over-year, demonstrating our ability to bend the cost curve. We're committed to doing more in 2020.

Finally, we continue to optimize our capital structure and delivered on our promise of increased capital return to shareholders with approximately $2.3 billion in capital return in 2019 for a total payout of 108%. And with that, let me hand the call back to Ron.

[Ronald P. O’Hanley, Chairman and CEO]

Operator, can we open the line to questions?

[Operator]

[Operator Instructions]. Our first question comes from Brennan Hawken with UBS. Your line is now open.

[Brennan Hawken, UBS Investment Bank]

Good morning, thanks for taking the question. Eric, you just ran through a bunch of color on expectations for the year in 1Q. One that I was hoping to dig a little in on is the fee revenue side. I think you said that the 1Q fee revenue growth down 2% to 3% sequentially, and you gave a couple of factors. Does that guidance include what we've seen so far year-to-date in the equity markets, which has been pretty robust or is that a potential offset if it proves to be durable through the quarter? Thanks.

[Eric Aboaf, CFO]

Brennan, it's Eric. The guidance is effectively as a combination at the end of the year. And obviously, if there's large dislocations between then and now, we factor it in. I think you'd say equity markets are up. Volatility still, though, on -- and trading is still pretty light. We've not seen that big January uptick that I think we used to see four or five years ago. Interest rates have been, call it, puttering around. So I don't think there's a lot that's really changed, and this is an outlook effectively based on what we see now. I think as I described, there's some basis, just the usual seasonality like in Charles River, which peaks in fourth quarter just because of the cycle of sales that's come through and then dip in first quarter. We have some visibility into servicing fees. Asset management fees, I noted will take a bit of a step down. Trading, we'll see. So it's kind of a combination that we're looking at.

[Brennan Hawken, UBS Investment Bank]

That's all really fair. Thanks for that color. And then when we think about some of these robust equity markets that we've seen, and you guys have clearly done a really good job of trying to get your hands around the elevated fee pressure that you were seeing over early 2019 and leading into that. In the past, we've seen some breakage in fee rate when equity markets rally really hard really fast because your servicing fees are not all just purely contractually a percentage of AUC's basis points on assets under custody. Some of them are inflation, some of them were pegged activity levels and the like. So can you help us think about -- should we be prepared for optically the way we model State Street some fee rate pressure here in the near term just because of those mechanical factors rather than thinking -- I just -- I know some people think that when the equity markets go up, okay, then the servicing fee is going to go up with the fee rate being flat. In the past, it hasn't worked out that way, so just trying to think about how to calibrate for that?

[Ronald P. O'Hanley]

Brennan, it's Ron. Let me begin on that. I mean in the past, you're correct, there has been a cycle when you've seen sharp-up equity markets that has been followed by a relook by the client base at what they're paying, and we have a fee renegotiation. And that's still possible. I think what's different this time is, firstly, we have comprehensively been through the client base, either at their bidding or at our bidding. In some instances, we've been the proactive ones wanting to take control of the situation. We've tended to get more term out of these things. And in general, the level of partnership that's between us and our clients now is at a much higher level. So I would suspect -- my expectation would be that certainly, there'll be some conversation, but I would not expect the same kind of effect that we've seen in the past.

[Eric Aboaf, CFO]

Yes, Brennan, I'd just add the kind of quantitative side to this is, remember, most of our fee schedules in the servicing business are based off of averages, average for a quarter or multiple months within a quarter or what have you. And so it's worth just remembering that if you take through the depreciation, stock market indices, and I think there is a good table on the top right of Page 6 in our slide deck, the S&P -- and this is 4Q to 4Q. But if you think about it on a full year basis, which I think a number of you have, the S&P was up 29% and the period -- end-of-period, that feels great. But the average was up only 6%, right? The EAFE average point-to-point was up 18%. On average, it was actually down 4%. So it's really the averages that are factoring through. And I just encourage you to think about those as you think about modeling the servicing fee effects. And in addition, those are what the -- but what we focus on, both from a -- as we think about the calculation of the servicing fees, but also what the clients think about as part of the billing process.

[Brennan Hawken, UBS Investment Bank]

That's great color, thanks and apologies for jumping in the weeds straight off to bat on you.

[Operator]

Our next question comes from Glenn Schorr with Evercore. Your line is now open.

[Glenn Schorr, Evercore ISI]

Hi, thanks. Curious if you could talk -- and you might have touched on it a little bit, but if you could talk on your deposit optimization efforts, what's working and where you are through the process you've been going through client by client. 4% growth is good. Do you consider any of it repo environment related and transient? Just curious to get the mark-to-market on that.

[Eric Aboaf, CFO]

Sure, Glenn. It's Eric. Let me start. Deposit initiatives were something that we really began to focus on late in fourth quarter of 2018, I think I'd say, and then it's been an intense effort for 4 or 5 quarters now. And it really is in response to thinking about how do we serve our clients with our balance sheet. Now as you say, sometimes it's deposits, sometimes it's cash money market sweeps into Guest Manager. Sometimes it's some of the sponsored repo that we do. So there's a series of different areas. I don't think it's particularly -- the results of those initiatives on a year-on-year basis are north of $10 billion of deposits, tend to be more on the interest-bearing side because that's what's discretionary. It's come in probably three buckets. The largest of the buckets is working with our custody clients and thinking about how to serve them on their discretionary cash. Sometimes it's the asset managers. Sometimes it's insurers. Sometimes it's the pension funds. So that's been -- that's probably been the biggest piece.

We've also, I think, built up over time a book of corporate deposits. Because remember, not only do we have partners and suppliers for corporations, but because of our custody of the pension plans, right, we have often an introduction from the pension -- the defined benefit pension plans or 401(k) plan into the corporate treasurer. And so that creates a natural access. And then the third bucket is we always supplement with a little bit of CDs or broker deposits, but I think that's been probably the smallest of this of the three buckets. So those are the kind of initiatives we've taken. They've been, I think, material in terms of continuing to build our balance sheet, which then lets us -- provides enough oxygen, in effect, for us to build our loan book, our investment portfolio, our trading book. And so that's kind of part of how we think about running the bank. And then specific to your question of what have been better, different, lower, higher because of quantitative easing or not, I don't think the initiatives would have been particularly different. I do think there is more deposits in the system, in the banking system, and we've seen some of that probably starting in the second half of the third quarter in that kind of period when the Fed began to intervene and into fourth quarter. It's hard to dimension how much there is, but you and I both read the Fed H.8 reports, and that kind of gives you a little bit of an indication.

[Glenn Schorr, Evercore ISI]

I appreciate that. And maybe one more on just the servicing wins. $294 billion in the quarter, $1.8 trillion for the year. If you look at that, that's over 5% organic growth. Now obviously, it's a gross number, not net. I don't know if you want to share just a ballpark range of where net is. But then the specific question is if you can help us with the composition of what's in the one but not yet funded pipe, I see some of the press releases, I see some ETF wins in there in the fourth quarter, but maybe just help us think through what's in there?

[Ronald P. O'Hanley]

Yes, Glenn. It's Ron. It's a mix of things that are in there. It's -- some of it is true one-offs, meaning we've won something. It's in the queue to be installed. It'll be installed. More typically, just given the nature of our client base, which tends to be larger asset managers and asset owners, when we win something, we install in tranches. Sometimes it could be very conventional business, like we have a very large mutual fund win earlier in the year. But some of the funds are more complicated than others. Sometimes the client wants it done in a particular sequence around their fund boards. So there's some of that in there. You can probably draw the conclusion that the more complicated of business tends to get involved later.

The other thing that's in there, though, is, increasingly, the nature of our business is that we're not just winning a custody or accounting assignment, but we're winning all or a portion of the front-to-back, meaning there's some middle office in there, there might be some Charles River in there. So oftentimes, what you're seeing is a installation of another service for an existing client where we had an install earlier in the year. And that's the way to think about it.

[Glenn Schorr, Evercore ISI]

Got it, okay. That's interesting. I appreciate it. And is it in and around the range of the average margin because I know going piece by piece would be impossible, but just like the ones that not yet funded, is it coming in at a higher level, average level or below average level?

[Eric Aboaf, CFO]

Glenn, it's Eric. It's -- I think, as Ron said, it's a mix. It's -- well, it's a mix of fee rate and it's a mix of timing. And as you could see, it could be installed where it's high a quarter ago. It's high again this quarter. And so sometimes this installs more quickly. Sometimes more slowly. So just -- I know it's hard to model. I just encourage you to put a big band around it.

[Glenn Schorr, Evercore ISI]

Cool, well your outlook comments help, so we will take it at that. Thanks guys.

[Operator]

Our next question comes from Ken Usdin with Jefferies. Your line is now open.

[Kenneth Usdin, Jefferies]

Thanks, good morning guys. To follow-up on the NII outlook, Eric, I was wondering when you talk about the expected decline next year, can you just give us a little bit more color on just the dynamics of how much and how the lower rates from last year still roll through on the NIM? And also against your point about there being some excess deposits in the system, but you're still growing these deposits from your strategic initiatives, can the balance sheet also expand to continue to expand from here, so I guess just a split dynamic of what happens on the NIM side versus what happens on the balance sheet? Thanks.

[Eric Aboaf, CFO]

Yes, Ken. It's Eric. You're right that -- you're asking the volume question and the rate question. So maybe -- let me do that in that order. I think from a volume perspective, the two drivers that we see in this business are firstly, the amount of wins that we have in custody and accounting because those typically come with those residual deposits that -- the frictional deposit in the system. So those will come based on the kind of the win rates that we have and some of the installation. I think the other one is the deposits in the system and I think we've clearly seen a bit of an uptick quarter-over-quarter based on the bank-wide data as well as some of the -- some of what you've seen in our results and a couple of the other banks that you've all seen that in the Fed statistics.

I think the question is, what happens to deposits in the banking system over the next year? Did we just -- did the Fed in effect with its easing process over the last four, five, six months get us to a new level and then we just go back to the slow build off of that or is there going to be more or less Fed activity and I'll leave that one to -- for you to think about. I think that one is the uncertainty. So we do expect some amount of modest deposit growth. I think the -- what we're careful on, on deposits and we still expect to see is some amount of continued rotation from noninterest-bearing into interest-bearing or interest-bearing into treasuries because you're seeing that in the underlying asset holdings of our clients in the industry. And as we think about the volume of deposits going forward, we've been comforted that there have been three quarters in a row of stable noninterest-bearing deposits. But I'll remind you, third quarter and fourth quarter of 2018 actually saw an uptick in noninterest-bearing deposits, and then it fell by -- it fell significantly in the first quarter of 2019 from 4Q 2018. So we're hesitant to think that we're -- we've gotten to a sea change. We like to see a flattening of that line, but we're hesitant to call that a sea change just yet, which is why we do think there will be some continued rotation in the coming quarters and year.

I think from a rate standpoint, it's everything you'd expect as long rates still have a negative effect on a full year basis again. So long rates, I guess I should say, long rates have a negative effect as the tractor of the investment portfolio plays through. And unless long rates pop up 30, 40, 50 bps, you still have that playing through to a negative. You have the short rates are -- kind of have been reset, and so we're going to -- it's going to take 3 or 4 quarters to lap ourselves, and so you have that effect playing through. And then you have some -- as we think about the first quarter, as an example, you've got some transactional impacts, right, as we call those perhaps, we replace them with long-term debt, right, because we have TLAC requirements. And so in effect, I end up with a higher net income, but the -- I get it -- we get higher available to common, but we also have a -- also have more interest expense because of how the P&L accounting is for us. So anyway, I'm hoping I covered most of it there.

[Kenneth Usdin, Jefferies]

Yes. And just one more, just balance sheet structure question to your point on the preferreds. You did that redemption. You said you were -- last quarter, you're able to do that before getting even the final. Could you continue to do more in that ahead of getting the finalization of SCB? Or does now SCB finalization really lead any further decisions you make about the balance sheet structure and capital actions?

[Eric Aboaf, CFO]

Yes, Ken, fair question. But obviously, we're -- any kind of decision by us around CCAR about interim capital actions is something that we just don't have an ability to telegraph beforehand or to really discuss. I'd just tell you, we always look at the full range of what we can do. We're always conscious that there are periods immediately after CCAR where one tends to have an opportunity. It gets a little more delicate in the first quarter. So let me just leave it at that. It's the kind of thing where I don't think timing matters a ton about when we take our capital actions, but the -- but we are looking at, obviously, the change in the leverage rules and then importantly, we need to see how the SCB comes through. And that's -- that I think we'll know in the coming weeks, and then we'll start to gear up for these -- for our annual CCAR process.

[Operator]

Our next question comes from Alex Blostein with Goldman Sachs. Your line is now open.

[Alexander Blostein, Goldman Sachs]

Thanks, hey, good morning everybody. Eric was hoping to dig into NIR in the quarter around some of the deposit cost trends. If I look at the non-U.S. side it looks like it was a negative 4 bps kind of number. I know there's some FX dynamics that are all through that, that could create a little bit of noise. But can you help us understand just kind of where you guys are in terms of deposit costs, how you expect it to evolve from here, and if there's anything one-off this quarter that helped that?

[Eric Aboaf, CFO]

Yes, Alex. It's Eric. I think there are a couple of probably elements here that are going through the deposit costs on the U.S. side and then the non-U.S. side. And the page for those of you on the phone probably best to look through is the financial addendum that we have, page 7 there's a detailed sort of average balance sheet table of the last eight quarters for everyone. On the U.S. side, you see our deposit costs came down, I think, a nice 19 basis points. Most of that is on the U.S. fee side. Obviously, this is a domicile view, not the currency view, but it's indicative. And that's really the effect of that October rate cut and the full quarter effect of that coming through, adjusted for our mix of pricing and so forth. And so I think you see the right sort of betas in that kind of 50% range that we've been seeing flowing through that line.

The non-U.S. domicile is a little messier. Part of what you see there -- and that one fell, those interest -- that interest expense fell more than you would naturally expect. It actually went from a positive interest expense to a credit in effect. Part of that was, remember, the ECB move, and we moved as well. We actually -- our beta was -- on that ECB move just as we had this begin to normalize NIM in the international markets as other banks are doing as well, given that it seems like it's going to be negative, not for a temporary period, but for the foreseeable future. And so we're beginning to -- I think the banking industry is beginning to reset what kind of NIM should be earned on deposits because of that change. And then we also have less in the FX swap costs and so we had less swap expense, which then goes through that line of the P&L and that we have in the footnotes, and that just bounced around a bit with the costs being on the interest-earning asset side.

[Alexander Blostein, Goldman Sachs]

Got it, that's helpful, thanks. And then a slightly bigger picture question to you guys on profitability. I guess when we take a step back, obviously, a very nice move on expenses this year, and you guys have more to do next year. I guess when you go back a year or so ago, you had a slide out talking about medium-term pretax targets kind of shooting for 2 percentage point improvement in pretax margin. That's still the case, but I'm curious what's the base and what total may be the destination here because in 2018, pretax margins were 28, 29. You guys are kind of 26-ish this year. So I guess off of which base should we be thinking about the two percentage point improvement?

[Eric Aboaf, CFO]

Alex, it's Eric. Let me start on that because I think it's something that we've obviously been thinking through the markets. When we set those up with the markets at a certain point, they worked against us, both on the equity market side, which has largely bounced back. Now we need to kind of -- it's going to take a few more quarters to get to a place where we're pleased, and that was in our outlook. But it was also at a time when NII, right, was expected to go up, and NII has actually gone the other way. And I think I mentioned in one of the conferences late last year that, that change in NII cost us effectively two points of margin.

That said, that's just information. I think when we think about how we need to run this business, we still need to drive towards those targets and drive to those targets at pace. And I think we've been clear that at the time we set those, the pretax margin was in the 28% range. And I tell you, we're at 26% now. We need to -- we've got plans to get to 27%, 28% and 29% and ultimately get that three handle or the 30% handle on margin because we think this is a business that should operate at that level. And I think if you work through some of our guidance for this year, you see us making headway on margin, driving revenues up and expenses down. And I think you'd continue to expect that kind of leverage. Operating leverage and margin expansion is kind of tantamount and kind of a fundamental part of our planning process. So we're standing by those targets. We think they're important, and they were well set and those are -- that's where we're headed.

[Alexander Blostein, Goldman Sachs]

Great, thanks so much for that.

[Operator]

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

[Brian Bedell, Deutsche Bank]

Great, thanks, good morning folks. Can you just come back to the pricing pressure concept in asset servicing and one detail I did miss, if you could just clarify, the fees down 2% to 3% in 1Q, just the servicing -- asset servicing fee component of that for 1Q? But the broader question is, we've had that 4% pricing pressure, I think, that you identified, Eric, a while back, and that had been moderating to that sort of 2% headwind. Just want to get your thought about that headwind coming into 2020 and clarify that, that's -- that is separate from a mix shift and when I talk about that as a -- the common mix shift towards ETF and away from mutual funds, which I know are lower revenue capture, albeit they are just as -- I believe, they're just as profitable because of the lower cost that's servicing them. So maybe if you could just talk about that dynamic in the -- as how that shapes that 2020 1% to 2% up for servicing fees?

[Ronald P. O'Hanley]

Why don't I begin this, Brian because there's a lot in what you asked in terms of pricing and how we think about our outlook on pricing and pricing pressure. I mean if you look back on this business for time immemorial, right, there's been -- there's kind of enduring deflation in the business, which we've all come to know and live with, and that's been a result of a combination of business growing, ability to scale, et cetera. And that's been historically a 2%.

There's also been mix shift that's been underway since then, too. I mean the mutual fund ETF move is not new. It certainly accelerated over the last few years. So -- and we expect that mix shift to continue. I mean the other factor in here is there's increasing concentration amongst ETF providers. We have a very large market share amongst ETF providers. But obviously, as those providers get larger, the nature of the fee rate typically is such that they're paying up less than the marginal asset.

So -- but this is the nature of the business, and that's what we have to deal with. So we do think and believe and we've said that's important. The pressure that we saw starting in 2018 and continuing out into 2019, we think that's abating. But we -- this is a business that has lived and will continue to live in the face of ongoing fee pressure, which is why we continue to be intensively focused on our operating model and how we build the business that can not only meet that, but that can become more and more profitable in that kind of environment.

[Eric Aboaf, CFO]

Brian, this is Eric. Let me add a little bit of a quantitative kind of estimations of the kind of Ron's summary there. So on pricing, I think, as he said, historically, there's always been a two percentage point or so headwind on pricing per year over the last couple of decade. Two years ago, we saw that tick up 4% kind of headwind. That was kind of 2017, 2018. And then last year, if you think about 2018 to 2019, that was also 4% headwind, roughly speaking. And then I think we've described how we've been marching through a set of renegotiations and resetting of pricing over that kind of 8 to 10 quarter time period.

As we look into our book of business and think about this coming year, what's factored into our outlook is approximately 3% pricing headwinds, so down from the 4%. And we've got some visibility, good visibility into first quarter and second quarter. And so that's factored into our outlook on servicing fee on a full year basis. To your point of where does mix come out, mix comes out in how we describe client flows and activity, and it's been relatively neutral. Activity is up a little bit with clients. Kind of transactional activity that flows, you're right, tend to work the other way around. So that's been a more neutral effect in aggregate relative to past history where it's been a slight positive of a point or two. And then finally, on first quarter, you asked -- I'll just remind you that what I guided to on fees for the quarter was down 2% to 3% in aggregate for fees. The downdrafts that I noted were in management fees and in CRD. And so by omission, I didn't really cover servicing fees because we expect those to be flattish, and we'll see how they'll play out. But that's our current expectation.

[Brian Bedell, Deutsche Bank]

Great, that's great color. And maybe then just on CRD, you guys reiterated the revenue and cost synergy outline that you had from day 1. I know that's mostly a 2021 impact in terms of where you want to be. Maybe just an update on sort of the time line into that or how you're thinking about 2020 in terms of part of that $260 million to $280 million revenue goal for 2021. In other words, is that -- are you making material progress do you think in 2020 as it relates to your guidance there?

[Ronald P. O'Hanley]

Brian, it's Ron. I would say we absolutely are making material progress. And in terms of the synergies that we outlined, both revenue and cost, we expect those to play out actually in the time frame that we described earlier. But the more important impact or the even greater impact of Charles River has been around how it's affecting our core business and changing the nature of the conversation and the relationships that we're having with our clients.

As we noted, we signed 4 so-called front-to-back deals or Alpha platform in 2019. So in just over a year of ownership, we signed deals, which, in essence, means that we have a comprehensive and complete relationship with the client front-to-back. The pipeline there remains very strong. And even in those cases where the likely outcome is not a full front-to-back, it's changed the nature of how we're dealing with our clients from a one-off product provider to a true business process -- outsourcing partner with these clients, and I think that trend will carry on in many ways, fundamentally change the nature of our servicing business to the positive.

[Brian Bedell, Deutsche Bank]

That's great. And is it more of a linear progression through 2021 or more of a hockey stick into 2021 as the deals -- as you see these deals in terms of revenue?

[Ronald P. O'Hanley]

I mean I'd expect it'll be largely linear, but with a bit of an uptick as we continue to build out the platform, I mean we announced over the year various platform partners that we've added to Alpha, and these are providers that are plugging into our platform and typically where we get a share of those economics. And I think you'll see at an increasing rate over 2020 and 2021 the number of those kinds of providers on the platform, and you'll see them -- the increasing importance of platform economics. And that will be less linear and more -- it's like how any platform grows, right? It starts out small and the momentum build as more and more become part of the platform.

[Eric Aboaf, CFO]

Brian, it's Eric. Add to that, the -- if you think about the revenue trajectory on the synergies, for example, part of what you'll see is some of the leading indicators, like bookings, have started to tick up. You saw those were up 28% on a year-on-year basis. And so that's what will begin to drive the Charles River kind of specific revenues this year and next year. I think in contrast to that, some of the revenue synergies were around connections with the State Street base of revenues. And in particular, the trading and sponsored repo kind of revenue activity that we've quickly tried to link into Charles River tends to actually happen earlier in the three year cycle than later just because of the speed at which we can either make the client kind of connections or the order management system connection. So there'll be a mix and I think sometime this year, we'll probably do maybe a more fulsome kind of where are we as we're year and half, two years into this deal and try to share more information and it sounds like that would be helpful.

[Brian Bedell, Deutsche Bank]

Yeah, perfect, that's great color. Thanks so much.

[Operator]

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

[Betsy Graseck, Morgan Stanley]

Hi, good morning. Eric, I wanted to just -- Eric, and I wanted to just dig in a little bit on some of the comments around the expenses. I think during the prepared remarks, you mentioned that there's more to come, and I would expect that, just wondering, should we anticipate that the pace of change, the rate of change of expense reductions, is it something you think you can continue for the next few years? Or is this 2020, we get the 1% down and then it's more hold it steady or continue to grow, so while I should say it to you, but grow in line with just core expense pressure, so I just wanted to get your understandings to the duration of your expectations around the more to come?

[Ronald P. O'Hanley]

Betsy, let me begin on that, and while we're not giving guidance beyond 2020 at this point, I would say that our ambition is to continue to manage expenses down, offset by the necessary investments that we need to make. We believe that there's more room for productivity improvement. Our automation efforts are underway, but we have much more in front of us than what we've accomplished. So we see a path to continued and ongoing expense management certainly through 2020 and likely beyond, is the way I would think about it. And part of that is we -- if you're going to win in this industry, that's what you need to do, right? We've talked about the servicing fee pressure, talked about the pressure that's on our clients, but it's also just about being able to scale at the level that we need to. I mean if you think about the amount of new business that we've brought in, the -- those assets could only have been brought in if there was confidence on the part of the client base that we would be able to scale that. And I just think that to be the leader in this business, we have to continue to get that productivity improvement driven by automation, driven by process redesign to be able to take on a business like that.

[Betsy Graseck, Morgan Stanley]

If we get...

[Ronald P. O'Hanley]

Go ahead, Betsy.

[Betsy Graseck, Morgan Stanley]

I was just going to say, if we get a slightly different rate environment where rates come down again, do you feel like you have the flexibility to ramp up that expense reduction?

[Eric Aboaf, CFO]

Betsy, it's Eric. That was probably where I was going to go. I think we're quite conscious that in a slower top line growth environment, we're signaling 1% to 3% on fees this year. That's a year where you want to hold expenses, actually bring them down, right, because we need to create some real operating leverage and margin expansion. And so I think part of the answer to your question is if revenue growth is in that low single digits, then the expense is coming down, is the right answer.

I think to your point and the precise question that if revenues take a downtick, whether it's interest rate-driven or something else on the equity markets or something, then we would go deeper into expenses and we ration our reinvestment and just do it at a -- perhaps at a different pace. We'd find ways to accelerate some of our other optimization efforts. You're seeing what we're doing in IT, for example, that we described in December. We'd go deeper there. And just think about where we were in January of 2019, we announced 1% down and felt like, through the middle of the year, the environment hadn't gotten appreciably different. And so we ended up with 2% down. I think that's the kind of incremental action we would find a way to deliver if the environment were not favorable.

[Betsy Graseck, Morgan Stanley]

Okay, thank you. And appreciate it.

[Operator]

Our next question comes from Jim Mitchell with Buckingham Research. Your line is now open.

[James Mitchell, The Buckingham Research Group]

Hey, good morning. Maybe first question just on the CET1 ratio standardized, it jumped 60 basis points, look like a 5 billion reduction in RWAs. Kind of what drove that and is there more to do there?

[Eric Aboaf, CFO]

Jim, it's Eric. I think you're on the capital ratio pages where we've shown this quarter both standardized and advanced. And we did that because our binding constraint now is effectively both. They're almost right on top of one another. And I think you need to be a scientist to really understand the trend in each of those capital ratios. So let me try, and I'll -- we'll do a follow-up if necessary. So standardized, if you remember, is more volume-driven with some very -- relatively simplistic factors. And so the standardized ratio actually improved because standardized RWA fell sequentially, and that occurred, in particular, in the standardized RWA of our FX activities and our securities -- I'm sorry, our SEC lending activities. And that's kind of related to the lower levels of volatility in the market and lower actions. So that was the biggest downward driver of standardized.

If you take out your Ph. D. and want to think about advanced RWA, our advanced RWA went up, which is why the advanced ratio came down sequentially. And the advanced RWA increased because of loan growth and investment portfolio growth and a little bit of ops risk primarily. So those were -- it's a little bit apples and oranges, but that was the driver. I think from our perspective, we -- it just -- it's a good reminder that we live in a world of both, and we -- obviously, we'll manage to both. I think what I found comforting is, notwithstanding all our capital actions that we've taken and our higher payout, we actually are at real healthy capital levels, and that obviously gives us flexibility going forward. It sets us well -- it sets us up well for this cycle with CCAR, and we can take things from there.

[James Mitchell, The Buckingham Research Group]

Absolutely, standardized is what matters for CCAR, and that going up is certainly a nice positive. So -- but maybe just the second question, following up on your guidance of kind of fee revenue growth of 1% to 3%, just maybe to push back a little bit on it. If I look at 4Q fees and normalize for seasonality and processing fees and then just annualized 4Q, I get to almost 2% growth in 2020. So it doesn't feel like a very ambitious target when you think about the S&P is now currently 8% above 4Q average level. So you have a pretty big tailwind in the markets. You have about 3.5% of growth from AUC/A that's yet to be installed, the $1.1 trillion or $2 trillion is equivalent to 3.5% growth. You have the market tailwind, and you only have about 2% fee income growth. Is there something we're missing, I know you talked about the 3% reduction in the fee rate, but it seems like there could be a little better than that, and just please feel free to talk me down from that?

[Eric Aboaf, CFO]

Jim, it's Eric. I'm trying to come up with a realistic forecast because, to be honest, we'd actually like to be realistic of what we're seeing. And we also want to -- maybe back to one of the earlier questions, if we're realistic on revenue, we'll do the right thing on expenses. And so both matter in this business. But I think this is a realistic forecast. And obviously, if something changes dramatically, we'll -- up or down, that could have an effect. But let me just go through the pieces, so that you have a sense.

So on servicing fees, we said to the lower middle end of the 1% to 3% range. So I think that's pretty clear. I think if you think about it, the equity markets in the U.S. on average, and the averages matter here, will probably be up in the high single digits. So that'll provide a couple of percentage points tailwind in fees. There may be a little bit of -- there'll be obviously some amount of net new business, but there's also the fee headwinds still, that 3% that comes the other way that we need to overcome. And so that's why we get to the lower to middle end of the 1% or 3% range.

And remember, there are some businesses that are, in servicing fees, that are driving very quickly. We've noted, for example, EMEA sometimes or some of the asset management space, but there are others like our hedge fund clients are actually tending to be relatively stable or even in downdraft in some cases. And so that works in different directions. So there are some puts and takes within the portfolio that we're always conscious of. I think on management fees, we said the upper end of that range, and I think you can square that with the lower step off in first quarter of 2020 that I mentioned in my prepared remarks.

Trading, I think trading is trading right now. I think you've seen it kind of trend downwards over the last year. I think volatility doesn't feel like it's moving up fast. It's not moving up fast, right? It's stable at best, leverage from hedge funds or from those who borrow or lend in the SEC finance business. If you look at the industry data, it's actually down year-on-year. And I don't see a quick turnaround for that. And so I don't want to gear a business model to an automatic recovery in trading volatility and opportunities to find wider margins and so forth.

And then there's our software and processing fee other line, and I think we've given good, clear guidance on Charles River. And like you say, you just have to be careful about the annualization of the processing fees and other. I think just this quarter, processing fees and other were up about $25 higher than would have naturally been expected than a year ago quarter-over-quarter. And if you look at the full year, I think there's that or even a little more in full year 2019 than in full year 2018. So you may want to think about annualizing either both 2018 and 2019 or even look back to 2018 just because there's a range of possibilities there.

[James Mitchell, The Buckingham Research Group]

Okay, all to the point, appreciate the color.

[Operator]

Our next question comes from Brian Kleinhanzl of KBW. Your line is now open.

[Brian Kleinhanzl, Keefe, Bruyette, & Woods, Inc.]

Great, thanks. A quick question on the guidance, you did mention that there was changes in leverage ratio coming forward, SCB could also be coming through, has any of that been that factored into the guidance or if those came through positively, that would all be incremental to the guidance you gave?

[Eric Aboaf, CFO]

Brian, it's Eric. Oh, that's a hard question because if I answer it, I'm going to show all my cards, and I can't show all my cards. I don't know what the CCAR cards are going to be like. And so that's a tough one. I think what we do now is we know the amount of capital returns last year. We have some amount of view on this coming year, but we're still guessing. And so I -- it's -- I think what you should probably do from a modeling perspective and what we would expect you to do is think about the capital return levels that we've been at last year as at least a starting point. I'll let you take a swag if you wanted to add a little more or not at that. But at least start with last year as I think that gives some earnings accretion to the EPS line because of the retirement of shares, and that should factor into your estimates in our -- that does factor into your estimates presumably in our guidance.

[Brian Kleinhanzl, Keefe, Bruyette, & Woods, Inc.]

Okay. And then separately, when you mentioned the pricing headwinds in 2020 of 3%, is 3% the new normal? Or do you still expect that to go back towards the 2% level of a headwind that has been historically?

[Eric Aboaf, CFO]

Brian, it's Eric. That's a hard question to answer now. I think we'll have a better sense of that later this year in 2020 because what we will get to is where are we with clients with whom we need to adjust pricing in 2017 and 2018 or '16, some of those. They tend to be 3-, 5-, 7-year contracts. There'll be some that start to come through. I think there'll be some balance of trade discussions with those clients. There'll be some different types of deals we do in 2020 and 2021. Think about the front-to-back deals have kind of a different patina to them, whether they come with more middle office or sometimes with a broader array of services that may not factor in differently.

So I think it's just early to tell. I will certainly, I'm sure at this point next year, give some kind of indication for 2021. I think we'd like it to come back down to 2%, but we don't want to build a business model to that right now, which is probably why we've been so emphatic about notwithstanding the fee growth that we're expecting this year that we continue to want to reduce expenses in this plan.

[Brian Kleinhanzl, Keefe, Bruyette, & Woods, Inc.]

Great, thanks.

[Operator]

Our next question comes from Michael Carrier with Bank of America. Your line is now open.

[Michael Carrier, Bank of America Merrill Lynch]

Thanks, just a quick one for me. You mentioned in the quarter some market-related adjustments in software fees, curious just what that was and if material and then in the 1Q fee outlook, what was the client mix item that you highlighted?

[Eric Aboaf, CFO]

Sure. It's Eric, Mike. Let me take the first part of that. On the market-related items in the software and processing fees, there are several -- the larger ones are tied around the asset management business where there are kind of two underlying activities. There's an activity where we seed funds with our own capital. And obviously, if those funds do well or if there's an equity market uptake, you tend to have a positive mark-to-market because they're effectively on our balance sheet.

The second one is we've got some compensation programs that tied -- that are tied to different investment vehicles. And because of how the accounting works those, and again, tied, it's, I think, relatively typical in asset management because the way the accounting works is you tend to have a mark-to-market effect and an accrual effect, but they tend to be at -- in different time periods. And so in appreciating markets as we had this year, they tend to be positive. In falling markets like we had at the very end of fourth quarter of 2018, they were negative, and that's why we have a big swing. Those are the -- there are a couple of other smaller ones, but those are the lumpy items that we just effectively need to live with.

[Ronald P. O'Hanley]

Mike, it's Ron. I'll pick up the second part of your question there. There -- we have a very large client where we do -- we have a comprehensive asset management relationship with them and like lots of other -- it's a large corporate. As it's derisking, it moves from risk on type of assets, which have a higher fee to fixed income and liability-driven kinds of investments, which have a lower fee. And this client happens to be large enough that it will be meaningful, assuming it takes place as we expect sometime in early 2020.

[Michael Carrier, Bank of America Merrill Lynch]

Alright, thanks a lot.

[Operator]

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

[Michael Mayo, Wells Fargo Securities]

Hi, I have one question that addresses the headwind and one for the solution. So first, in terms of the problem pricing pressure, which you addressed, you said it's gone from 4% headwind to 3% headwind, maybe not 2%, but a little bit better. I guess isn't some of that improvement due to the runoff of low-margin BlackRock? And if you have assets to be installed equal to 3.5% of AUC, is that why you are conservatively guiding for 1% to 3% fee growth? And if the pricing pressure is really abating on a core level, why is that?

[Eric Aboaf, CFO]

Mike, it's Eric. I think there are a couple of different pieces there on the pricing pressure. I think we try to be real distinct in our -- certainly internal analysis, but also our disclosure around pricing pressure relative to other drivers of the fee -- the servicing fee line. So the other drivers are net new business, which would include client transition or added business. There is -- we talked about flows and activity, which have been relatively modest. And then we talk about markets. So we talk about the different buckets consciously because it helps us better manage.

And I think if you go through some of the description that I gave, the fee headwind, we do expect to be lighter from 4% this past year-over-year. In 2020, we expect it to be closer to 3%. I think we do expect some market uplift in 2020. That's in contrast to effectively no market uplift in 2019 if you look at the averages and you look at the averages around the world and average those. And then on net new business, which would include some of that, either added clients or the occasional transition out, we do expect that, that would be a bit positive in 2020 based on some of the last year of significant wins. And in 2019, to your point, it was actually flat in effect, and that was because of that client transition. So that's a little bit of a compare and contrast.

[Ronald P. O'Hanley]

Mike, on your question on fee pressure itself, maybe the better way to describe it is we see the effects of the pressure abating. I mean at some level, clients, of course, want to have the best fee proposition that they can. We've gotten better at managing that, and we've gotten better through the addition of additional services like Charles River and the Alpha platform of being able to respond to a fee reduction with a -- with either a consolidation of business, offsetting new business, a deeper and broader share of the wallet.

So maybe the way to think about it is there's always ongoing fee pressure. And at times, that's higher or lower, but it's always there. In the meantime, we've gotten better at managing it, both in terms of how we actually go about managing, but also in terms of the additional services that we can now bring to bear.

[Michael Mayo, Wells Fargo Securities]

And then part of the solution to that, as you've mentioned, is getting more efficient, reduced headcount 4 quarters in a row and really technology. So I know you just hired a new Chief Technology Officer, but if you could just give some sense of your technology priorities last year. Tech spending, I guess, went up 4% to $2.1 billion. Where do you expect the tech spend to go?

And I know I've asked this. I asked this at the Annual Meeting last year, but you ended the decade with a 26% pretax margin and it was 29% when you first converted to the cloud. Just -- and this predates you, Ron, predates you, Eric. But when you look back at that and you say, okay, what are you going to do different the next few years that you maybe should have done or State Street should have done earlier last decade?

[Ronald P. O'Hanley]

So there's a lot in your question, Mike, and let me try and answer it efficiently. The focus last year was on, firstly, being ruthless in our prioritization of what was important and trying it much more closely to the needs of the business, firstly, our clients; secondly, what we needed to do for our operating model; and thirdly, what we needed to do for ongoing -- improving ongoing operational resiliency. We're very careful about the incremental investments we make, what we need to make incremental investments.

That has set us up. That -- if you will, the actions we took in 2019 have set us up now to be focused on what we think are the right priorities. We let go some personnel that we felt just weren't consistent with the priorities that we've set. And now what we need to do is just get better at executing those priorities. We feel we've got a plan in place to do that. So what we told you is that you've seen our historic growth. Our intention is to bend that expense growth just like we've bent overall expense growth. We'll do that through a combination of continuing to reprioritize. The gross impact of that will be reasonably high, but it'll be offset by the investments that we need to make to continue to be positioned the way we want to be with our clients. So the net result of that will be a significant arresting of the growth, but we'll probably still be slightly up for the year, is the way I would think about it.

[Michael Mayo, Wells Fargo Securities]

Okay. So total tech spend should increase what, like 1%, 2%, any numbers or just a little bit higher?

[Eric Aboaf, CFO]

No, let me just clarify. We were very clear in December that our tech spend has been, this past year, 2018 to 2019, has been up, right, and up way too high in the high single digits at the 8% to 9% range. And our plan this year, which is factored into the outlook, is to have tech be flat to down 2%.

[Ronald P. O'Hanley]

Yes. And that would be done, which I think is important to understand, through just like we manage overall expenses there'll be some gross reduction in tech spending, offset by a lower amount of tech investments to get us to a flat to slightly down kind of spending.

[Michael Mayo, Wells Fargo Securities]

Got it, alright, thank you.

[Operator]

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

[Robert Wildhack, Autonomous Research]

Morning guys. Ron, in December, you highlighted some hiring to target growth in the asset owner space. Can you talk about the competitive dynamics in that business and any differences from the asset manager side? And is that something you're emphasizing as a real strategic priority in the near and medium term?

[Ronald P. O'Hanley]

So Rob, we are emphasizing that as a priority for a couple of reasons. Firstly, lots of the capabilities that we have are increasingly relevant to that space. The asset owner space in the distant past was much more of a custody only, maybe a little bit of accounting. And increasingly, asset owners of typical large and medium asset owner, firstly, is some form of an asset allocator. And in many cases, they have their own investment activities, alongside what they're doing with third parties. So it lends itself to the array of services that we have. The cycle time on them tends to be a little bit quicker, but it's a different selling cycle. If it involves public, it's a very prescribed selling cycle. So it's something that we believe we can leverage a lot of the capabilities that we have. And it's not like we're not present in that business already, but we believe there's opportunity to grow share as those -- that segment needs more and more of the distinct capabilities that we have.

[Robert Wildhack, Autonomous Research]

Got it. And then on the asset management side, there's obviously been some consolidation in the e-broker space. And I believe there was some speculation that this could have an impact on distribution of State Street products. Do you think that's the case? And maybe more generally, can you discuss how you're thinking about your distribution strategy as that landscape keeps evolving?

[Ronald P. O'Hanley]

That's a good question. And there's -- I think that, that's -- we're still in early stages in that. I mean at one level, it leveled the playing field for distribution. So for those that were, in some way, sharing revenues are paying to be on platforms when it goes to 0, you don't write checks anymore for that. So it's -- in some cases, for us and others, we're not the only ones that's reduced our expenses. But it's also -- it's harder to get -- it's harder to pay for now a distinctive positioning. But we do think it will cause is -- with, if you will, transaction fees, no longer the primary criterion by many investors, we believe that it's going to -- that it should enable us to point investors to what they should be focused on, which is liquidity of the product, the true cost of moving in and out of the product. And we've got -- and despite a range, we've got some of the most actively traded products out there. Very liquid. In some cases, deeper and more liquid than the underlying assets. So we think this is an opportunity for us to actually focus on the liquidity side, the importance of that for our investors. But early, early days in this.

[Robert Wildhack, Autonomous Research]

Great, thank you.

[Operator]

Our next question comes from Gerard Cassidy with RBC. Your line is now open.

[Gerard Cassidy, RBC Capital Markets]

Thank you. Good morning Ron and Eric. Ron, can you share with us -- you talked earlier about business wins, and there's been a whole mix of different products that you succeeded with this past year. Can you talk to the front-to-back business wins which is new because of Charles River, what types of customers are you seeing grab on to that type of full array of products, is it a completely new customer, or is it no existing customers that are now willing to give you that opportunity to go front to back?

[Ronald P. O'Hanley]

Gerard, the pipeline is -- we're pleased about the pipeline, is that it's a true mix of clients. We would have expected that our existing clients are a client where we had a large position already, and therefore, in daily conversations with them would be interested in this. And that certainly has played out. And in most of the instances kind in 2019, there were some existing relationship. But what's been particularly gratifying is that we have in the pipeline and working very much through them towards what we would expect to see mandate signed in 2020 or early 2021. Clients where we had no relationship or just a very, very minor relationship where they see the advantage of being able to have a platform, and it might be all State Street products or might not, but a platform that integrates it all there and give them the ability to reengineer their own business model.

It's led to, as I said earlier, a -- just an entirely different set of conversations with clients. It's not about we'll do custody for you at a fraction at this point lower than your guide, and it's much more about what are you trying to achieve in your business, [indiscernible]. Interestingly, as you'd expect, some of the clients in the pipeline are those that are challenged by the environment. Others are those that are already winning in the environment and are trying to figure out how they're going to be able to scale for the next 5 or 10 years. So it's a rich mix of clients, and we think has a -- just a very, very large potential for us as we go forward.

[Gerard Cassidy, RBC Capital Markets]

Very good. And then maybe, Eric, I know there's been a lot of talk on the call about the pricing pressure that you guys have seen, it went up to 4%. Now it seems to be coming in a little bit, and you talked about the mix of your business, repricing, which may be contributing to the reduction. Can you talk to the pricing competition, though? Are you finding that your competitors are less price competitive than maybe two or three years ago or has it really remained unabated?

[Eric Aboaf, CFO]

Gerard, it's Eric. I think it's actually a mix of competitors, in some cases, and clients and others that actually drive the pricing headwinds. And so if you think about it, we are the largest of the providers, so the asset manager segment in the U.S. and around the world as a custodian and fund accountant. And I think it's those clients, the asset manager clients, in particular, that have actually borne the brunt of some of the challenges in the investment industry. And so in some ways, we're near to the bull's eye of where there's disruption in the investment industry, and that's been why I think we've been disproportionately impacted. It's kind of the effect of having that larger share position.

I think we've always seen competitors come in and out of our industry, certainly, those in the other segments, our MBS, of our position, asset managers, but I don't think it's as much a competition-driven change. There's always some of that, but I don't think it's as much of that. And I tell you, for every large competitor that's in the ascent, there's a large competitor who's beginning to fade and focus on other areas, or sometimes there's a small disruptor coming in. There are other small players deciding that there are other areas to refocus. So I think a little more client-driven than otherwise.

[Gerard Cassidy, RBC Capital Markets]

Well thank you and appreciate the time that you spent on the call. Thank you.

[Operator]

There are no further questions at this time. I will turn the call over to Ron O'Hanley for closing comments.

[Ronald P. O'Hanley]

Thanks very much, everybody, for your participation and your interest.

[Operator]

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