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State Street Corp  (NYSE:STT)
Q3 2018 Earnings Conference Call
Oct. 19, 2018, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to State Street Corporation's Third Quarter of 2018 Earnings Conference Call and Webcast. Today's discussion is being broadcast live State Street's website at investors.statestreet.com. (Operator Instructions)

Now I would like to introduce Ilene Fiszel Bieler, Global Head of Investor Relations at State Street. Ma'am, please go ahead.

Ilene Fiszel Bieler -- Global Head of Investor Relations

Thank you, Laura. Good morning, and thank you all for joining us.

On our call today, our Chairman and CEO, Jay Hooley, will speak first. Then Eric Aboaf, our CFO, will take you through our third quarter 2018 earnings slide presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.com. Afterwards, Ronald O'Hanley, President and COO, will join Jay and Eric, and we'll be happy to take questions. (Operator Instructions)

Before we get started, I would like to remind you that today's presentation will include adjusted basis and other measures presented on a non-GAAP basis. Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our 2Q '18 -- 3Q '18 slide presentation.

In addition, today's presentation will contain forward-looking statements. Actual results may vary materially from those statements due to a variety of important factors such as those factors referenced in our discussion today. Our forward-looking statements speak only as of today and we disclaim any obligation to update them, even if our views change.

Now, let me turn it over to Jay.

Joseph L. Hooley -- Chairman and Chief Executive Officer

Thanks, Ilene, and good morning, everyone. As you've seen, we announced our third quarter financial results this morning.

Our third quarter and year-to-date results reflects solid performance across our businesses as we continue to win new business and invest in the future, while reducing legacy costs as we advance our digital transformation. Despite a higher than average share count, third quarter earnings included substantial EPS growth and increased return on equity comparative to 3Q '17.

Assets under custody and administration rose to record levels of $34 trillion, a 6% increase year-on-year, driven by strength in equity markets and new business wins. We achieved new asset service mandates of approximately $300 billion during the quarter, driven by two substantial wins of approximately $90 billion each from a large European client and a top insurance and investment management company. Importantly, year-to-date, we've now seen a number of sizable new client business wins totaling $1.8 trillion. And our new business pipeline opportunities remain robust across the franchise, giving us continued confidence about the differentiation in the marketplace from the service and solution standpoint.

Assets under management at State Street Global Advisors were at record levels of $2.8 trillion at the end of the third quarter, up 5% year-on-year and 3% sequentially, reflecting strength in equity markets and ETF inflows, driven by the continued success of our low-cost product launch late last year, and institutional inflows.

These positive growth trends within our core franchise were partially offset by market and industry headwinds, leading to overall fee revenue increasing only 2% year-over-year. I'm particularly pleased with our ability to drive costs out of our core business and adapt quickly to the revenue environment we experienced this quarter. We actively brought down expenses for two successive quarters.

Beacon continues to deliver significant savings and we have embarked on new productivity initiatives to achieve greater standardization and globalization of our operations and services. These levers equip us to achieve strong expense control, as evidenced by the year-to-date increase in our pre-tax margin, while continuing to invest for the future. More importantly, these initiatives enable us to create new data-oriented services and will provide the foundation for the integration of Charles River into the industry's first ever front-to-back office asset servicing platform from a single provider.

Let me take a moment to update you on Charles River Development. As you know, the acquisition closed October 1. Integration is well under way and initial client reaction has been overwhelmingly positive. Charles River is already creating opportunities among new and existing clients. We have our management team in place for establishing a Client Advisory Board anchored by OMERS, the Ontario Pension Fund, which is a broad-based user of Charles River dating back 11 years. We are encouraged by the early reaction to the acquisition and are confident that will enable us to deepen and grow our client base, while delivering positive results for our shareholders.

With that, let me turn the call over to Eric to take you through the quarter in more detail.

Eric Aboaf -- Chief Financial Officer

Thank you, Jay, and good morning, everyone.

Please turn to Slide 4, where you will find our quarterly results as well as a few notable items to prior quarters. As a reminder, 2Q '18 included a repositioning charge of $77 million and 3Q '17 included a $26 million gain related to the sale of an equity trading platform, as well as $33 million in restructuring costs. I'll also remind you that 3Q '18 results include the impact of the new revenue recognition accounting standard. This increased both fee and total expense by $70 million year-over-year, but is EBIT neutral.

Now let me move to Slide 5, where I will review the quarterly results as well as year-to-date highlights. Third quarter 2018 EPS increased to $1.87, up 13% relative to a year ago. ROE was 14%, up a full percentage point. And pre-tax margin increased 0.5 point as compared to prior year. 3Q '18 results reflect a disappointing fee revenue environment, largely offset by strength in net interest income and tighter expense control. We achieved positive operating leverage of 80 basis points compared to 3Q '17. Fee operating leverage, however, was negatively impacted by lower-than-expected fee revenue, which I will touch on shortly. Given the soft fee revenue environment, we intervened on expenses. Excluding the impact from revenue recognition and the prior-year restructuring charge, we held expense growth to just 1% as compared to last year. Sequentially, we actively flexed expenses downward. Last quarter, I told you, we would keep second half expenses flat to first half. In 3Q, we did just that. Expense control is a key management priority as we navigate the quarterly revenue environment. We are carefully investing in product differentiation that continues to drive new business wins, while reducing legacy costs. On a year-to-date basis, we delivered solid results. EPS increased 24% and ROE increased approximately 2 percentage points. We achieved positive operating leverage of 2.3 percentage points, supported by positive momentum in NII and 4% year-to-date servicing fee growth. Pre-tax margin increased approximately 1.5 percentage points, further demonstrating our focus on managing expenses.

Now let me turn to Slide 6 to review our AUCA and AUM performance, which increased on both a sequential and year-over-year basis. AUCA increased 6% from 3Q '17 to $34 trillion. Growth was primarily driven by US market appreciation in several large client installations, partially offset by the previously announced BlackRock transition. In Global Advisors, our asset management business, AUM increased 5% from 3Q '17, driven by strength in the US equity market and new business from ETF mandate, only partially offset by lower net flows within the institutional and cash segments.

Please turn to Slide 7, where I will review 3Q '18 fee revenue as compared to 3Q '17. Total fee revenue increased 2%, reflecting higher equity markets and trading activity, as well as the benefit related to revenue recognition. Servicing fee revenue was lower compared to 3Q '17 as well as compared to 2Q '18, although it was up 4% on a year-to-date basis. 3Q results reflect the previously announced BlackRock transition, which was worth an additional $20 million this quarter, as well as balancing industry conditions. Most important, global economic uncertainty has driven investors to the sidelines, causing significant outflows and lower activity across the bulk of the asset management industry. We have also seen some fee pressure in two to three quarters of fund outflows in both the US and Europe, which together creates a downdraft on industry servicing fees. And emerging markets, which typically represent higher per dollar servicing fees, were negative both year-over-year and quarter-over-quarter. That said, net new business was strong again this quarter, and year-to-date servicing fees are up 4%, as I mentioned.

Now, let me briefly touch on the other fee revenue lines related to 3Q '17. Management fees increased 13%, benefiting from global equity markets as well as $50 million related to the new revenue recognition standard. Trading services revenues increased 11%, primarily due to higher FX client volumes. Securities finance fees decreased, driven by some balance sheet optimization that is now complete. This provides a base off of which to grow these revenues, in line with our balance sheet expansion, as I previously mentioned. Processing fees decreased from 3Q '17, reflecting a prior year gain, partially offset by higher software fees.

Moving to Slide 8, NII was up 11%, and NIM increased 13 basis points on a fully tax equivalent basis relative to 3Q '17. NII benefited from higher US interest rates and continued disciplined liability pricing, partially offset by continuing mix shift toward HQLA securities in the investment portfolio. NIM increased due to higher NII and a smaller interest earning base due to deposit volume volatility. Deposit betas for the US interest-bearing accounts were relatively unchanged from last quarter. So we expect betas to continue to hedge higher in future quarters, in line with industry trend.

Now I will turn to Slide 9 to highlight our intense focus on expense discipline, which continued into the third quarter. 3Q '18 expenses were well controlled relative to 3Q '17, increasing 3%. Excluding approximately $70 million associated with revenue recognition and the prior year restructuring costs, expenses were up less than 1% from a year-ago quarter, as we continue to actively manage the cost base. The 1% increase in expenses was due to investments in costs to support new business as well as higher trading volumes, partially offset by Beacon saves. Sequentially, expenses decreased 4% from 2Q, which included the second quarter $7 million repositioning charge. Excluding the charge, expenses were flat, further demonstrating our ability to flex the cost base to the current revenue environment. As I mentioned, this is the second quarter in a row of sequential underlying expense reduction. During Q2 '18, we reduced incentive compensation. This quarter, we reduced vendor and discretionary spend. Quickly from a line item perspective and relative to 3Q '17, compensation and employee benefits increased just 1%, reflecting costs for new business and annual merit increases, partially offset by Beacon savings and new contractor, vendor initiatives. Information systems increased, reflecting Beacon-related investments, as well as additional investments to support new business growth. Transaction processing costs increased due to the impact of the new revenue recognition standard, offset by sub-custodian savings this quarter. Occupancy costs were down as result of the continued progress in optimizing our global footprint. And excluding the $38 million impact of revenue recognition, other expenses decreased 3%, reflecting lower discretionary spend such as travel expenses and Beacon-related savings.

Turning to Slide 10, let me briefly highlight what actions we have successfully taken to manage expenses relative to the revenue landscape over the last several quarters. On the top of the slide, you can see that we achieved $65 million in net Beacon saves this quarter through our efforts to optimize the core servicing business, transform our IT infrastructure and gain efficiencies within the corporate functions and SSGA. Notably, we are on track to complete Beacon by early 2019, significantly ahead of our original year-end 2020 target. We continue to invest toward the highly digitized environment, including robotics and machine learning, which are driving innovation and cost savings for us and our clients. In addition, as you can see in the bottom panel, we just rolled out a series of new expense initiatives in light of current industry conditions that are affecting quarterly revenue. These totaled $40 million just this quarter, and additional actions are planned in the fourth quarter.

Moving to Slide 11, let me touch on our balance sheet. The size of our investment portfolio remained flat sequentially and well positioned, given the rate environment. Our capital ratios increased measurably from 2Q '18 as a result of our pre-funding related to the Charles River acquisition, which we completed on October 1, as well as earnings retention. As a reminder, in late July, we issued approximately $1.1 billion of common stock; and in September, successfully issued $500 million of preferred stock, while temporarily suspending buyback. We fully intend to resume our common stock repurchases in 1Q '19 and expect to return $600 million to shareholders through 2Q '19. We also completed the necessary adjustments to our management processes and believe that we are well prepared for CCAR 2019.

Moving to Slide 12, let me summarize. Our 3Q '18 results reflect a continued strong focus on managing expenses in response to the current quarterly revenue environment. The 11% increase in net interest income compared to 3Q '17 offset in part the softness in servicing fee revenues I described. Notably, 3Q '18 pre-tax margin increased to 29.4%, supported by the strength in NII and disciplined expense management. Year-to-date results also reflect solid progress from the 2017 period. We announced new business wins of $1.8 trillion of custodial asset. EPS increased 24%, and ROE improved by almost 2 percentage points to 13.8%. NII increased 17%, reflecting higher US interest rates and our success in managing liability pricing. Calibrating expenses, the revenues generated positive operating leverage of 2.3 percentage points.

Let me briefly touch on our 4Q '18 outlook, which currently excludes the recently completed Charles River acquisition. We expect 4Q '18 servicing fee revenue to be flattish to 3Q, assuming continuing industry conditions and stable market levels. We expect continued sequential NII growth, so this always depends on market rates and betas. We expect total expenses only slightly above 3Q levels, but consistent with our expectation to keep second half of 2018 expenses flat to the first half, excluding the seasonal deferred incentive bump(ph)and repositioning, as we actively manage expenses relative to the revenue landscape. As I said, these estimates do not yet include the acquisition of Charles River that we completed earlier this month. So let me give you some color on that, before I turn the call back to Jay.

Although it is early days, we are excited about the opportunity to deliver our -- for our clients the first ever front-to-back office asset servicing solution from a single provider. During fourth quarter, we'll be giving guidance on revenues and expenses from the Charles River acquisition at an upcoming conference. In 2019, we look forward to providing regular updates to investors on how we are progressing against the revenue and expense synergies that we communicated on the July earnings call.

Now, let me hand the call back to Jay.

Joseph L. Hooley -- Chairman and Chief Executive Officer

Thanks, Eric. And Laura, we're now -- if you'd open up the call to questions, we're available.

Questions and Answers:

Operator

(Operator Instructions) And our first question comes from Glenn Schorr of Evercore ISI.

Glenn Schorr -- Evercore ISI -- Analyst

Hi, thanks. A couple quick ones on the securities portfolio OCI(ph). A, the duration extended a little bit I think; B, the yield on the securities book was flat; and C, it now has 1 billion(ph)unrealized loss position, which I think is just extension of the mortgage book, but could -- you mind commenting on those three things?

Eric Aboaf -- Chief Financial Officer

Sure, Glenn. It's Eric. Maybe in reverse order. The OCI position is just one that moves inversely with rates. And so, as we have seen the upward rate environment, that comes through as a mark on the balance sheet. I think it's within a good set of bounds, so that was to be expected.

In terms of the investment portfolio, I think, as we described in first quarter and second quarter, we continue to remix that portfolio. We've been generally shifting out of credit and into sort of more classic HQLA securities. There were some movements of that this quarter between ABS and Munis and so forth, which resulted in relatively flat yield. The big piece that you have to remember is that we've added and continue to add international foreign debt securities, right, German bonds and British gilts, and that kind of high-grade sovereign. As we do that, we do less of the FX swaps back to the US, and so our FX swap costs actually came down by nearly $35 million this quarter. And so what you actually see is, you see relatively stable yields on the portfolio on aggregate. But if you look down on the interest-bearing liability line for non-US domicile deposits, you see reduced interest expense, because we have less of that FX swap. So, just keep in mind that the FX played through both on the investment portfolio side and the asset side and the liability side as you read through.

Glenn Schorr -- Evercore ISI -- Analyst

I definitely get that. I appreciate it. And then the -- there's a further migration out of non-US deposits, and it looks like US deposits are up. It also is a big drop in the yield paid in the non-US deposits. So, is that you purposely migrating those deposits via pricing?

Eric Aboaf -- Chief Financial Officer

No, this has less to do with rate than just the movement of the domicile some deposits. If you remember, we like many banks had deposits in the payment branches and other, what I'll call, offshore but US related areas. Those are always -- those were typically US dollar deposits, but were classified by the regulatory reporting standards as non-US domicile. So we effectively did is, we've closed down that program, it's no longer necessary. It's one of those legacy programs that we and other banks have had. So what's happened is, the US deposits, which are paid US interest rates which tend to be higher than foreign deposits interest rates have actually moved out of the non-US line into the US line, which is what brings the non-US line down sequentially, and then it just blends into the US line. At this point, we've made, I think, two steps of a change of about, I want to say, almost $20 billion that we've moved. It's now -- those moves are completed. And so, on a go-forward basis, the account should be a little cleaner for you to read through.

Glenn Schorr -- Evercore ISI -- Analyst

Okay. That's all of that. Thank you.

Operator

Our next question is from Brennan Hawken of UBS.

Brennan Hawken -- UBS -- Analyst

Good morning, guys. Thanks for taking the question. First question, just wanted to follow up, Eric, on the four quarter indication on servicing fees. You had indicated that you expected them to be flat with this third quarter. So, I guess the question is, is that based upon the current quarter-to-date action that we see in some of the markets, because there's been some continued EM weakness? And I know that's a headwind for you. So does it consider those dynamics? And do you just think that it will be offset by improved volume trends? Or can you give us a little bit more there, please?

Eric Aboaf -- Chief Financial Officer

Yeah, I think when you look quarter-to-quarter, it's always -- it's a set of small moves in rounding. So, we continue to see negative flows in all the public data, whether it's EM, but also in the other international markets, which will be a bit of a headwind. We've got nearly all of the BlackRock transition out. We've got, I said, $10 million in the 1Q to 2Q, $20 million from 2Q to 3Q. We got 5 bucks more, so that will get to a $35 million run rate. So that's nearly finished up. And then, there are some installations coming through as the pipeline plays out. And then the open question will be what happens to market levels, because you know how that plays through our fee structure. So, we think it's going to be flattish. I think there's -- it's a rough estimate for now and kind of an assemblage of those -- the composite of those moves.

Brennan Hawken -- UBS -- Analyst

Okay. So, it does consider some of that weakness. Thank you for clarifying that. Second question being you previously had indicated an expectation of fee operating leverage. I wanted to say that the bottom end of the range was positive 75 bps for the full year. I don't think you included those comments in your prepared remarks. Is there an update to that outlook? How should we think about that? I'm guessing, it would be pretty hard to reach that kind of fee operating leverage for the full year, given the first nine months' trend.

Eric Aboaf -- Chief Financial Officer

Yes, Brennan. It's Eric. And I think you've you called it right. I gave outlook here. I needed to give outlook either on a fourth quarter basis, or on a full year basis, and obviously you guys can model out the other piece either way. But I'd just do it for fourth quarter just to give you the direct information. I think, if you put together the composites of 1Q plus 2Q plus 3Q, yes, in my fourth quarter, you'll see that we have good line of sight to many of the targets that we gave in January, but I think the operating leverage, as you described, will -- is not going to be one of them on a full year basis. That said, we are very focused on controlling what we can control. And you've seen us, I think, intervene pretty significantly on expenses, and we'll continue to do that as we navigate through the quarterly revenue environment. And that's probably an area, expenses in particular, where I think we well outperformed our intentions for the year.

Brennan Hawken -- UBS -- Analyst

Okay. Thanks for the color.

Eric Aboaf -- Chief Financial Officer

Yeah.

Operator

Our next question is from Ken Usdin of Jefferies.

Ken Usdin -- Jefferies & Co. -- Analyst

Thanks. Good morning, Eric. Eric, can you talk a little bit about -- you mentioned that in second quarter you had trimmed back on the incentive comp, and then this quarter you made the additional changes to $40 million. I guess, how do we -- can you help us understand, given the third quarter results and the fourth quarter outlook, how do we understand where you are in terms of incentive comp overall? Like, is it truing up relative to where the revenues have come through part of your fourth quarter outlook for flat expenses? How do you just generally think about -- State Street has done that in the past, or it's trued up at the end of the year for a disappointing revenue trajectory? So just maybe you can move us to some of the moving pieces of how you expect that flat expenses in the fourth would be coming from?

Eric Aboaf -- Chief Financial Officer

Sure. So, Ken, let me first describe how we and, I think, other banks address incentive compensation, right. At the beginning of the year, we have estimates of what we're going to deliver in terms of revenues and expenses and other NII and total earnings and EPS. As we move through the year, right, we check to see how we're trending against those expectations. First quarter was a good quarter, generally, and there was no need to make any adjustments. In second quarter, right, as we saw that step down around flows and those industry conditions that have started to permeate through the P&L, we came to the clear realization that we weren't going to deliver at least for the first half year. And as a result, we did a year-to-date catch-up on incentive compensation. And that was worth $40 million, $45 million in terms of reduction in that quarter. This quarter, we've kind of kept that at the adjusted pace. So, -- but obviously without the catch-up, so the quarters are lumpy. And then in fourth quarter, we'll assess again where we are. But as I said, I think we have delivered on a number of our objectives and targets that we set out for ourselves and made public, but not all of them and every one of those targets count.

In terms of line of sight into fourth quarter, we -- there's kind of a comp and benefits and a non-comp and benefits part to that. Merit has already played through on comp and benefits. I think incentive compensation, we kind of have some line of sight to between this quarter, but we need to kind of see how fourth quarter plays out. As you describe, headcount is important. In particular, you remember in second quarter, we took some decisive action and drove some management delayering, right. That was the result of the organizational globalization and streamlining that we took upon ourselves to do; and so some of that will start to play out as a benefit into fourth quarter. So, there's kind of a number of puts and takes for fourth quarter as we think about the comp and benefits line. And then the other non-comp and benefits is every vendor and third-party spend and discretionary line. We know how we've done this quarter. we have -- we reforecast and think about the actions where we have taken our intend to take, and that gives us some line of sight, which is why we said fourth quarter would be up slightly from third quarter, but we think well-controlled and deliver nicely on a year-on-year basis.

Ken Usdin -- Jefferies & Co. -- Analyst

Okay, got it. Thanks, Eric. And then second one, just you mentioned in the slides sec lending business has been changed a little bit due to some of your balance sheet optimization. Can you just talk us through -- are you through with that balance sheet optimization and would you expect sec lending to kind of have formed a base from here? Thanks a lot.

Eric Aboaf -- Chief Financial Officer

Sure. Yes, we are through with the adjustments we needed to make in the sec lending business. That one includes the classic agency lending and enhanced custody. There's been number of regulatory approvals, including CCAR that affect those businesses. We had a -- the condition upon our -- of our -- that we had the conditional approval under CCAR. We did, I think, some very good work around the analysis and the reporting and the management of counterparties, which did include the securities lending area. We now feel like we're complete on those. We have confidence, we're as a result, well prepared for CCAR.

And when we think about the work we've done, we actually feel like we have also begun to deploy the kinds of future actions, or actions today and actions that we can continue in the future that can give us lift in headroom. And so, we have implemented a set of additional diversification from the very largest counterparties, the Nex Group. Sometimes it's US to international, sometimes international to US. We've done netting and novations that help compress the book in some ways, so you don't have the large puts and takes, but you've got netted down exposure. And then what we've done is effectively systematized many of those tools, because those are kind of action tools. And we've systematized those, in many cases, on a day-by-day and even intraday basis and that gives us confidence that we've been able to now create headroom off of which we can grow sec lending on a go-forward basis, certainly in line with the balance sheet, but our intention is that, that is a continued growth area.

Unidentified Participant -- -- Analyst

Thanks, Eric.

Operator

Our next question is from Betsey Graseck of Morgan Stanley.

Betsey Graseck -- Morgan Stanley -- Analyst

Hi, good morning.

Eric Aboaf -- Chief Financial Officer

Good morning, Betsey. Go ahead.

Betsey Graseck -- Morgan Stanley -- Analyst

Maybe you could talk a little bit about some of the expense opportunities that you see maybe not next quarter, If you can't do it specifically, but over the next year or so in not only your own benefits from Beacon that you've been generating, but what do you expect to get from CRD?

Joseph L. Hooley -- Chairman and Chief Executive Officer

Betsey, this is Jay. Let me start that and then Eric will pick up. The -- you mentioned Beacon and I think that's a good place to start, because a lot of that expense actions that Eric just referenced a few minutes ago are kind of tactical expense actions. I think that we're strategically as we have gone through Beacon and its predecessor ITOT, the deeper we go, the better the opportunity looks. We are standardizing activity, connecting processes together, eliminating human touch, reducing reconciliations, all of which have multiple benefits, the one you're asking about is the cost benefit. And we'll expire Beacon formally next year, but those opportunities will by no means expire. I mean they are multi-year opportunities to continue to drive greater efficiencies in this core operations around custody accounting globally, and you'll recall at the back end of 2017, we reorganized the business so that we're in a better position to take advantage of systematically going at -- we got straight through processing really to reduce the human labor content in the core activities that we conduct. And we've got a long way to go before we get that to a place where we're straight through and they'll have huge benefits to clients, it will have huge benefits in the cost line. So there's plenty to do.

Ronald P. O'Hanley -- President and Chief Operating Officer

Betsey, this is Ron. Let me just add a little bit to what Jay said, because I think that for all the things that we've accomplished to date. I would say that there is -- there's a second order that we can get out of it. Let me be specific here. So we've been on this big push to put in place end-to-end processing and that's been enabled by a lot of the automation and changes we've done in Beacon. But there's more that can be done there. I mean, as we do some, we find more. As we stood up and strengthened our global hubs in India, Guangzhou, and Poland. They've matured and they've gotten to the point where it's less about just taking in bits of work and more about taking in whole processes. So that would be one. The second order and third order out of this is as we've talked earlier about the -- about the delayering, I would say that we're going -- that we're moving into the point where we can do major flattening of the organization as you actually move these processes together. And then lastly, much of the Beacon journey and the technology journey has been about standardizing when we can. Our -- the historic core of our client base has been large asset managers and in many cases in the past that have driven us to customization. We've now learned and we continue to learn how to standardize as much as possible and move less to customized and more to configure and that in itself will provide more opportunities. So we see ongoing opportunities to reduce expenses without actually in fact impairing client service, but at the same time improving client service.

Betsey Graseck -- Morgan Stanley -- Analyst

Okay and how far away do you think you're from fully digital asset capability?

Eric Aboaf -- Chief Financial Officer

Let me take that Betsey because this is a journey and you can think of the glass as half-full because there continues to be opportunities literally in every area. As we've globalized the business and think about what Jay described as straight through processing, those kinds of opportunities exist at a level of say accounting or custody. But they also exist deep down custody, for example, you can break down into bank loan processing, securities processing, derivatives processing, and every one of those in our minds, we continue to find more areas as we fully globalize the organization. And so it's hard to say whether we're in the third inning or the seventh inning, where Red Sox fans appear, so it's -- there's always a temptation to do that. But the truth is, there continues to be real substantial opportunities and as we go deeper and deeper and more and more globally through the organization.

Betsey Graseck -- Morgan Stanley -- Analyst

All right. Thanks.

Operator

Our next question is from Alex Blostein of Goldman Sachs.

Alex Blostein -- Goldman Sachs -- Analyst

Hey, good morning, everyone. So I was hoping we could peel back the onion a little bit on what's going on in servicing fees and understanding that the quarter-to-quarter dynamic is -- could be pretty lumpy, but, Eric, you mentioned fee pressure a bit more specifically I guess in your prepared remarks. So I'm just wondering whether or not you guys see an acceleration in fee pressure within servicing from some of the asset management clients. If so, kind of what's changed in the last kind of six months and then we can see now the active managers as you've seen outflows for a long time. So kind of what's driving the incremental fee pressure? And more importantly, I guess as you think about State Street servicing fee organic growth over the next kind of 12 months to 24 months, what should we be thinking about take into account the fee dynamics as well as kind of your comments about the pipeline?

Joseph L. Hooley -- Chairman and Chief Executive Officer

Alex, this is Jay, let me start and Eric and probably Ron will want to weigh in on this important question. I think the -- at the very broadest level, this de-risking which really began in the second quarter, broad-based de-risking has only continued and the way it affects us as we talk about outflows, but of the -- mutual funds have been outflow -- outflowing in the US for a long time. I'd say the step-down we was in Europe, where we have a large business mostly in the offshore centers. Well, last year in the first quarter, we have very robust inflows that went to neutral and I think that's probably a factor of Brexit and Italy and all the commotion that's going on in Europe. So that was kind of a new factor. We are -- because of our success over there probably disproportionately affecting, I'd say broadly the EM pressure is the second thing that it has really put pressure on us. And that's all that combined created lower transaction fees. So it's mostly around the broad-based de-risking, the Fed has those two or three tributary factors that go with it. And I'd say Europe was a little bit of emphasis, I think that's -- so that's none of that's particularly good news I'd say, if there was no a silver lining at all, is that news we all see this, our clients are under considerable pressure. And that can play out a couple of ways with us. It puts pressure on our fees that we charge our clients, but in the overall scheme of thing our fee is not going to solve our clients' issues, they are so relatively de minimis. So it really opens up the opportunity, which is why we continue to stress the new business pipeline, the differentiation, the middle office DataGX, more recently Charles River. Because our clients are continuing to come to us on an accelerated way to say, help us out, take over the middle office, help us solve the data problems. The response to Charles River was over the top. I mean our clients get what's going on and the need to consolidate front to back processing to extract data. So I would say though I'll let these guys weigh-in, but the -- in the broadest context, it's the de-risking and all the things that flow from that. And the reaction from our clients is, some pressure but also help us out.

Ronald P. O'Hanley -- President and Chief Operating Officer

Yes, what I would add to that, this is Ron, just maybe a little bit more specificity on the flows in Europe, mutual funds are still quite popular relative to ETFs and Jay noted the net flows went from positive to basically neutral. But it's worth looking at the underlying component, kind of what was the in versus what was the out. With that de-risking, the big out was in emerging markets as Jay noted and that's just a higher fee per asset for us. So that just hurts us disproportionally. At some point, these things reverse. We are not here to predict when, but when that does reverse obviously, we should benefit from the opposite.

In terms of the client discussions that Jay talked about, client discussions for several years now have moved much away from conversations between us and the Head of Ops to heavily strategic conversations between us and the CEO and the CIO, and those have just accelerated for all the reasons that Jay said. And I think it's at the point now where virtually every asset management firm that hasn't done something and by the way, most haven't, right. Most haven't outsourced their middle office, most haven't moved to a platform like Charles River or Aladdin, are talking about doing that. What Charles River has enabled us to do is just to broaden that conversation, but we're already having it. And we are very optimistic that this will turn into more and stronger new business as we go forward simply because our clients challenges while imposing certainly some fee pressure on us are also our future opportunities.

Alex Blostein -- Goldman Sachs -- Analyst

Thanks. And I guess my second question, Eric, maybe around NIR. So how would you guys still expect growth sequential in the fourth quarter. Maybe talk a little bit about what you're seeing in balance sheet trends so far in Q4 and I know the ending deposits were lower ending could move around of course. So what are you seeing with respect to deposits so far in the fourth quarter and I guess longer term as we think about the trajectory for statutory deposits and the mix interest non-interest bearing, how should we think about that over the next, kind of, 12 months to 24 months?

Eric Aboaf -- Chief Financial Officer

Sure, it's Eric. The deposits have been -- that's just been bouncing around at about that level here and we show around $160 billion. You can't -- it's hard to predict the month-by-month or even the first two weeks of a quarter because we do get these very large spikes as one of the top custodians, just think about the amount of transactions that flowed through our pipe and you do see that in the end of period balance sheet relative to the average, we did have the seasonal lightness in deposits in that August time period, we heard that in -- at some of the conferences that didn't put us off. It kind of came back as expected in September. So we have these ebbs and flows. And so it's hard to define kind of a coming quarter or a coming year based on those. What I would tell you is part of the reason that we felt good about our deposits and obviously, we got to see what happens with quantitative easing and fed balancing trends and so forth is.

We've been very engaged with our clients on deposits over the better part of the year, if not a year and a half. And part of that is it's a natural way for them to pay us, right, or for us to serve them. And if you remember, deposits is just one of the offerings we make, right. We think of it as a set of liquidity solutions we offer our clients. Sometimes deposits, sometimes repo, sometimes money market (inaudible), and each one of those has a value to our deposits in offering that cascade. It's actually one of the more sophisticated discussions that we've been having with our clients over the past year. So anyway that's a little bit of color more than anything else, Alex, but we feel like we've got a healthy amount of deposit. We feel like there is relative stability there. We feel like we're sharing in the economics appropriately with clients earn more, we earn more as the fed rates flowed upwards. And to be honest, we're continuing to turn our attention to Britain, to Europe, to Asia, because they're big pools of deposits there. And we'd like to see prevailing interest rates rise in some those geographies and if they can, that could be another opportunity for us in the coming quarter -- coming quarters I should or coming years.

Alex Blostein -- Goldman Sachs -- Analyst

Okay. Thanks.

Operator

Our next question is from Brian Bedell of Deutsche Bank.

Brian Bertram Bedell -- Deutsche Bank Securities Inc. -- Analyst

Great, thanks. Good morning folks. Maybe just to go back on to the -- on the servicing side, maybe just one different angle on that, obviously, we see the fee rate coming down, it sounds it's-as you were saying, it's due to that mix away from EM and European. Mutual funds, I know to the extent that assets do shift toward passive and ETF, it's a much lower fee, but I think, Jay, you've also said in the past, the profitability of those assets is comparable to mutual funds. So can you just maybe talk a little bit about if we can just continue to see pressure on the asset mix there and we see those fee rates come down, where do we see the offset on the expense line, does that come through sort of right away or does it take some time to work its way through?

Eric Aboaf -- Chief Financial Officer

Brian, it's Eric. Let me start on that. I think you've got the right couple buckets of drivers on fee rates, right. The first is the mix, in particular EM and even Europe is at a higher rate than the US and then active funds are at a higher rate than passive. So both of those play through. I think the other thing that is playing through in the fee rates literally are the two of the largest transitions ever here. With BlackRock floating out, that was on an old fee rate contract and had a stack of different products and services in their collective funds and that's obviously transitioning out.

As we bring on Vanguard, we've been quite clear that we've started with the most core of the core products, which is custody, right. And obviously, we always have discussions with large clients about bringing on other parts of the stack, but custody is one piece of that stack. And so, we're kind of -- you're seeing the offset of a stack of services versus a one sort of a start on trillion plus in assets. So that's the other piece that's just coming through in the quarter-on-quarter. But I think in general, you have the right view. It's around mix of assets. It's around mix of underlying fund and fund types, and that's playing out.

And in terms of the expenses, our perspective is the reason why we're focused on margin, the reason why we're focused on operating leverage and we can -- operating leverage fully our fees or there are different ways to -- and all the ways matter, right. We're focused on driving down our costs and increasing efficiency every year because we know that's what this business requires and our view is if we can do that smartly and within ways that help our clients, right, that can be good for them and good for us.

Brian Bertram Bedell -- Deutsche Bank Securities Inc. -- Analyst

And can you just remind me of the servicing wins to be installed in the fourth quarter and you are not including any wins that you'll be getting in the fourth quarter, what would the servicing installation pipeline look like coming into 2019?

Eric Aboaf -- Chief Financial Officer

Yes, we've got that in the press release servicing business to be installed at $465 billion. You'll see that's been that that I think a -- it's quite a nice level. If I go back over the last eight or nine quarters, it tends to be above the level which we run, which is part of the reason why we have some confidence not only in the pipeline, but some of what we see in terms of revenues in the coming quarters.

Brian Bertram Bedell -- Deutsche Bank Securities Inc. -- Analyst

The $465 billion is for the fourth quarter, or is it into next year?

Eric Aboaf -- Chief Financial Officer

That's into next year, right. So clients come on quite quickly. If you remember the Vanguard kind of custodial client played through quickly and that was because it was simpler to put on the $465 billion will come through over several quarters and obviously what we're working on now is the pipeline and pushing through closing that pipelines, so we add more as we install more and that's just the natural cadence of the sales and then inflation activity.

Brian Bertram Bedell -- Deutsche Bank Securities Inc. -- Analyst

Got it. And I just missed the last part of your fee operating leverage comments, your prior question. Can you just repeat that? What your expectation for fee operating leverage for the full year is now with the weaker fees?

Eric Aboaf -- Chief Financial Officer

Yes, I said, I didn't go through it in detail, right. I wanted to be helpful at the end of my prepared remarks and I gave you my fourth quarter outlook by area, including fees. I think you can easily now calculate estimate of all of our metrics, including fee operating leverage, if you just add up the first three quarters up, kind of parachute in an estimate of fourth quarter, and I think what you'll see is, I think we had five main targets out there as part of our January guidance. I think we've hit many of those, but not all of them, and I think fee operating leverage is one that where we won't achieve what we intended. But on others, like expenses with Beacon, we started off with an intention to save a $150 million this year, we're at -- we've said we're confident we can do $200 million, we've actually already done $180 million after three quarters. So we have some -- we have quite a bit of confidence there and then you saw we deployed another $40 million of more tactical expense reductions just this quarter, right, to add to the expense management efforts. So I'd say -- it's -- there are a number of these that we're going to hit on, somewhere else we'll deliver on, and others that we may not, but we're focused on navigating through this environment.

Unidentified Participant -- -- Analyst

Thanks for all the additional color. Thanks.

Unidentified Speaker --

Yes.

Operator

Our next question is from Mike Carrier of Bank of America.

Michael R. Carrier -- Bank of America -- Analyst

Thanks guys. First one, just on one more on the servicing side and more on the outlook that when you look at the pipeline, like any context your color on the mix of that, any of this on the passive side to traditional like alternatives, just to get some sense. And then, Eric, maybe just when we think about fee rates on products whether warranted de-risking or if we eventually get to a rerisking environment, what maybe the divergence on fee rates on products that shift things around both on the positive and negative side?

Ronald P. O'Hanley -- President and Chief Operating Officer

Yes, Mike. It's Ron here. Let me talk about the outlook. I think the outlook is quite strong as we've said for the reasons that we've talked about it as much because of the pain that our clients are suffering. So the nature of the outlook is less about active versus passive because typically it's what we get reflects what the underlying asset manager itself is -- is managing. But what I would say is that the outlook more often they're not -- the discussions more often do not include as you'd expect custody and fund accounting, but quite frequently the middle office, and as we look back on many of the large deals we've done, roughly half of them have been middle office plus custody and accounting. And I think that reflects just the nature of these large and medium-size asset management firms saying, this isn't just about, am I going to shave a little bit of fee and move it over to another custodian but more who is able to help me improve my operating model. And so that set of discussions is rich, the pipeline is strong. Are all the discussions going to result in a pipeline? Probably not. But I think just from the sheer amount of activity, we're encouraged by the outlook for the pipeline.

Eric Aboaf -- Chief Financial Officer

And Mike, let me just give you some of the kind of ranges on the fee rate. Our overall fee rate if you take servicing fees divided by AUCA, it's about 1.6 basis points. But the range is actually quite large within that, if you think about (inaudible) because of their complexity and the spoke nature, can be five, six, seven, eight there and that's the industry standard. ETFs are at the other edge of that, can be well below (inaudible) half of it, but it's just there is a wide range mutual funds, collected funds, institutional, retail are all quite different. And then the European offshore centers versus onshore centers because of the tax and accounting complexity, have -- offshore tends to be at a higher rate than onshore and offshore has been where we've had much of the flows in Europe right through Luxembourg vehicles and the Irish vehicles, which is what actually went negative in the second quarter, was dead flat in the third quarter. So those are some of the -- maybe the ranges and the drivers, then it's even when I work through and try to give guidance on something like servicing fees for the fourth quarter, there is a number of different considerations and which is why the results can move even over the course of a month.

Michael R. Carrier -- Bank of America -- Analyst

Got it. A tough one in. And just real quick, tax rate is a little lower. I don't know if you mentioned that, but just on the outlook. And then on the expenses, you guys mentioned where you are on Beacon and then you mentioned the $40 million and just wanted to get some clarity on, is that an addition, and when you see these, like revenue pressures, like where are you guys in terms of the expense base being maybe more variable versus in the past?

Eric Aboaf -- Chief Financial Officer

Yes, let me do those in order, first on taxes, then on expenses. On taxes, we had some discrete items, but the largest one was a true-up on the year-end 2017 tax package. If you remember, we had a charge in the fourth quarter of $150 million(ph). There's a lot of information that's come through, some puts and takes. But we had more benefits than otherwise as we trued up on depreciation, R&D, and some of the many nuances where you remember we're not finalized or haven't come through on the rule making, and so that true-up was worth about 3.5 points on the tax rate roughly. And I think was obviously a positive this quarter.

On expenses, I think the -- we think about the expense opportunities as we covered earlier on a number of different levels, right, there's enormous amount of continued opportunity as we continue through Beacon and standardize and simplify and we do that at multiple levels and sometimes it's in the processing shop, sometimes it's in the IT shop. So there is a whole set of, I'll call it more process engineering that we continue to do there as we continue from the learnings from Beacon into the next phase. I think the management delayering and simplification, as Ron described, is an area of continued opportunity and I get that the fixed cost, but we've got to take out fixed cost, not just variable costs, as we drive down the productivity curve. And then I think the areas of third party or non-compensation spend, if our clients, the asset managers are under pressure and they're asking us to see how we can do a bit better for them and giving us more business as an offset. We're going back to our vendors and say, look, you've got look upstream as well and help us deliver better for our clients, and so, we are working actively whether it's market data vendors, sub-custodial vendors, contractor vendors, IT vendors, I mean, you just go through the long list, then I'd say, every one of those are vendors, but they're partners to us and they need to help us deliver what we need to on our productivity journey.

Michael R. Carrier -- Bank of America -- Analyst

Okay, thanks.

Operator

Our next question is from Mike Mayo of Wells Fargo.

Mike Mayo -- Wells Fargo -- Analyst

Hi. If you could help me with the disconnect that I have. The first part of the decade as State Street claimed experience for business ops and IT transformation. The second part of the decade, you're claiming success with project Beacon, which is about done. Today's press release says "solid performance." But the year-to-date pre-tax margin, it looks like it's more as flat, the same as it was in the 2011, you highlight them, recent de-risking and certainly EM hurt, but for most of the decade, you had lot of (inaudible) and lot of higher stock market. So, three questions. Number one, you alluded to do expense efforts. Will there be a new expense program in 2019 or in the next few years ahead? I guess, getting all the same from project Beacon, but not showing the positive (inaudible) not showing the improvement in pre-tax margin. So, I guess, I hope our expectation to be a new expense program will lead what for the pre-tax margin?

Number two, how do you guys think about governance, because we hear Jay saying things are good, solid performance, and he's the outgoing CEO and then Ron, you are the new CEO, taking over next year and there seems to be a little gap and this is one of the longest senior transitions in a while. So you can comment on governance.

And three, in terms of a strategic pivot, you highlighted Charles River partly to pivot strategically at State Street, think about at larger strategic pivot perhaps even a combination, let's say, a brokerage firm (inaudible) bank or asset manager you had a deal yesterday. What are your thoughts about expenses, governance, and acquisitions? Thanks.

Unidentified Speaker --

Mike. Why don't I start that on expenses. So your specific question is, are we planning to employ a new expense program either at the end of this year or in 2019. And the answer is, at this point, I don't think we need to because there's intense focus on expenses now. And much of the programs you cited in the past have provided -- one, they provided savings; two, they provided foundations for the next one. And I look forward and the rest of us look forward and see lots of opportunities to continue to manage our expenses, and to do that in concert with improving our product and improving outcomes for the clients. So, I just don't see that we actually have to announce a separate program, because I would argue that that's what we're doing.

The other thing, Mike, that we want to be clear on here, and I think we said this in our materials, is we do continue to invest; and we're investing, one, to continue to get more of that expense out and to make sure it's an enduring expense reduction, so that it's not just belt-tightening, but then, in fact, we're actually getting end-to-end processing in place; that we're actually getting real automation, that we're getting kind of full usage out of the global hubs. So -- and to continue to improve our offering to the client. So -- and I mean, the easy way out of this would be, I suppose, to just stop investing, but we don't see that as an option, given what we're trying to do to maintain competitive superiority.

Eric Aboaf -- Chief Financial Officer

Mike, it's Eric. I'd just also emphasize that we did ITOT as a multi-year program over three or four years. We've done Beacon over three or four years and completed it sooner. I think we're quite comfortable now that we have the tools. I described the levels, the different expense levers. And that's -- that naturally can be folded into an annual program. And we have every intention, as we discuss this here among the three of us that in January is a natural time to tell you here is how much we plan on taking out of the expense base here in the areas in which we'll be doing that, and here's what to expect in the coming year. And then, use that as cadence by which as we give guidance. We give guidance on revenues, on operating leverage, on NII to cover what our intentions are in a very practical and specific way on expenses. So, I think you can plan on that in our January call.

In terms of the metric, I think the -- I do think it's worth stepping back to the metrics. And I like how you do it over half a decade, a decade. And I know you're sooner this industry for even longer. But ROE, right, hit 14% this quarter, up almost 2 points on a year-to-date basis, right. And that's ROE, that's not return on tangible common equity ex the goodwill that get reported by many of our peers, which in our case is 19%, but like classic ROE, 14% for the quarter for year-to-date.

Margin, which I think you've got to look at both the GAAP margin, because we do more tax-advantaged investing than other peers. But if you want to do it on a normalized basis, it's in the 31% range, is I think pretty healthy. And clearly, we don't have an enormous lending book like others do, which tends to make margins even wider, but I think we're quite comfortable with the margins that we have in the 30% range on -- 31% range on operating days, and you see our GAAP margins continue to build. So, I think we're very focused on driving expenses that are calibrated to revenues and we have a good strong way to continue to do that.

Joseph L. Hooley -- Chairman and Chief Executive Officer

So, Mike, let me -- this is Jay. I think that was the first question. Let me pick up the second and then, reach to the third. The -- Ron and my transition is going quite well. At the end of the year, I will phase out and become Chairman and Ron will take over of the CEO role. And he's not only well equipment but I think this year has given us both quick transition time with clients, employees, and more recently shareholders.

Let me go your COD(ph)question. I think that we still like this space. This space being the trust and custody business, because we think it has global expansion possibilities, we think it will still also grow, as assets still grow, as they move from government to retirement. So, the secular macro picture, I think, still looks pretty good to us. Having said that, this business, over many decades, has been a business of evolution and custodians, if you call us custodians, continuing to evolve to find points of differentiation. And so, -- and I think we have been leaders in that, whether it's been finding the international opportunity, whether it was finding the ETF opportunity, whether it was being first of the hedge fund opportunity. More recently, moving into the middle office, where we now have a $10 trillion plus scale business that's bridging into the data GX angle.

And the next big frontier is the front office, not just the front office but connecting the front office to the back office. And you'd only have to be in some of these conversations to realize that when you have CEOs across the table who now acknowledge this that this business has been built up over time with huge inefficiencies in multiple systems. And they now view State Street as not only having the foresight to be there first, but having the fortitude to build this front, middle, back office business that will help them compete in the next decade. So I think that, to your point of, is there more to do, is there more dramatic to do. I think the big dramatic, we just did, which is to lurch into the front office. I think that to do is to knit all these things together, and I think that will define how this business looks into the future.

Ronald P. O'Hanley -- President and Chief Operating Officer

Yeah. What I would add to that, Mike, is that in terms of does that necessarily mean that we are going to be forced to do more acquisitions, or to do kind of dramatic types of corporate actions like you saw yesterday with Invesco and Oppenheimer. We don't see that need right now. The -- with Charles River and the platform that we're building and our organic activities, we feel like we've got what we need. We can build out organically to the extent to which there's something that makes sense to augment our capabilities, and is -- has the financial criteria that we would like to see. We'll do that, but we don't -- we're not here saying, well, with that we need an acquisition.

Mike Mayo -- Wells Fargo -- Analyst

All right. Thank you.

Operator

Our next question is from Jim Mitchell of Buckingham Research.

James Mitchell -- Buckingham Research -- Analyst

Good morning. Maybe just asking it this way on the expense question, do you think that, going forward, you can generate positive fee operating leverage relative to organic growth?

Eric Aboaf -- Chief Financial Officer

Jim, it's Eric. I think we'd have to -- positive fee operating leverage is certainly a good objective to have. Organic growth is hard to, I think, analytically -- like we have to clarify the terms, because remember how this business model works that we built up out over years on servicing fees, right. There is a piece of servicing fee revenue that comes from market appreciation, there is a fees that comes typically from flows and client activity, and that actually has gone negative this quarter. There's a piece from net new business and share shift, as we continue to consolidate or we move up the value chain, and there's always a little bit of pricing that we work through.

So there's a set of four elements. And I think our view is -- and I -- there is four elements on the fee side and then there are deposits now, and I think the deposit conversation continues to become more important because of the position our clients are in, and in ways to even remunerate us for some of the services that we provide. So I think, over time, as we -- we want to drive expenses down, and expenses cannot grow faster than total revenue. So I think that's just a fact, right. Our margins need to continue to float upwards, and that's our -- we have -- we're all -- that's got to be a very clear bar. I think there will be time-to-time, where we focus more on fee operating leverage when we might be getting an unusual benefit from NII because of the rates tailwind or when we have a downdraft in rate, because you want to kind of peel that apart. But I think in more normalized times, we probably do want to focus on total operating leverage, but there is -- I'm one of those folks to believe that every measure has a purpose and a place, and we should keep an eye on all of them.

Ronald P. O'Hanley -- President and Chief Operating Officer

Jim, I would just add to Eric's point on your organic growth question is that the other factor is consolidation among custodians and that continues to happen and for the most part, we tend to -- tended to be the beneficiary in that as clients are moved from multiple custodians through either to one or toward one.

James Mitchell -- Buckingham Research -- Analyst

Right, OK. That's great. And maybe a follow-up Eric on just the other expense line, it dropped, I think, $45 million sequentially. Is there anything unusual in there or is that just Beacon savings that might be somewhat the same going forward. I know you highlighted expenses in the fourth quarter only up slightly, so is that a reason that a new, kind of, run rate to think about another or anything unusual in there?

Eric Aboaf -- Chief Financial Officer

Yes, that one bounces around a little bit, right. It bounces around quite a bit and there's a series of different elements there. So I'd just be careful about that one and I try to use, kind of, a multi-quarter view of that. There are big lumpy items like professional fees, which moves around by $10 million because those been in both IT and non-IT and some of our regulatory initiatives. There are large items like insurance and that -- including the FDIC insurance, with the assessments coming in and out and so forth. There are T&E flows through that line. And as I mentioned, that one was particularly well controlled this quarter.

There is litigation that kind of -- that bumps through that line and that can make it move -- that actually wasn't significant this quarter, but could make it move. So there is a -- I think it's one that's always going to be lumpy, but our view is there are 15 kind of sublines in there at the first order and we've got initiatives on each of those 15, and one where there is a significant amount of, I'll call, non-comp and benefit spend that we had and well controlled.

James Mitchell -- Buckingham Research -- Analyst

All right, thanks.

Eric Aboaf -- Chief Financial Officer

Yes.

Operator

Our next question is from Geoffrey Elliott of Autonomous.

Geoffrey Elliott -- Autonomous Research LLP -- Analyst

Good morning. Thanks for taking the question. You mentioned EM quite a few times as one of the drivers of pressure on servicing fees. I wonder if you could do anything to help quantify that, help us in future have a better feeling for how weakness in EM or strength in EM is going to feed through into that line?

Eric Aboaf -- Chief Financial Officer

Geoff, it's Eric. I've been wrestling with your question because the -- and I think just like you'd like see it better, I'd like find ways to disclose it better. I think the -- if you think about our disclosures, we have good disclosures on what happens when markets appreciate or depreciate and how that affect servicing fees. And part of your question makes me think can I turn that into a disclosure on emerging markets versus developed markets. So I'm just kind of thinking through it as you asked the question.

I think there is a related set of disclosures that we make verbally and on our slide decks, but maybe you are encouraging us to see if we can quantify, but if flows are negative in US active funds or flows are negative in emerging markets by X (ph) or sufficiently different form the average, right. How much could that mean in terms of impact on service fee growth or decline? And that -- I think that's the kind of question you're asking. So I don't have a prospective answer for you. We have that deep in our analytics and then let me just take it on as an opportunity to see if we can add more over time. I think what you're looking for is kind of the first order approximation of how these different trends impact us and we'll do some work to see if we can get some more out there and some rules of thumb knowing that mix as we've talked about today, creates an enormous kind of fuzziness over those rules of thumb, but let's -- we'll add a little bit of context and thought there for you.

Geoffrey Elliott -- Autonomous Research LLP -- Analyst

Thank you. I think that just kind of helped to get away from the mechanical S&P up and (inaudible) asset servicing fees must be up as well. And then second one on Charles River, you mentioned you're going to give some more color around expectations of that teleconference later in the quarter. What are you kind of waiting for you? What are you still putting together before you come out with those numbers on how CRD is going to impact Q4?

Eric Aboaf -- Chief Financial Officer

Yes, Geoff. So the biggest change that we have to do beside just integrating Charles River into our systems and our close process and so forth and we've owned it now for 18 days, is we have to complete the work on the accounting 606 implementation of revenue recognition. If you recall, we as a bank did that January 1 of this year as did most of the other banks and asset managers, and it was quite significant to them. We literally have to do that with Charles River, which means you literally have to pull every contract and go through every contract, bucket it between on premises versus cloud and each of those has term or doesn't have term and how much term. There's an upfront revenue recognition in some cases. There is an overtime in others. And so, it's literally a contract. It's a manual exercise and the team has been intensely working through that. At that point, I'll be able to give you an estimate of fourth quarter revenues, but I'd like to do that once and well for you.

We have a rough estimate and we've had them for since the spring and summer, but I'd like to be honest to finish that work, I'd like to close October and maybe November results under GAAP standards as opposed to private company more cash accounting that's often been done and then ensure that with you. So that's the work. We've got a couple of opportunities. Certainly by December, we'll -- the first week or through December, we'll certainly do that for you. And our intention is to share with you here is GAAP revenue estimates or range for the fourth quarter. Here is expenses and EBIT. And here are probably some of the metrics that we'll be tracking for you, right, because this is one of those where there is a pipeline, there's beyond a pipeline, there is a set of booked -- contractually booked activity and then, there is an installation period and then, it turns into revenue. And so, we'll come back with a -- some of the leading indicators as well. So that will be a -- but we'll do that very proactively and we'll do that obviously during the latter part of the fall here, so that everyone is well prepared as we go into the end of the year.

Geoffrey Elliott -- Autonomous Research LLP -- Analyst

Understood. Thanks very much.

Eric Aboaf -- Chief Financial Officer

Yeah.

Operator

Our next question is from Steven Chubak of Wolfe Research LLC.

Steven Chubak -- Wolfe Research LLC -- Analyst

Hi, good morning. So I wanted to start off with the question on the securities portfolio. The duration is extended for each of the past few quarters. Most recent one was that 3.3 years. If I look at peer set, they're actually running a little bit below two. I'm just wondering given the market expectation for multiple rate hikes or flatter yield curve, what's really driving the decision to extend the duration at this point in time? And maybe just a quick follow-up, how we should think about the impact that will have on the pace of asset yield expansion in the context of the mix of the next versus portions of the book?

Eric Aboaf -- Chief Financial Officer

Sure. Steve, it's Eric. So there's a lot -- lot that goes into the design of an investment portfolio and I'd share with you a couple of bits of context. So the first is that we've always run a very short portfolio here in particular because of the large opportunity and rising rates at the shorthand and you've seen that, that's been quite remunerative for us and continues to be quarter-after-quarter. So what you are seeing us do is I think effectively just starting to balance out of portfolio as rates get higher, right, because you -- as rates went from near zero to north of 200 basis points at the front end and north of 300 basis points in the back end, right, at some point we have to, as bankers all began to pivot and say when do I want to the lock in some of that duration? I don't want to do it all in one day or one month or one quarter, but I do want to take advantage of that curve, because that curve has current earnings benefits on one hand and it's an anticipation of -- at some point the Fed stops raising rate, maybe we -- you know a couple of years from now there's another business cycle and rates come down, and when rates come down, you do want to have that duration in place. So look at the context, and we are still -- I think we're still relatively short from an interest rate sensitivity perspective. And remember, we have more fixed rate deposits than most of our peers, so we tend to need more fixed rate assets. So you got to keep that in mind as you benchmark us with some of the other universals or regionals in particular. And there is a question of navigating through the cycle. I think to summarize that, we're actually quite pleased with the performance of the portfolio or the performance of NII and NIM, and we continue to see good upside even with this duration, you know every rate hike is probably worth almost $10 million a quarter in the coming quarters with this level of investment positioning. And so, both good earnings and good upside in our mind.

Unidentified Participant -- -- Analyst

All right, thanks, Eric. And just one follow-up for me on some of the non-interest bearing deposit commentary from earlier. You alluded to stability in that deposit base of around 160, but the non-interest bearing deposits I mean end-to-end declined 20%. I know there is a lot of volatility around the end of the period balance sheet. But just given that -- the sheer magnitude of the decline now, I was hoping you to speak to what drove that acceleration at the end of the quarter and what's a reasonable expectation for non-interest-bearing deposits in 4Q just hoping you get comfortable with that, (inaudible) decline should not continue.

Eric Aboaf -- Chief Financial Officer

Or -- so the -- let me kind of tackle that from a couple of different perspectives. So the first is, I think the average deposits have been in the kind of 160-ish range in aggregate. I think what we have seen on a year-over-year basis and a quarter-over-quarter basis, we've seen it across every bank and seen -- it continued, I'll call it rotation out of non-interest bearing into interest bearing. And on a quarter-to-quarter basis, that's 5%. So, not literally $2 billion, a $35 billion rotates out in that from non-interest bearing into interest bearing. And that's just I think what is completely to be expected given where we are in the interest rate cycle. And I think you've seen other banks show that you are seeing -- some show actually a faster rotation than that. I think we're quite comfortable with the pace of this rotation. What's hard to perfectly forecast is, you know, what's the future pace of that going to be and will it level off? I think we all believe it will level off at some point, because there are different segments who hold non-interest bearing deposits, in particular, a number of the hedge funds or alternative providers for whom we do servicing, they tend to hold non-interest-bearing deposits with us probably because those are the valuable for us and other banks under the regulatory rules. And probably because that's the way to pay us for our services. And some of that is probably relatively sticky for the duration through cycles. There are other parts of that $35 billion non-interest bearing deposits. I'll just continue gently rotate through. And what I tell you is, we keep modeling it and the rotation keeps seeing a little less than expected. And well that I think current uncertainty in the future (inaudible) some indication that the pattern here is a pattern that we can just use as a way to forecast from. So anyway hopefully that's enough color. I think deposits, in particular, because we're at this higher rate portion in the cycle, right, we're starting at higher rates finally, which is nice to see in the US and because of the Fed reversal or Fed easing the reversal, if they don't, it is always harder to forecast. And so we're just navigating through carefully and working very closely with our clients, quarter-to-quarter to serve them in this function.

Unidentified Participant -- -- Analyst

All right. Just very quick follow-up. I know that you mentioned difficult to forecast deposit trajectory. But since the correlation is so high between your deposits and industrywide excess reserves, keep going as a reasonable profit while also (inaudible) some organic growth?

Eric Aboaf -- Chief Financial Officer

I think you can -- I have less confidence in direct relation between excess reserves and our deposits. Why? Because, you know, our deposits are those remaining kind of frictional deposits by and large that exist as the custodian where you got the asset manager or the pension fund (inaudible) back and forth, they need some frictional deposits with you, so they don't draw any overdraft line which they tend to be low-to-do, so they use it as a way to you would balance, keep some funds in a checking account. And I think we've pushed off most of the wide excess deposits that may directly correlate to the reserves. What I try to do from a deposit forecasting perspectives beyond is I look at the Fed deposit reports or the (inaudible) reports that come out weekly and then the monthly versions of those, and I think that is overall deposits in the banking system that were a proxy for overall deposits in the banking system, those have been inching up, you know it was at 4% or 5% a year for a little while, now it's closer to 2% to 3% a year right now, sometimes 1%, so that's a good proxy. And I think the question is, we certainly want to grow deposits at that rate with assets and their custody growing and new business wins, you know, part of the discussion that we are having now I think more than we've ever had before is, hey, (inaudible) assets, what deposits are you going to bring with you, how do you (inaudible) deposits with us, how do we serve you well with those deposits or with (inaudible) or some of the other. And so I think as you see assets under custody grow, there should be the deposits that come with those, and that's another part of the modeling that I do.

Unidentified Participant -- -- Analyst

Got it. I just had a long follow-up. Thanks for accommodating the additional question.

Eric Aboaf -- Chief Financial Officer

Our pleasure.

Operator

Our next question is from Brian Kleinhanzl of KBW.

Brian Kleinhanzl -- KBW. -- Analyst

Great. Thank you. I just had one question. When you look at uncertainty -- I do appreciate the additional color that you gave us, this quarter, but ever since probably beginning the launch, you have nothing but pretty much linear trend down on your asset servicing fee rates, and I get it there are some categories that you have higher fee rates, but I mean when we think about (inaudible) book of business you have -- (inaudible) continues to reprice lower over time?

Unidentified Speaker --

Brian, it's Eric, just first order though remember that since we launched Beacon, right, we've had a run up in market -- in equity market levels, right, appreciation, just think of it in 2017 equity market spiked nicely 20% depending on what the time period. During that period, remember what happens is (inaudible) in our queue that you don't have a linear effect on servicing fees. We described 10% of an equity markets or 10% of fixed income markets increases servicing fee revenues between 1% and 3%. So automatically as markets appreciate our fee rate by definition will flow downward, right, just because they aren't linear, right, the fees are not linear with markets like they are in the world classic asset management industry. So I think in appreciating markets, you're only going to get some flowing down. I think that kind of first order effect. The second order effects are interesting which is what else happened --may happen (inaudible) fee discussions with clients, but there's more services that we continue to add as well whether it's middle office or (inaudible) for someone (inaudible) mutual funds and so on and so forth and so there's a series of other effects. And then if you recall as well, if you have ETF, dominating flows in the US in particular, right, and the outflows, right, we had what's now two or three years of inflows into ETF and out of actives in the US, right, that has a downward pressure on our fee rate as well. And I think there are two dominant ones. One is just market appreciation, effects from that and kind of the swing to ETFs in the U.S. affects the math and then there are a number of other pieces that we -- that will influence it quarter to quarter.

Brian Kleinhanzl -- KBW. -- Analyst

Okay. Thanks.

Operator

Our next question is from Vivek Juneja of JP Morgan.

Vivek Juneja -- JP Morgan -- Analyst

Hi. Thanks. A couple of questions. Just shifting gears a little bit to asset management fees seeing that that fee growth has also been a little bit slower than AUM growth, any comments on pricing trends there?

Ronald P. O'Hanley -- President and Chief Operating Officer

Vivek, this is Ron. You're seeing -- in terms of asset management fees, you are seeing what I would describe as a pressure and in some cases accelerating pressure on asset management fees. A lot of our business as you know is either indexed or quantitative. And particularly on the indexed side, institutional index has been quite a bit of fees pressure there as investors are looking for everything they can to reduce their fees. So, yes, the pressure remains. We expect it to continue to be there, but at some level it almost got to moderate because you're approaching a point where people are going to -- institutions are going to just start turning away from the business.

Vivek Juneja -- JP Morgan -- Analyst

So Ron you don't think you are going to have match your former institutions' zero fee rate all pricing on any of your ETFs?

Ronald P. O'Hanley -- President and Chief Operating Officer

No, it's a longer question. I believe that if you look at the rationale for why the Fidelitys and others are contemplating this, they are using it really more in the context of a retail environment and using it as

a way to attract customers in and also using -- typically they are using those vehicles as building blocks for bigger kind of retail SMA. So I think it's not quite as comparable to what our business is here. But your point, Vivek, is a good one in that the overall kind of fee pressure is another factor.

Eric Aboaf -- Chief Financial Officer

And one of the things we do continue to do, right we've got the ETF business, we also have the OCIO business and I think part of the trends we're seeing is there is some fee pressure on more the legacy institutional activity. And on the other hand, if some of the barbelling and expansions on that OCIO business does provide some offset to that and we are also seeing that. I think year-to-date our fee rate was relatively flat in asset management and that's -- those are effects, those countervailing effects are you can see in the numbers.

Vivek Juneja -- JP Morgan -- Analyst

Okay. And did you -- normally in the third quarter do you not see some seasonal benefit from performance fees? It didn't seem like we saw that this quarter. Am I missing something?

Ronald P. O'Hanley -- President and Chief Operating Officer

It depends by -- we're fairly global and so it depends kind of quarter-on-quarter market levels and then fund by fund. But remember emerging markets were down (inaudible) international was down as well. It was only the US that's kind of back here (inaudible) feels good. So I think there was -- the average to be relatively neutral this quarter.

Vivek Juneja -- JP Morgan -- Analyst

And one more if I may on the servicing fee side. I am sure you're getting a long call on that. But just while we are all on the topic, over the -- this is going back over the years. Jay you have always talked about middle office business providing a stickiness which generally translates into also helping somewhat with pricing erosion. We haven't seen that obviously. We don't need to go -- but given that trend, given everything that's going on, is there a reason why the CRD offering doesn't just become another free offering over time, just given what we've seen over now a decade in this industry?

Joseph L. Hooley -- Chairman and Chief Executive Officer

I think it's -- Vivek, this is Jay, I think that the front office and CRD is different. It's at the central nervous system of these asset management firms, it's a conversation with a different level of clientele than we've dealt with typical back office, middle-office services. So I don't think it's the same. I think that the value that we see inherent in the front office the obvious piece which is to create connectivity and efficiencies for the middle and back, but the bigger value is we view this front office initiative as not just the software platform but rather a platform that can network other investment capabilities whether it's liquidity or other things into it. So I think it's a different conversation with a different clientele and has a different value proposition.

Eric Aboaf -- Chief Financial Officer

Yeah, I'd add to that Vivek, I think that these are not commodities that we're talking about here. What we are talking about is working with fund managers or asset owners that act like fund managers and how do we help them add value to their investment process, how do we help them simplify their overall operation and lower their costs. So there is a real value element to this that I think will enable us to keep the pricing discussion quite separate.

Vivek Juneja -- JP Morgan -- Analyst

All right. Thank you.

Operator

Our final question is from Gerard Cassidy of RBC.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Thank you. Good morning. Eric you touched on a moment ago the revenues and the servicing fees with markets going up or down the range 1% to 3% of how they are impacted. If you exclude the net interest income revenue for a moment and just look at your total fee revenue, what percentage of total fee revenue is linked to the value of assets in the custody of management? Years ago I know it was much higher, it's lower today. But where does it sit today?

Eric Aboaf -- Chief Financial Officer

If you think about total fee revenues, right, you have got servicing fees, management fees, FX fees, securities finance fees, I think we start to get impacted by the large numbers and the averages. And so I think the disclosure we tend to do is the 3 in 10 out of equity, 1 in 10 for the fixed income, it's hard to kind of on a every quarter basis to be precise about that, right. So if markets go up but FX volatility goes down, I have got FX fees going in the opposite direction. So while it's true on average, right, which is how the disclosures are clearly made, I think the market sensitivity is tough one to pin down, to be honest. I think what we can say confidently is that most of our fees, right, are market sensitive, but they are sometimes market sensitive to market levels to market volatility and to market flows, right. And so as a result the first question is what percentage of our fees are market sensitive, I'd say most of them are. If you say what part of market sensitivity level, flow or volatility, I'd say it's a mix of those three and different mixes of each of those three for each of the different fee lines that we report.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Very good. And then another follow-up question. I'm glad you called out the ROE number that you guys reported, since I think many investors point to the ROE as a good indication of valuation on a price to book basis. So when I go back and look at State Street in 1990s, this Company almost always reported ROEs in the high teens. Then we went into the tech boom and they actually got into the mid-20s, then following the tech before the financial crisis, they drifted down into the mid-teens, we had the step-down we all know following into financial crisis with the increased levels of capital that you're all required to carry, so there was a step function down. With your ROA now up around 120 basis points, which is one of the highest that State Street has achieved over that time period, is it really just a matter of leverage that the ROEs are just never going to be able to get back up to high teens or is no, it's not leverage, it's a structural pricing issue and if you have a good pricing back, maybe we will see higher ROEs.

Eric Aboaf -- Chief Financial Officer

I think -- Gerard, it's Eric. Let me start on that. I think, I don't have the luxury that you have of been in the business for as many decades, for the decade and a half that I've been in this business both here and as a part of the universal bank, I think the single biggest change pre-crisis to post-crisis is the capital requirements and the capital requirements cover what you'd expect a little bit of market risk, little bit of credit risk and operational risk. It's the core of what we do and those capital requirements are not perfect, right, many (inaudible) perfect, but they are real and they are part of running a bank.

I think we use that processing houses that were not banks, most of them are banks today. And so as a result, I think we are in a somewhat different zone than where we might have been a couple of decades ago. That said, if we're reaching to 14% now in ROE, if -- the following question you might ask is while there is more upside, I do think there is more upside because I think there is upside in margin, there is upside in -- for our clients. There's upside in in kind of balance sheet optimization and management. And so, we have expectations. I think that that margins will flow it up and (inaudible) will flow it up. I think what the destination maybe is it's hard to -- I think that one is still open, but we see upside, maybe just not what -- maybe not what you may have recalled from the 90s.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Great. I appreciate that. And Eric, you might ask Jay about the roll bar back in the 1990, those are (inaudible) meanings we had. Thank you.

Joseph L. Hooley -- Chairman and Chief Executive Officer

Thanks, Gerard.

Gerard Cassidy -- RBC Capital Markets -- Analyst

You are welcome.

Joseph L. Hooley -- Chairman and Chief Executive Officer

Laura, does that conclude the questions?

Operator

Yes, we have no further questions, sir.

Joseph L. Hooley -- Chairman and Chief Executive Officer

All right. Thank you, and thanks everybody else for attention this morning.

Operator

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

Duration: 104 minutes

Call participants:

Ilene Fiszel Bieler -- Global Head of Investor Relations

Joseph L. Hooley -- Chairman and Chief Executive Officer

Eric Aboaf -- Chief Financial Officer

Glenn Schorr -- Evercore ISI -- Analyst

Brennan Hawken -- UBS -- Analyst

Ken Usdin -- Jefferies & Co. -- Analyst

Unidentified Participant -- -- Analyst

Betsey Graseck -- Morgan Stanley -- Analyst

Ronald P. O'Hanley -- President and Chief Operating Officer

Alex Blostein -- Goldman Sachs -- Analyst

Brian Bertram Bedell -- Deutsche Bank Securities Inc. -- Analyst

Unidentified Speaker --

Michael R. Carrier -- Bank of America -- Analyst

Mike Mayo -- Wells Fargo -- Analyst

James Mitchell -- Buckingham Research -- Analyst

Geoffrey Elliott -- Autonomous Research LLP -- Analyst

Steven Chubak -- Wolfe Research LLC -- Analyst

Brian Kleinhanzl -- KBW. -- Analyst

Vivek Juneja -- JP Morgan -- Analyst

Gerard Cassidy -- RBC Capital Markets -- Analyst

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