Eric Aboaf
Vice Chairman and Chief Financial Officer at State Street
Thank you, Ron, and good morning, everyone. Turning to slide 4, I'll begin my review of our first quarter financial results, which included a $0.32 EPS impact from an additional FDIC special assessment as described within the notable items table on the right of the slide.
As Ron noted, we produced a strong start to the year. On the left panel, you can see that total fee revenue was up both sequentially and year-on-year. Relative to the year-ago period, we delivered robust management fee growth, higher front-office software and data revenue, and servicing fee growth, while underlying expenses were well-controlled.
As I mentioned during the first quarter, we recorded provision for credit losses of $27 million, largely due to two CRE names. All told, we generated both positive total and fee operating leverage relative to the year ago, excluding notable items. We also delivered solid year-on-year EPS growth of 11%, excluding notable items, which was supported by the continuation of our share buybacks in the first quarter.
Turning now to Slide 5, we saw period-end AUC/A increase by 17% on a year-on-year basis and 5% sequentially to a record level. Year-on-year, the increase in AUC/A was largely driven by higher period-end market levels, net new business and client flows. I would note that we have seen a mix-shift into cash and cash equivalents worth an estimated 1 percentage points to 2 percentage points of total AUC/A versus a year ago.
Quarter-on-quarter, AUC/A increased primarily due to higher period-end market levels and client flows. At Global Advisors, period-end AUM also increased to a record level, up 20% year-on-year, largely reflecting higher period-end market levels and net inflows and up 5% sequentially, primarily due to higher period-end market levels.
At the right center of this slide, the market volatility indices provide a useful indicator of client transactional activity that drive servicing fees, spreads in FX trading and specials activity in agency lending.
Turning to Slide 6, on the left side of the page, you'll see first quarter total servicing fees up 1% year-on-year, primarily from higher average market levels, partially offset by pricing headwinds, a previously disclosed client transition and lower client activity and adjustments including changes in certain client asset mix into lower-earning cash and cash equivalents. In addition, the pace of installation started slower than we expected in the first quarter.
Let me dimension some of these items for you. As I've told you before, the impact of the previously disclosed client transition was a headwind of approximately 2 percentage points to year-on-year growth. In addition, lower client activity and adjustments, including the client asset mix shift to cash was also a headwind of approximately 2 percentage points to year-on-year growth this quarter, some of which we believe is cyclical. Sequentially, total servicing fees were up 1%, primarily as a result of higher average market levels, partially offset by lower client activity and adjustments, including the changes to certain asset mix and pricing headwinds.
On the bottom of the slide, we summarize some of the key performance indicators of our servicing business. In the first quarter, we generated $67 million of servicing fee wins nicely spread across both North America and Europe. As you recall, solid sales in North America like this was one of the goals that we had described at a conference last fall.
In addition, we had $291 million of servicing fee revenue to be installed at quarter end, up $71 million year-on-year and $21 million quarter-on-quarter. We also had $2.6 trillion of AUC/A to be installed at period end.
Turning now to Slide 7. First quarter management fees were up 12% year-on-year, primarily reflecting higher average market levels and net inflows from the prior period, partially offset by the impacts of a strategic ETF product suite repricing initiative. Relative to the prior quarter, management fees were up 6% due to similar reasons, partially offset by lower performance fees.
As you can see on the bottom-right of the slide, following record inflows in 4Q '23, our investment management franchise remains well-positioned with momentum across each of its businesses. In ETFs, the overall flows were relatively flat in first quarter. Our SPDR Portfolio U.S. Low-Cost suite achieved continued market share gains, driven by net inflows of $13 billion.
In our institutional business, we saw first quarter net outflows of $19 billion, primarily driven by a single client. That said, we saw continued momentum in the U.S.-defined contribution area with record AUM of approximately $730 billion. Lastly, in our cash franchise, we saw first quarter net inflows of $9 billion, the fourth consecutive quarter of positive net flows into cash.
Turning now to Slide 8, first quarter FX trading services revenue was down 3% year-on-year but up 8% sequentially. Relative to the year-ago period, the decrease was mainly due to lower spreads associated with a subdued FX volatility, partially offset by higher volumes as client engagement increased across nearly all of our FX venues. Quarter-on-quarter, the 8% revenue increase primarily reflects higher volumes with particular strength in our EM business as well as higher direct FX spreads.
First quarter Securities finance revenues were down 12% year-on-year, mainly due to lower agency balances and lower spreads, primarily associated with significantly lower industry specials activity. On a quarter-on-quarter basis, we have seen agency lending balances up as demand is rising. Software and processing fees were up 25% year-on-year in Q1, largely driven by higher revenues associated with CRD, which I'll discuss in more detail shortly. Quarter-on-quarter, software and processing fees declined 13% primarily due to our lower on-premise renewals, partially offset by higher lending-related fees.
Finally, other fee revenue for the quarter increased $5 million year-on-year. Sequentially, other fee revenue increased $17 million, largely driven by an episodic currency devaluation in the prior quarter, which did not recur.
Moving to Slide 9, you'll see on the left panel that first quarter front office software and data revenue increased 32% year-on-year, primarily as a result of continued SaaS implementations and conversions driving higher professional services and software-enabled revenue growth. Sequentially, front office software and data revenue was down 20%, primarily driven by lower on-premise renewals and installations.
Turning to some of the Alpha business metrics on the right panel, we were pleased to report two additional Alpha wins, including our second Alpha for Private Markets mandate. In addition, three mandates went live in the first quarter, bringing the total number of live mandates to 21. First quarter ARR increased 19% year-on-year, driven by over 20 SaaS client implementations and conversions over the last year.
Turning to Slide 10, first quarter NII decreased 7% year-on-year, but increased 6% sequentially to $716 million. The year-on-year decrease was largely due to deposit mix-shift and lower average non-interest-bearing deposit balances, partially offset by the impact of higher average interest rates, client lending growth and investment portfolio positions. We were pleased to report a sequential increase in NII, which was primarily driven by higher investment securities yields, an increase in average interest-bearing deposits and loan growth, partially offset by the decline in average non-interest-bearing deposits.
The NII results on a sequential quarter basis were better than we had previously expected, primarily driven by strength in both interest-bearing and non-interest-bearing deposit balances towards the end of the quarter. While it is difficult to forecast the path of deposits in the current environment, we're pleased with the success that we are having in engaging our clients.
On the right of this slide, we provide highlights from our average balance sheet during the first quarter. Average deposits increased 4% year-on-year and 6% quarter-on-quarter, mainly driven by client balance growth across the interest-bearing deposit stack, partially offset by a reduction in non-interest-bearing deposits.
Average non-interest bearing deposits decreased by less than $3 billion quarter-on-quarter. Cumulative U.S. dollar client deposit betas were 80% since the start of the current rate cycle with cumulative foreign currency betas for the same period continuing to be lower in the 30% to 60% range, depending on currency.
Turning to Slide 11, first quarter expenses, excluding notable items, increased barely 1% year-on-year as we both invested more to fuel fee growth and increased the size of our productivity and optimization savings efforts by more than 50%. On a line-by-line basis, excluding notable items, on a year-on-year basis, compensation and employee benefits decreased 3%, primarily driven by lower incentive compensation and salaries as well as a decline in contractor spend that was partially driven by the consolidation of one of our operations joint ventures in India.
Information systems and communications expenses increased 4%, mainly due to higher technology and infrastructure investments, partially offset by the optimization savings and vendor savings initiatives. Transaction processing increased 4%, mainly reflecting higher broker fees due to increased global markets volumes.
Occupancy increased 10%, partially due to real-estate costs associated with the consolidation of the joint venture in India, which used to form part of the contractor cost within compensation benefits, partially offset by footprint optimization. And other expenses increased 5% largely due to the timing of foundation funding.
Lastly, I'll spend a moment on our transformation efforts. If you recall, consolidating the first operations joint venture last October increased our FTE headcount as we insourced those capabilities. However, it also came with an expected financial benefit, excluding integration cost, of $20 million over the course of the year.
As Ron mentioned, the consolidation of our second operations joint venture in India closed on April 1, and this will also come with an increase in additional headcount from 2Q as well as expected financial benefits. The consolidation of these two joint ventures will be a catalyst for the next phase of State Street's global operations transformation and enable us to create a second wave of service improvements and productivity savings next year.
Moving to Slide 12. On the left side of the slide, we detail the evolution of our CET1 and Tier-1 leverage ratios followed by our capital trends on the right of the slide. As you can see, our capital levels remained well above the regulatory minimums. While we continue to focus on optimizing our capital stack, the strength of our capital position enables us to extend our balance sheet to support our clients.
As of quarter-end, our standardized CET1 ratio of 11.1% was down approximately 50 basis points quarter-on-quarter, largely driven by the expected normalization of RWA. The LCR for State Street Corporation was a healthy 107% and 130% of State Street Bank and Trust. Our exceptionally strong liquidity metrics benefit from the deep and diversified nature of our funding base and active balance sheet management.
In the quarter, we were pleased to return $308 million to shareholders consisting of $100 million of common share repurchases and $208 million in declared common stock dividends. As Ron noted, we continue to expect to return around 100% of earnings to shareholders this year.
In summary, we're quite pleased with the quarter. We have a clear strategy for growth, a detailed set of priorities that we are executing against in order to drive continued positive business momentum and expect to deliver increased fee operating leverage this year, excluding notable items.
Finally, let me cover our full-year and second quarter outlook, which I would highlight, continues to have the potential for variability given the macro environment we're operating in. In terms of our current assumptions, as we stand here today, we are assuming global equity markets flat to first quarter end for the remainder of the year, which implies daily averages up 5% quarter-on-quarter in 2Q and up around 17% for the full year.
Our rate outlook broadly aligns with the current forward curve, which I would note continues to move while we expect FX market volatility will remain muted. Given our strong start to the year and higher average market levels, we think total fee revenue for the full year will now be at the higher end of our prior guide of up 3% to 4% year-on-year, so up a solid 4%, which is better than our previous outlook.
There are, however, episodic and industry headwinds impacting our servicing business this year, including a previously disclosed client transition and the impact of client activity and adjustments, which includes the client asset mix shift into lower-earning cash and cash equivalents. We believe some of these factors are cyclical in nature and we expect to offset a portion with higher sales and additional management actions this year.
Turning to NII, as a result of our first quarter outperformance, strong deposit growth and the improved interest rate outlook, we now expect full year NII will be down approximately 5% year-on-year, which is better than our previous guide of down approximately 11%.
On expenses, we expect full-year expenses ex notables will be roughly in line with our prior guide of up about 2.5%, but with the potential for some additional revenue-related costs this year. Given our improved outlook, we now expect to deliver additional positive fee operating leverage for the full year, excluding notable items.
Finally, turning to 2Q on a quarter-on-quarter basis and excluding notable items, we would expect total fee revenue to be up 1.5% to 2%; NII to be down 2% to down 5%; and expenses up about 2% to 2.5%, excluding the seasonal compensation expenses in 1Q and notable items. We think the provisions for credit losses could be in the $15 million to $25 million range in 2Q, and we would expect to have a better view on that later in the quarter as we continue to monitor our portfolio. Lastly, we expect 2Q tax rate to be approximately 22%.
And with that, let me hand the call back to Ron.
