Vice Chairman and CFO at State Street
Thank you, Ron, and good morning everyone. Before I begin my review of our fourth quarter and full-year 2022 results. Let me briefly discuss some of the notable items we recognized in the quarter, outlined on slide 5, First, we recognize acquisition and restructuring costs, including wind-down expenses related to the Brown Brothers Investor Services acquisition transaction, which we are no longer pursuing. Second, we recognized $70 million of repositioning costs consisting of an employee severance charge of $50 million to eliminate approximately 200 middle and senior manager positions, largely related to our investment services business as we continue to streamline our organizational structure.
We also recognized $20 million of occupancy charge in the quarter to help us further shrink occupancy cost. We expect these actions to generate a total run-rate savings of roughly $100 million. Lastly, we recognize the benefit of $23 million in the quarter related to the settlement, proceeds from 2018 FX benchmark Mark litigation resolution, which is reflected in the FX trading services GAAP revenue line. Taken together, we recognize notable items of $78 million pre-tax or $0.16 a share. Now turning to Slide 6, I'll begin my review of both our fourth quarter 22 and full-year 22 results. As you can see on the top-left of the table, despite the dynamic and challenging operating environment, the diversity and durability of our business model allowed us to finish the fourth quarter with solid results.
Total revenue for the quarter increased 3% Year-over-Year, or 5% Year-over-Year excluding notable items as lower-fee revenue was more than offset by robust NII growth of 63%, which I'll spend more time discussing later in today's presentation. We also continued to demonstrate prudent expense management, which enabled us to deliver positive operating leverage in the quarter and pretax margin is up more than 4 percentage points year-on year. Our ROE is up more than a percentage point this quarter as well. On the right-side of the slide, we show our full-year 2022 performance. Notwithstanding the challenging operating environment we saw in 2022 for the year, I'm quite pleased that we again delivered positive operating leverage and nearly a percentage point improvement in pretax margin. As Ron mentioned, it has been three consecutive years of margin expansion and ROE improvement.
Turning to Slide 7, during the quarter, we saw period-end AUCA decrease by 16% on a year-on-year basis but increased by 3% sequentially. Year-on-year, the decrease in AUCA was largely driven by continued lower period-end market levels across both equity and fixed-income markets globally, a previously disclosed client transition, and the negative impact of currency translation, partially offset by net-new business installations. Quarter-on-quarter AUCA increased as a result of higher quarter-end equity market levels and the positive impact of currency translation.
At Global Advisors, we saw similar dynamics play out. Period-end AUM decreased 16% year-on-year and increased 7% sequentially. The year-on-year decline in AUM was largely driven by lower period-end market levels, some institutional net outflows, and the negative impact of currency translation, which was partially offset by $22 billion of net inflows in our Spider ETF business. Quarter-on-quarter, the increase in AUM was primarily due to higher quarter-end market levels, ETF net inflows, and the positive impact of currency translation, partially offset by cash net outflows.
Turning to Slide 8, on the left side of the page, you'll see fourth-quarter total servicing fees, down 13% year-on-year, largely driven by lower average market levels, lower client activity, adjustments and flows, normal pricing headwinds and the negative impact of currency translation, partially offset by a net-new business. Excluding the impact of the currency translation servicing fees were down 10% year-on-year. Sequentially, total servicing fees were down 1% primarily as a result of the client activity adjustments and flows.
On the bottom panel of this page, we've included some sales performance indicators, which highlight the good business momentum, we again saw in the quarter. As you can see AUCA wins in the fourth quarter totaled a solid $434 billion, driven by strong broad-based traditional wins across client segments and regions, including expanding relationships with existing Alpha clients. At quarter-end, AUC/A one but yet to be installed totaled $3.6 trillion with Alpha representing a healthy portion, which again reflects a unique value proposition of our strategy. Turning to Slide 9, fourth quarter management fees were $457 million, down 14% year-on-year, primarily reflecting lower average market levels and the negative impact of currency translation, which represented about 2 percentage point headwind quarter-on-quarter, management fees were down 3%, largely due to equity and fixed-income market headwinds.
As you can see on the bottom-right of the slide, notwithstanding the difficult and uncertain macroeconomic backdrop in the year. Our franchise remains well-positioned, as evidenced by our continued strong business momentum. In ETFs, we saw solid full-year net inflows in the U.S. with continued momentum and market-share gains in the spider low-cost equity and fixed-income segments. In our institutional business, there's continued momentum in defined contribution with 448 billion of inflows in the full year, including target date franchise net inflows of $21 billion.
Offset by industry-wide outflows in institutional index products. In our cash franchise, we still gained 60 basis points of market share in money market funds and in 2022, even though first-half inflows reversed in fourth quarter. On slide 10, you see the strength of our diverse revenue growth engines with both FX trading services and software and processing up double-digit teens year-on-year in a difficult year. Relative to the period a year-ago fourth quarter FX trading services revenue ex notables, was up 15% primarily reflecting higher FX spreads partially offset by lower FX volumes.
Our Global FX franchise was able to effectively monetize the less liquid market environment, which was driven by sharp moves in the U.S. dollar. Sequentially, FX trading services revenue ex notables, was up 8%, mainly due to higher direct and indirect revenue. Securities finance performance in the fourth quarter was more muted, with revenues up 1% year-on-year. Sequentially, revenues were down 6% mainly reflecting downward pressure on spreads due to lower specials activity and year-end, risk of activity by clients. fourth quarter software and processing fees were up 16% year-on-year and 17% sequentially, primarily driven by higher front-office software and data revenue associated with CRD which were up 28% year-on-year and 25% sequentially. Lending fees for the quarter were down 10% year-on-year, primarily due to changes in product mix and flat quarter-on-quarter. Finally, other fee revenue of $18 million in the fourth quarter was flattish year-on-year and up $23 million quarter-on-quarter, largely due to the absence of negative market-related adjustments.
Moving to Slide 11, On the left panel you will see fourth quarter front-office software and data revenue increased 28% year-on-year, primarily driven by multiple on-premise renewals and continued growth in software-enabled revenue associated with new client implementations and client conversions to our cloud-based SaaS platform environment.
Turning to some of the front-office and Alpha business metrics on the right panel, the 21 million of new bookings in the quarter were once again well-diversified across client segments, including asset owners, wealth, and private markets, as well as across asset classes, particularly in fixed-income. Front-office revenue backlog and pipeline remains healthy, giving us confidence in the future growth of this business. As for Alpha, we are pleased to report two new Alpha mandate wins this quarter in the insurance and asset-owner client segments.
Now turning to Slide 12, fourth quarter NII increased 63% year-on-year and 20% sequentially to $791 million. The year-on-year increase was largely due to higher short and long-term market interest rates and proactive balance sheet positioning, partially offset by lower deposits. We have a well-constructed balance sheet including both US and foreign client deposits, a scale-sponsored repo franchise, and a high-quality loan and investment portfolio that was consciously configured to benefit from rising global rates. Sequentially, the increase in NII performance was primarily driven by higher global market rates working through our balance sheet.
On the right of the slide, we show our average balance sheet during the fourth quarter year-on-year, average assets declined 6% and increased 3% sequentially, primarily due to deposit levels as well as currency translation impacts. The US client deposit beta, excluding some new deposit initiatives, was about 65% to 70% during the fourth quarter. For deposit betas for the quarter were much lower in the 20% to 50% range depending on currency. Our international footprint continues to be an advantage. Total average deposits were up sequentially, we saw a sequential-quarter reduction in non-interest-bearing deposits of 5% which was more than offset by higher NII accretive interest-bearing deposits that will help support high-quality client loan growth and selective expansion of the investment portfolio.
Turning to Slide 13, fourth quarter expenses, excluding notable items were once again proactively managed in light of the tough fee revenue environment and flat year-on-year or up approximately 3% adjusted for currency translation. We've been carefully executing on our continuing productivity and optimization savings efforts, which generated approximately $90 million in year-on-year gross savings for the quarter or approximately $320 million for 2022, achieving near the top-end of our full-year expense optimization guidance of 3% to 4%. These savings enabled us to drive positive operating leverage and pretax margin expansion which well, partially offsetting continued wage inflation headwinds and continued investments in strategic parts of the company including Alpha private markets, technology and operations, and automation.
On a line-by-line basis compared to 4Q21. Compensation and employee benefits were down 1% as the impact of currency translation. Lower incentive compensation was partially offset by higher salary increases associated with nearly 6% wage inflation and higher headcount. Headcount increased 9% primarily in our global hub as we added operations personnel to support growth areas such as Alpha and private markets, invested in technology, talent, and in-source certain functions. There is also a portion of the headcount increase associated with some hiring catch-up post-COVID.
We expect the headcount to increase more modestly in 2023. Information systems and communications. Expenses were down 5% due to benefits from our insourcing efforts and continued vendor pricing optimization, partially offset by technology and infrastructure investments. Transaction processing was up 1%, mainly reflecting higher broker fees and market data costs, partially offset by lower sub-custody costs related to lower equity market levels. Occupancy was down 17% largely due to an episodic leased-back real-estate transaction associated with the sale of our data centers, which was worth approximately $12 million. And other expenses were up 12% primarily reflecting higher professional fees and travel costs.
Moving to Slide 14, on the left side of the slide, we show the evolution of our CET1 and Tier-one leverage ratios, followed by our capital trends on the right of the slide. As you can see, we continue to navigate the operating environment was strong capital levels relative to our requirements. At quarter-end, the standardized CET1 ratio of 13.6% increased 40 basis points quarter-on-quarter, primarily driven by episodically lower RWA, partially offset by the resumption of share repurchases in the quarter.
With respect to RWAs, It's worth noting that we saw unusually low RWA this quarter worth about $10 billion, largely driven by our markets businesses and some specific currency factors. We would anticipate a similar amount of normalization of RWA. In the $10 billion, $15 billion range going into first quarter. Our Tier-one leverage ratio of 6% at quarter-end was down 40 basis points quarter-on-quarter, mainly due to the resumption of share repurchases in fourth quarter. We were quite pleased to return $1.7 billion to shareholders in the quarter consisting of a billion 5 of common share repurchases and $220 million in common stock dividends.
Lastly, as Ron mentioned earlier, we announced this morning that our Board of Directors has authorized a new common stock repurchase program of up to $4.5 billion through the end of 2023. And as I said in December, we expect to execute this buyback at pace and get back to our target ranges for both CET1 and Tier-one leverage market conditions and other factors dependent. Turning to slide 15, Let me cover our full-year 2023 outlook as well as provide some thoughts on the first quarter, both of which have significant potential for variability given the macro-environment, we are operating in.
In terms of our current macro expectations, as we stand here today, we expect some point-to-point growth in global equity markets in 2023 which equates to global equity markets being down about 2% each point year-on-year on a full-year average basis. Our rate outlook for 2023 largely aligned with the forward curve, which I would note is moving continuously. However, we currently expect to reach peak rates of 5% per Fed funds, 3.5 at the ECB and 4.5 of the Bank of England. As for currency translation, We expect the U.S. dollar to be modestly stronger than the major currencies on average, but less than what we saw last year. As such, currency translation like to have a half-point or less impact on both revenues and expenses.
In light of the macro factors I just laid out, we currently expect that full-year total fee revenue will be flat-to-up 1% ex notable items but servicing fees likely flattish and management fees down a bit, largely due to a modest reclassification of revenue out of fees and NII. Regarding the first quarter of 2023, we currently expect fee revenues to be down 1% to 2% ex notable items on a sequential-quarter basis, given some normalization of foreign-exchange market volatility that impacts our training business with servicing fees, expected to be up 1% to 2% and management fees, expected to be down 1% to 2%.
We expect full-year 2023 NII to be up about 20% on a year-over-year basis. After a very strong 2022, this is dependent of course on the outcome of rate hikes and deposit mix and levels. After a significant step-up in the fourth quarter 22 NII. We expect first quarter 23 to be flattish. And after the first quarter of 2023, we expect to see a slight 1% to 2% sequentially, quarterly attenuation of NII throughout the remainder of 2023. Then with the stabilization, is expected in 2024. Turning to expenses, as you can see in the walk, we expect expenses ex notables will be up 3.5% to 4% on a nominal basis in 2023.
Driven partially by wage and inflationary pressures and continued investment in the business and our people. While still driving positive operating leverage. You can also see on the walk that for full-year 2023, we expect gross sales of approximately 3%, which will help offset inflationary pressures and variable costs and ongoing investment scenarios like private markets and Alpha and further automation. Regarding the first-quarter of 2023 on a year-over-year basis, we expect expenses ex notable items to be up about 2%. Finally, taxes should be in the 19% to 20% range for 2023.
This outlook would deliver a fourth consecutive year of margin expansion and advance us toward our medium-term target goal of 30%. As well as deliver positive operating leverage and strong EPS growth for our shareholders. And with that, let me hand the call back to Ron.