Q4 2023 State Street Corp Earnings Call

Participants

Eric Walter Aboaf; CFO & Vice Chairman; State Street Corporation

Ilene Fiszel Bieler; Executive VP & Global Head of IR; State Street Corporation

Ronald Philip O’Hanley; CEO, President & Chairman; State Street Corporation

Alexander Blostein; Lead Capital Markets Analyst; Goldman Sachs Group, Inc., Research Division

Brennan Hawken; Executive Director and Equity Research Analyst of Financials; UBS Investment Bank, Research Division

Brian Bertram Bedell; Director in Equity Research; Deutsche Bank AG, Research Division

Ebrahim Huseini Poonawala; MD of United States Equity Research & Head of North American Banks Research; BofA Securities, Research Division

Gerard Sean Cassidy; MD, Head of U.S. Bank Equity Strategy & Large Cap Bank Analyst; RBC Capital Markets, Research Division

Glenn Paul Schorr; Senior MD & Senior Research Analyst; Evercore ISI Institutional Equities, Research Division

James Francis Mitchell; Research Analyst; Seaport Research Partners

Michael C. Brown; MD; Keefe, Bruyette, & Woods, Inc., Research Division

Michael Lawrence Mayo; MD, Head of U.S. Large-Cap Bank Research & Senior bank Analyst; Wells Fargo Securities, LLC, Research Division

Robert Henry Wildhack; US Capital Markets Specialty Financials Analyst; Autonomous Research US LP

Ryan Michael Kenny; Equity Analyst; Morgan Stanley, Research Division

Steven Joseph Chubak; Director of Equity Research; Wolfe Research, LLC

Presentation

Operator

Good morning, and welcome to State Street Corporation's Fourth Quarter and Full Year 2023 Earnings Conference Call and Webcast. Today's discussion is being broadcast live on State Street's website at investors.statestreet.com. This conference call is also being recorded for replay. State Street's conference call is copyrighted and all rights are reserved. This call may not be recorded for rebroadcast or distribution in whole or in part without the expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be held on the State Street website.
Now I would like to introduce Ilene Fiszel Bieler, Global Head of Investor Relations at State Street.

Ilene Fiszel Bieler

Good morning, and thank you all for joining us. On our call today, our CEO, Ron O'Hanley, will speak first. Then Eric Aboaf, our CFO, will take you through our fourth quarter and full year 2023 earnings slide presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.com. Afterwards, we'll be happy to take questions. (Operator Instructions) Before we get started, I would like to remind you that today's presentation will include results presented on a basis that excludes or adjusts one or more items from GAAP.
Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our slide presentation, also available in the IR section of our website.
In addition, today's presentation will contain forward-looking statements. Actual results may differ materially from those statements due to a variety of important factors, such as those factors referenced in our discussion today and in our SEC filings, including the risk factors in our Form 10-K.
Our forward-looking statements speak only as of today, and we disclaim any obligation to update them even if our views change. Now let me turn it over to Ron.

Ronald Philip O’Hanley

Thank you, Ilene, and good morning, everyone. Earlier today, we released our fourth quarter and full year 2023 financial results. As I reflect on 2023, the operating environment was dynamic with a complex set of challenges for the world's investors and for our industry, and I'm proud of how we carefully navigated State Street for various headwinds while continuing to execute against our strategic agenda.
We focused and delivered on that agenda in 3 key areas: achieved strong sales wins across our businesses, drive strategic change in our Investment Services business, and remained disciplined on productivity and broader cost management. Further on that last point, during 2023, we implemented key productivity actions and announced additional efficiency measures that will enable us to enhance the productivity of our operating model in 2024 and the years ahead.
We took these many actions, all while investing in our business and returning substantial capital to our shareholders, which helped to drive full year earnings growth, excluding notable items. The world's investors, State Street and our industry faced a host of significant market events and macroeconomic forces in 2023.
In the first quarter, turmoil in the banking sector ultimately led to the resolution of several banks, which was a catalyst for some of the largest fixed income market move seen in decades.
In the second quarter, anticipation grew about the potential economic benefit from artificial intelligence, helping to drive equity markets higher. However, as we progressed into the third quarter as the Federal Reserve raised interest rates to the highest level in 22 years in July, the prospect of higher for longer rates led to a substantial selloff in bond markets with the U.S. 10-year treasury yield exceeding 5% in October for the first time since the global financial crisis.
Rate uncertainty and an increasing number of geopolitical concerns cause equities to struggle. Then during the fourth quarter, the equity market rallied vigorously as inflation receded and investors grew increasingly optimistic about a soft landing with positive sentiment gaining further momentum in the last month as the Federal Reserve signaled pivot to lower interest rates this year.
In sum, while our full year overall financial results benefited from higher interest rates globally last year and despite the strong market appreciation in the fourth quarter, daily average global equity markets only increased by low single digits in 2023, providing just a modest tailwind to our fee revenue, while client activity was muted as investors stayed on the sidelines for much of the year. And even in such an eventful year, equity and FX market volatility continued to contract, creating revenue headwinds for our trading businesses.
Slide 3 of our investor presentation provides some of our highlights for the year. Beginning with our financial performance, full year earnings per share was $5.58 or $7.66 excluding notable items. Year-over-year, excluding notable items, EPS growth was supported by $3.8 billion of common share repurchases, a record level of NII, continued growth of our front office software and data business, and higher securities finance revenues, the combination of which more than offset the impact of lower servicing and management fees and underlying expense growth, which was still well controlled.
We continue to build business momentum and position State Street in longer term success. To that end, we achieved a number of important accomplishments in 2023, as you can see on Slide 3. A key highlight of today's results is the clear progress we are making on innovation and advancing product capabilities, which in turn contributes to stronger sales momentum across our broad franchise aimed at generating better fee revenue growth in the year ahead.
Within the Investment Services business, we are intensely focused on ensuring better execution against our strategy and revenue goals. We unveiled the sharpened execution plan last year, underpinned by a number of measurable actions aimed at driving servicing opportunities across key regions and product areas, realizing the full potential of our Alpha value proposition and accelerating sales and revenue growth particularly in our core back-office custody.
Encouragingly, as I just noted, today's results demonstrate our proven ability to deliver the level of sales required for attractive organic servicing fee revenue growth in the future as we built upon the $91 million of new servicing fee sales in the third quarter by recording $103 million of new servicing fee wins in 4Q, which is the highest level of quarterly new servicing fees in recent years.
From its inception, we have noted that Alpha will further establish broaden and deepen client relationships, positioning State Street as our clients' essential partner. Alpha distinctively enables us to grow and tie together the full breadth and depth of State Street's capability as a true one State Street solution for our clients from front to back. 2023 was an important year for Alpha software delivery. The last 2 quarters of the year included the significant development of the fixed income portfolio management module, which propels CRD and Alpha capabilities and competitiveness forward.
In 3Q, we recorded our first Alpha for private markets client. And in the fourth quarter, we continued Alpha's momentum by deepening relationships with a number of key existing mandates and recording 4 new Alpha wins, while our front office software and data business had a record quarter of new bookings in 4Q, both demonstrating our ability to drive stronger sales.
Within our Global Markets business, even as low volatility created a headwind, we continue to see proof points of our very strong market position. For example, in its 2023 FX awards, Euromoney Magazine named State Street as the winner across 4 important categories, including the best FX bank for real money clients. We also continued to innovate and strategically expand our product capabilities and geographic reach including the planned acquisition of outsourced trading from CF Global Trading.
At Global Advisors, we undertook targeted strategic actions aimed at gaining market share and driving growth in the coming years. As a result, we saw encouraging business momentum with GA setting a number of growth records in 2023. A number of key performance indicators make us optimistic as we look ahead. For example, in Q4, GA recorded the best ever quarter of aggregate total flows, including record quarterly flows within our SPDR ETF franchise, amounting to a capture of 21% of total global ETF flows in Q4 and ending 2023 with a record level of total ETF assets under management.
Our cash business had an exceptional year, delivering record annual flows in 2023 with institutional money market fund AUM also reaching a record. Overall, we gained market share in a number of key areas, including institutional money market funds and U.S. low-cost equity and fixed income, ETFs.
Turning to our efficiency and productivity efforts underlying expense growth was well controlled in 2023 with full year expenses increasing 3%, excluding notable items. Q4 expenses, excluding notable items, rose just 1% quarter-on-quarter, reflecting the impact of our ongoing expense actions. Transforming our operations to improve effectiveness and efficiency and realized productivity growth remains a key priority for us. To that end, we announced important steps in our multiyear productivity efforts aimed at improving our operating model.
As we previously announced, we are streamlining our operations in India. We have now assumed control of of our joint ventures in that country with a second joint venture consolidation expected to close in the spring. We expect these actions will accelerate the transformation of State Street's global operations, improve service quality and client experience and enable us to achieve productivity savings as part of our plans to deliver positive fee operating leverage in 2024.
Turning to Slide 4 of our presentation, you can see our fourth quarter financial highlights and business momentum indicators, which Eric will shortly take you through in more detail. Before I conclude my opening remarks, I would like to touch on our continuing balance sheet strength, which has enabled us to return a substantial amount of excess capital in recent quarters. For example, over the last 5 quarters to the end of December, we have returned $6.4 billion of capital to our shareholders.
As we pivot to a more normalized level of capital return, in 2024, it is currently our intention to return approximately 100% of earnings in the form of common share dividends and share repurchases, subject to market conditions.
Accordingly, as we announced this morning, our Board of Directors has authorized a new common share purchase program of up to $5 billion with no set expiration date.
To conclude, while 2023 was an eventful year, we finished strongly in 4Q, which creates an encouraging starting point for our businesses into 2024. This year we remained highly focused on both the execution of our strategy and the accountability for results. Our goals are clear. We must continue the improvement in our sales performance that we demonstrated in the second half of 2023, and continue to implement a set of productivity initiatives and product enhancements that will drive longer-term improvements in our operating model efficiency and effectiveness and deliver positive fee operating leverage in 2024, all while returning capital to our shareholders. We are laser-focused on these goals.
Now let me hand the call over to Eric, who will take you through the quarter in more detail.

Eric Walter Aboaf

Thank you, Ron, and good morning, everyone. Before I begin my review of our fourth quarter and full year 2023 results, let me briefly discuss the notable items we recognized in the quarter on Slide 5, which collectively totaled $620 million pretax or $1.49 of EPS.
First, we recognized an FDIC special assessment of $387 million, which is reflected in other expenses. Second, we recognized $203 million of net repositioning charges to enable the next phase of our productivity program. As we had indicated in December, the bulk of this action primarily relates to the severance of around 1,500 employees. Our initiative to streamline and delayer our operations, technology and staff functions and improve efficiency will allow us to sustainably reduce expenses.
We expect these actions collectively to have a payback of roughly 6 quarters and begin this quarter with roughly 2/3 of the benefit occurring in 2024. These actions and the related savings will contribute to our fee operating leverage goal for 2024 and in subsequent years.
Turning to Slide 6. I will begin my review both our fourth quarter and full year 2023 financial results. As you can see on the table, total fee revenue was flattish for all periods of comparison quarter-on-quarter, the year-on-year quarter and for the full year. The slight market appreciation notwithstanding the combination of muted volatility, central bank pivots and geopolitical concerns pushed investors to the sidelines for much of the year.
In terms of our more durable revenues, we continue to benefit from strong momentum in our front office software and data business, which was up 5% on a full year basis and 13% on the year-on-year quarter. In terms of areas that have begun to rebound, management fee performance was down for the full year at minus 3%, but has begun to rebound with an up 5% result for the year-on-year quarter as flows picked up, and we gained share.
Back-office servicing fees was challenged for much for the year as the client transactional activity was muted, but has started to turn positive and is up 1% this quarter as we've seen a recent lift in equity markets. And of course, we continue to be affected by industry-wide headwinds in our Global Markets businesses given the low levels of volatility in the FX markets and special activity in agency lending throughout the year.
NII has been tough to predict and surprised to the positive this quarter compared to third quarter. I'll turn to that in a few minutes. Expenses were well controlled in the quarter as we continue to thoughtfully allocate resources across the franchise and to areas where we see the greatest opportunities for top line growth.
Relative to a year ago, total expenses ex notables were up 2% year-on-year and reflect intensifying cost management in a tough environment as the year progressed. This expense control, coupled with the repositioning actions I just mentioned, prepare us to deliver productivity savings and positive fee operating leverage in 2024.
Finally, despite a dynamic and challenging operating environment, we delivered full year 2023 EPS growth of 3%, excluding notable items. This was supported by share repurchases, a record level of NII and the growth of our front office software and data business, which is less exposed to macroeconomic conditions.
Turning now to Slide 7. We saw period-end AUC/A increased by 14% on a year-on-year basis and 4% sequentially. Year-on-year, the increase in AUC/A was largely driven by higher period end market levels and net new business. Quarter-on-quarter AUC/A increased primarily due to higher period end market levels. At Global Advisors, period-end AUM increased 19% year-on-year and was up 12% sequentially, largely reflecting higher period end market levels and strong net inflows.
Notably, as Ron mentioned earlier, and I'll describe momentarily, in fourth quarter, GA recorded the best ever quarter of aggregate net flows of $103 billion, which sets us up well for 2024. At the center right, we've also added a table with market volatility indices, which we believe can be useful indicators of plying transactional activity that drives servicing fees, specials activity and agency lending and flows and margins in FX trading.
On Slide 8 now. On the left side of the page, you'll see fourth quarter total servicing fees up 1% year-on-year, primarily from higher average equity markets, partially offset by pricing headwinds, lower client activity and adjustments in a previously disclosed client transition. Sequentially, total servicing fees were down 2%, primarily as a result of the pricing headwinds and a previously disclosed net client transition partially offset by higher client activity and adjustments, which was nice to see as clients started to come off the sidelines.
On the bottom left of the slide, we summarize some of the key performance indicators of our servicing business. We were quite pleased to see new servicing fee revenue wins of $103 million this quarter, the highest in many recent years, primarily reflecting the enhancements of our sales processes and product offerings, including in North America, where we saw strong outcomes after a period of underperformance. These servicing wins contributed to the total full year fee revenue wins of $301 million and underscores the progress we're making towards stronger sales performance. Recall, our goal for 2024 is even higher at $350 million to $400 million in servicing fee sales for the year.
Finally, we had $270 million of servicing fee revenue to be installed at quarter end, up $57 million year-on-year and $15 million quarter-on-quarter. We expect about half of this to install in 2024. We also had $2.3 trillion of AUC/A to be installed at period end.
Turning to Slide 9. Fourth quarter management fees were $479 million, up 5% year-on-year, primarily reflecting higher average equity market levels and some performance fees partially offset by a previously described shift of certain management fees into NII and the impact of a strategic product suite repricing initiative that has aided ETF flows.
Relative to the third quarter, management fees were flat, mainly driven by higher performance fees, offset by a previously described shift of certain management fees into NII and the impact of the strategic ETF product suite repricing initiative.
As you can see on the bottom right of the slide, our investment management franchise remains well positioned with very strong and broad-based business momentum across each of its businesses. In ETFs, we had record quarterly net inflows of $68 billion, driven by record net inflows into SPY as well as the SPDR portfolio U.S. low-cost suite, experiencing consistent market share gains. In our Institutional business, we saw quarterly net flows of $6 billion, primarily driven by defined contribution products.
And lastly, across our cash franchise, we saw quarterly cash net inflows of $29 billion primarily into money market funds, which contributed to the record total full year 2023 cash net inflows of $76 billion, and institutional money market fund market share gains.
Turning now to Slide 10. Fourth quarter FX Trading Services revenue was down 11% year-on-year ex notables and 2% sequentially, relative to the period a year ago, the decrease was mainly due to lower FX spreads from muted market volatility, offset by slightly higher volumes. Quarter-on-quarter, the decrease primarily reflects lower direct FX revenues from muted volatility.
Fourth quarter securities finance revenues were down 6% year-on-year due to lower agency balances, partially offset by higher agency spreads, higher specials activity and prime services revenue. Moving on to Software and Processing revenues. Fourth quarter fees were up 10% year-on-year and 26% sequentially, largely driven by CRD, which I'll turn to shortly.
Finally, other fee revenue for the quarter increased $15 million year-on-year, primarily due to a midyear tax credit investment accounting change, partially offset by the impacts associated with the devaluation of the Argentinian peso.
Moving to Slide 11. You'll see on the left panel that fourth quarter Front Office Software and Data revenue increased 13% year-on-year, primarily as a result of the continued SaaS implementations and conversions driving software-enabled and professional services revenue growth. Sequentially, Front Office Software and Data revenue was up 38%, primarily driven by higher on-premise renewals and go-live implementations.
Turning to some of the Alpha business metrics on the right panel. We were pleased to report 4 more Alpha mandate wins in the quarter, which means 7 wins for the full year 2023. State Street Alpha continues to be an important differentiator of our business and creates an attractive value proposition for our clients with contractual terms usually covering 5 to 7 to 10 years.
We've also gone live with 3 more Alpha clients, which brings us to 6 for the year, which sets us up well for 2024 and added significant new functionality for fixed income portfolio managers. Fourth quarter ARR increased 16% year-over-year driven by 20-plus SaaS client implementations and conversions and we had a record quarter for front office new bookings at $32 million.
Turning to Slide 12. Fourth quarter NII increased 14% year-on-year but increased 9% sequentially to $678 million. The year-on-year decrease was largely due to lower average deposit balances and deposit mix shift, partially offset by the impact of higher interest rates. Sequentially, the increase in NII performance was primarily driven by the impact of interest rates and the full quarter impact of the third quarter investment portfolio repositioning as well as higher deposits and loan balances.
The NII results on a sequential quarter basis were better than we had previously expected as both interest-bearing and noninterest-bearing deposits increased and certain client repricings were further delayed. Some of the higher deposit balances may have been seasonal, but the Fed's quantitative tightening appears to have been offset by the reduction of the Fed reverse repo operation, which seems to have resulted in inclines having higher bank deposit balances.
It's hard to know how deposits will trend, but we're pleased with this higher step off going into the first quarter of 2024. On the right side of the slide, we show our average balance sheet during the fourth quarter. Average deposits increased 4% quarter-on-quarter with noninterest-bearing deposits up 3% for the quarter.
Turning to Slide 13. Fourth quarter expenses, excluding notable items, increased 2% year-on-year or 1% ex FX. Sequentially, fourth quarter expenses were up only 1% as we actively managed expenses and continued our productivity and optimization savings efforts, all while carefully investing in strategic elements of the company, including Alpha, private markets, core custody and tech and ops process improvements in automation.
On a line-by-line basis and year-over-year ex notables, compensation and employee benefits increased 1%, primarily driven by higher salaries and employee benefits, partially offset by lower contractor spend in performance-based incentive comp. Information systems and communications expenses increased 4% mainly due to higher technology and infrastructure investments, partially offset by the benefits from ongoing optimization efforts in sourcing and vendor credits.
Transaction processing increased 1%, mainly reflecting higher brokerage costs. Occupancy increased 24%, largely due to the absence of an episodic sale-leaseback transaction in the prior period. And other expenses were up 3% sequentially, flat year-on-year, mainly reflecting higher marketing expense and professional fees.
Lastly, let me spend a moment on headcount. As we discussed in the third quarter, as part of our ongoing transformation and productivity initiatives, we've streamlined our operating model in India and have now assumed full ownership of one of our operations, joint ventures and we recently announced that we intend a similar undertaking with a second consolidation in the country this spring.
This consolidation continues the transformation of State Street's global operations and will enable us to unlock productivity savings, which we expect to start this quarter through a reduction in contract services and in the years ahead, as we simplify our fragmented operating model. As you would expect, consolidating the first joint venture increased our FTE headcount roughly 4,400 in the quarter as we in-source global capabilities. However, these costs were already in our expense base and reported historically under the comp and benefits line.
These actions are contributing to our higher productivity savings targets for 2024.
Moving to Slide 14. On the left side of the slide, we show 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, we continue to navigate the operating environment with very strong capital levels, which came in above both our internal targets and the regulatory minimums. As of quarter end, our standardized CET1 ratio of 11.6% was up 60 basis points quarter-on-quarter, largely driven by episodically lower RWA and improvement in AOCI, partially offset by the continuation of common share repurchases.
The decrease in interest rates during December after the completion of our buyback contributed about 20 basis points to our CET1 ratios and some market factors over the last week of December conveniently contributed roughly another 50 basis points to the RWA end-of-period print.
Going forward, I would expect the RWA to run at higher levels to support our various businesses. Our LCR for State Street Corporation was a healthy 106% and 122% for State Street Bank & Trust. In the quarter, we were quite pleased to return over $700 million to shareholders, consisting of $500 million of common share repurchases and over $200 million in common stock dividends.
Lastly, as we announced earlier today, our Board authorized a new multiyear common equity repurchase program of up to $5 billion with no expiration date.
Turning to Slide 15. Before I start, let me first share some of the assumptions and underlying our current views for the full year. Let me cover our full year 2024 outlook as well as provide some thoughts on the first quarter, both of which have more potential for variability than usual, given the macroeconomic environment we're operating in.
In terms of our current macro expectations, as we stand here today, we expect global equity markets to be flat point-to-point in 2024, which equates to the daily average being up about 10% year-over-year. Our interest rate outlook for 2024 largely aligned with the forward curve as of year-end 2023, which I would note continues to move.
We expect to see modest increase in FX and equity volatility, which should support slightly higher FX trading services fees this year, but we are still seeing muted volatility in the first quarter. And we expect currency translation to have less than 0.5 percentage point impact on revenues and expenses due to dollar depreciation, and I would remind you that a weaker U.S. dollar has a favorable impact on revenues and an unfavorable impact on expenses.
So we currently expect that full year total fee revenue will be up approximately 3% to 4% ex notable items with servicing fee and management fee growth driven by them and continued strong growth in Front Office Software and Data. This includes a headwind of a little less than 1 percentage point to fee growth from the expected previously disclosed client transition.
Regarding the first quarter of 2024, we currently expect fee revenue to be up 2% on a year-over-year basis, with servicing fees expected to be up 1%, management fees up 7% to 8%, and front office software and data expected to be up over 20%, largely due to increased SaaS, new business and conversions and on-premise renewals. We expect full year 2024 NII to be down about 10% on a year-over-year basis compared to a record 2023. This is dependent on the outcome of global rate cuts and deposit mix and levels, which are obviously difficult to predict.
Regarding the first quarter of 2024, after a significant step-up in 4Q '23, we expect 1Q 24 NII to be flat to down 3% on a sequential quarter basis given current deposit mix expectations.
Turning to expenses. As you can see on the walk on Page 16, we expect full year expenses ex notables will be up about 2.5% on a nominal basis in 2023, driven largely by our continued investment in the business, which we expect to largely offset through greater productivity savings worth $0.5 billion, which is approximately 1.7x last year's gross savings level.
Regarding the first quarter of 2024, we expect expenses ex notable items to be up 1% to 1.5% on a year-over-year basis keeping in mind the seasonal expenses usually occur in the first quarter. As a reminder, we expect to achieve positive fee operating leverage, excluding notable items for full year 2024, given the projected growth in fee revenue and well-controlled expenses.
Finally, we expect taxes should be in the 21%, 22% range for 2024. And with that, let me hand the call back to Ron.

Ronald Philip O’Hanley

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

Question and Answer Session

Operator

(Operator Instructions) Your first question comes from Alex Blostein with Goldman Sachs.

Alexander Blostein

Thanks for all the details. I was hoping we could start with unpacking some of the NII dynamics, and I guess I appreciate the uncertainty when it comes to deposits. But Eric, maybe talk a little bit about what drove the upside in the fourth quarter in deposit levels? And if you have a view on what sort of seasonal versus more kind of core client franchise driven and maybe give us some insight on where you expect balances to ultimately stabilize in the back half of '24.

Eric Walter Aboaf

Sure, Alex. It's Eric. Let me share with you the texture we have, but I'll just say deposits and deposit levels continue to be volatile. They surprised to the upside. And in particular, we saw a nice uptick in deposits into September, October, we actually saw on the NIB side a downtick in November and then a large, I think, again in December.
So the averages came in up for the quarter, which made a big difference. $1 billion of NIB for a month is worth $5 million and you kind of multiply through. And that quickly adds up as we had a spread in December of $5 billion, $6 billion relative to our expectations. And at the same time, we also saw interest-bearing deposits up. Now some of that is just our regular way engagement with clients. Some of that is there leaving more deposits with us. And I think you did see in the Fed reports, the banking system deposits are up 1%, 2% quarter-on-quarter from third quarter to fourth quarter. So it does seem like there's something happening in the market that's creating a little more stability, a little bit of buoyancy. There's some amount of seasonality that we always tend to see in -- at the end of the year as folks accumulate cash, sometimes to pay dividends and ETFs in the next year.
So it's just hard to read, but that's what played out. And it played out better through the quarter and through the end. If I then try to look forward, it's very hard to look forward for the year. We'd like to operate and expect to operate in the deposit range of $200 billion to $210 billion. That's our kind of goal. A lot of that is just client engagement and helping put their cash to work. And sometimes they put cash to work in deposits, in repo, in money market sweeps. But there's a category -- each one of those is an important category and outlet for clients. And what we're seeing is clients using all the -- I'll call it, all the above, right, including just holding treasury securities. So that we expect to continue, and we think deposits will be roughly in the zone in the first quarter.
What's a little harder to read is just how noninterest-bearing deposits play out. We do expect those to continue to flow downward. They tend to flow downward for our clients with the largest funds, those are the ones that have been floating down over the last 2 years. So we continue to see that expectation. There continues to be a little bit of repricing that plays out into the first quarter or 2 as well. And that's why I guided on an NII basis to flat to down 3% for the first quarter, just to give you a little bit of an indication, but we expect that to be roughly on flattish deposits.

Alexander Blostein

Got it. Very helpful. My follow-up, sticking with deposits is around just deposit beta as we start to sort of enter the rate cutting cycle. So hoping you could articulate maybe what you're assuming for deposit beta on the way down in your '24 NII guidance? And then broadly, how we should think about sort of the cadence of deposit betas as we progress through the rate cutting cycle into the back half '24, '25 maybe. But just curious to know kind of high or the upper at the beginning lower towards the end or the opposite?

Eric Walter Aboaf

Alex, it's an important topic because it's how we interact with our clients. It's how we price our products. It's how the industry has operated in for many years. I think you know that our deposit betas on a cumulative basis have climbed quite a bit in the U.S. They're 75% or so cumulatively since the start of the cycle. In euros, it's around 60% cumulatively in pound sterling, closer to the 30% to 35%. So they're clearly moved up.
What certainly happens as, and I'll say when, if and when rates fall, is the deposits beta is reverse. There's some amount of symmetry. Now they reverse instantaneously. We want to be careful with our clients. We want to be fair. But we do think that over multiple quarters and certainly over any realistic time frame, the Fed cuts, and there's got to be an adjustment. Now part of that happens because we have a good bit of our deposits that are indexed to market. right? They're indexed to market indicators. There are quite a few that are indexed with a spread. And then there are a small amount now that has a transactional kind of, I'll call it, administered feature. But you'll generally see a broad amount of symmetry in deposits down versus up.
I think what you do need to keep in mind is that our asset sensitivity and liability sensitivity, though, are somewhat different between the international markets and in the U.S., right? In international markets, because those cumulative betas are still in the 30% to 60% range. We're still asset sensitive. So we make more money with increases in rates. And we actually -- NII will trim down with decreases in rates. And that's where we're most -- that's our interest rate sensitivity today.
On the U.S., we have a slight positive bias towards being liability-sensitive, but it's still relatively slight. I'd almost call it neutral. So part of what we're doing is just navigating this interest rate environment. It's not exactly clear when the rates come. It's not clear whether the U.S. cuts before Europe or vice versa. And part of what we'll do is actively manage our portfolio to try to take advantage of what's coming. At the same time, we'll price our deposits fairly and prudently.

Operator

Next question comes from Brennan Hawken with UBS.

Brennan Hawken

I think maybe some of what you just said on the non-U.S. side might explain this. But when we think about triangulating the minus 10% to the fact that 1Q is either going to be flat, totally down a little on NII, it sort of suggests that your exit rate by the time you get to the 4Q '24 based on what you can see today, it's probably going to be rather low. Am I reading correctly in thinking that it's that non-U.S. piece? And that's going to drive some of that weakness. And am I extrapolating the comments correctly to think that we could see a little bit more back-end weighted decline for NII.

Eric Walter Aboaf

Brennan, it's Eric. I think you've got the right general pattern framed in the area of NII. Clearly, we have a very strong step off in particular, in December, but in the fourth quarter, which will flow into first quarter. And then we expect a trending down. We had a couple of -- well, probably earlier this -- earlier last year, so a couple of quarters ago, I described an NII range of $550 million to $600 million. And we think we'll get into that range, the top end of that range by around the third quarter. But it's a little bit hard to know the exact shape. We just -- but you've got the right direction of travel.
And then we expect some stabilization in the second half of next year, maybe around the top half, the middle half of that range, just really hard to tell exactly where and when. If you step back and ask, what are the underlying drivers? There are really 3 drivers that continue to be important. In terms of tailwinds, we continue to have long rates playing through the portfolio and the investment portfolio balances as the as they recoupon at higher rates, that's particularly important in the first half of the year, a little less so in the second half of the year, but that continues through as a positive.
You then have, as you mentioned, short rates starting to come down. And because of our sensitivity position across the global markets, that does start to have a headwind impact on NII as those cuts continue to come through. Now we'll see what's the pattern and pace of U.S. versus international cuts. And I think right now, we've pegged to the forward, which shows a lot of consistency in symmetry, but we'll see if that really happens because you can see inflation expectations keep moving around literally daily, weekly.
And then the third feature is just client deposits. It's a mix. And while we expect client deposits to be in that zone of $200 million, $210 million, they might bump up above that, a little below that, but they'll be in that broad zone. The mix will continue to shave down out of noninterest bearing over the next quarter or two, we think, it's hard to, again, to predict and then there's -- we're working through the final stages of some of our interest-bearing deposit, repricing those seem to have taken a little longer in some cases than we expected. That's okay. That means we accrete income. But those continue to come through and they'll play through in the first quarter or two as well. And then that's what kind of brings us to some level of reasonable stability in the back half of the year.

Brennan Hawken

Eric. It's very, very helpful. And by the way, I apologize for the background noise that is here. Second question, a bit more strategic. So we saw a flurry of Bitcoin ETF launches here recently. It didn't seem like you all actually landed any of those servicing opportunities. So I want to confirm whether my early read on that is right. And given the magnitude of the investment and the focus you've made on digital assets, what did you learn if you guys missed on that? And is that what led to the restructuring of the digital asset group? And what should we see as a change from that restructuring?

Ronald Philip O’Hanley

So Brennan, there were 11 launched on the day that the -- or day after the SEC gave approval, and we actually service 3 of them. And I think we're the only ones that servicing across 3 different digital custodians. So we helped 3 of the major players make this happen. So we're quite active in the space. And as you'd expect, we do everything for each of those 3 except for the actual custody for the reasons that I think you know.
So no, we're very active in the space. It was -- what did we learn? I mean it's early. What I think everybody is watching out for is there's a lot of players that went into the market, some of them with some existing high levels of assets. What will be interesting to see over time is, does it actually consolidate? How does it work in terms of the -- who the buyers are institutional versus retail versus intermediary, but these are early days. And it was good to get the uncertainty cleared up. And for all this to get launched, and we're keen to be part of it.

Brennan Hawken

Yes. Ron, thanks for clarifying pure custody versus the servicing, Very, very helpful.

Eric Walter Aboaf

Yes. And just to clarify, it's -- I mean, I think everybody knows this. But I mean, right now, it's extremely difficult for a bank to do pure custody because of the capital requirements that are imposed on a bank. I mean it's basically 100% capital. So therefore, virtually everybody is working with some kind of digital custodian, a non-bank digital custodian, but all of the other parts of the ecosystem, which we're quite familiar with, we are participating in.

Operator

Your next question comes from Glenn Schorr with Evercore.

Glenn Paul Schorr

So big flows in SSGA, which is great to see these things are unpredictable, but I am curious on if you had any thoughts towards sustainability, maybe it would be the color of what clients are buying, what clients, I mean, I'm sorry, what flavors of ETF are they? The average fee? And what you're specifically doing differently on the distribution front and education front to get at those flows?

Ronald Philip O’Hanley

Yes. So there are a number of things going on there in the fourth quarter, Glenn, and throughout 2023. I think as we've noted, and certainly, you all would have observed, there was -- it was most of the year with some episodic exceptions, it was a risk-off environment that changed in fourth quarter somewhat as predicted once investors got a sense of where interest rates were going. As they did when the Fed communicated in the third quarter more or less a pause. I think that started activity going. So, much of the activity late in the year would have been the kind of classic risk on, let's put positions on quickly, benefiting the highly liquid SPDR Core, SPY in the sector ETFs. But underlying it and throughout the year, the low-cost ETFs, which represent different investors, these would be -- the ultimate holders here tend to be individuals. They're often advised by an intermediary like an RIA. So the -- it's very sticky. And we have continued to build share there, both in equity and fixed income, low cost.
Across the board, fixed income is seeing a dramatic growth. I think there's increasing acceptance, both by retail investors and institutional investors that the ETF is a good vehicle to hold fixed income and you're just seeing that asset allocation moving that way.
And then finally, active ETFs of all sort, you're seeing growth in. And it's been a long time coming. As you know, it's been over a decade on how is this actually going to play out. And it's ironic how it's playing out and that everybody is just taking their standard investment strategy and putting it in active ETF. We benefit some of that on the GA side in terms of what they're doing in fixed income, but we benefit from it greatly on the servicing side because we're very, very, not to overuse the word, active in the active ETF servicing space. And we believe you'll see a lot more growth there as core funds and core offerings of well known asset managers either get converted to ETFs or launch those ETFs.
So we're really pleased on the GA side. In terms of what drove it, I think it was the next part of your question, I mean, part of it was much more focused and resources dedicated to the various intermediary channels. I mean we -- our roots are in the institutional channels, but the lots of the growth is in the intermediary channel. So that's part of it. And then as we talked about, I believe, last quarter, we took a hard look at pricing, particularly in the so-called low-cost ETFs and recognizing their durability felt that it was worth the investment to reprice them to continue to gain market share because they tend to be very, very sticky.

Glenn Paul Schorr

That's a lot of detail. It's perfect. I appreciate it. I'll go quickly on the follow-up. It's the same question just different on the servicing front, happy with the wins you noted. Maybe we could just drill down. I know it's not huge yet, but the private markets piece of the servicing wins. I'm curious if you want to tell us how much it was. But more importantly, what it is and how -- is it one client? Or is it multiple times, I'm curious on how that premarket servicing space is developing.

Ronald Philip O’Hanley

No, no, it's both. To answer the last part of it first, Glenn, it's certainly not 1 client. I mean, this is a space that we've invested in, and we're well known in. And we see a secular trend here. where it's -- so many of these operations are held inside, firms are highly bespoke often sitting in very expensive locations. And as the product sets have become more complicated, I mean, it's following a path that the active long-only industry followed 10, 15 years ago. I was trying to do all this stuff inside when it was just a couple of products, they are fairly straightforward. That's not what's happening now. Products are more complicated. As you start to think about the structures that enable high net worth individuals to participate in it, you've got that added complexity. And then oftentimes, there's side investments that are permitted, et cetera. So it's very complicated.
It lends itself to outsourcing. It's still very much an in-sourced business. So we see lots of potential growth in it. It's fee characteristics are different. Positive in the sense that the fees are higher, but also the fees get fully recognized when the fund is fully invested. So part that we pay a lot of attention to is what's the expected actual, one, money raised and then draw down? And how do we do our best to match our expenses to that? But we're very excited about the business.
Much of the new investment product investment that Eric talked about in the 2024 guide includes further strengthening of our position there. There's innovation in there and we -- our goal is to continue to set moats around us so we can continue to excel at it.

Eric Walter Aboaf

And Glenn, it's Eric. I'd just add private has been a real strong area of growth for us. We've described it as up 10%, 15% in different quarters. So it's a big part of our growth agenda as we -- this past year. And then this coming year as we take our sales goals up, the $350 million to $400 million at least 1/4 of that plus is going to be around private, and that's what's going to help us continue to drive private growth. We think in the 15%-plus range in terms of year-on-year revenues. So it's an area that I think we've actually broadly with both large and small and midsize. It's actually well distributed, and it's got a good mix of U.S., Europe and Asia sales coming through as well.

Ronald Philip O’Hanley

Yes, as well as, Glenn, it's not just private equity, it's private equity adventure. -- private credit is booming. And for every bank that complaints about what's going to happen with regulation and the fact that it's pushing activity out of the banking system that's going right into the private credit area, and we should be the beneficiary of that growth.

Operator

Your next question comes from Gerard Cassidy with RBC.

Gerard Sean Cassidy

Eric, can you share with us -- I know you run more in the State Street 10 years ago. But your comments about the net interest income outlook and just how volatile it is due to what's going on in the bond market with the Federal Reserve and their balance sheet. Are there any indicators, you're monitoring that we could look at that might be able to give us a better insight to when net interest income for State Street might be more predictable on a go-forward basis?

Eric Walter Aboaf

Gerard, it's Eric. I take a sigh when I think about this question. I think the predictability is partly around Fed actions, right? This is the highest rate level that we've seen in 22 years. And also the -- if I go back couple of years, the lowest rate level we've probably seen in 2 decades as well, right? So we've kind of -- we're at these wide bookends relative to really the -- since the -- I want to say the turn of the century, right? That's really created this volatility.
Can we manage that and mitigate? Well, we do try to sustain on a regular basis, match off deposit, deposit tenor, rate characteristics with the asset side of the portfolio, and we do that with duration. The challenge is if you take too little duration, you have even more volatility. If you have to take too much duration on the asset side of the portfolio, you've got more AOCI risk. And so our tools to stabilize work up to a point and then have some negative implications.
So I don't really see a way to turn what we'd like to have. I don't see a way to turn this into just a flywheel of metronome that moves at a certain pace, and it's just a feature of what we do. And part of it is our institutional deposits have somewhat more asset sensitivity or liability sensitivity to rates relative to a very simple regional bank. So we'll tend to have a little more, but that's part of the industry. That's -- I think we're in line with peers.

Gerard Sean Cassidy

Very good. Ron, in your prepared remarks, you talked about the success and the momentum you're having with the Alpha product in the Servicing business. In the Investment Services business, I should say. Is there any capacity constraints that you've got to be careful about if the momentum continues? Or is it almost now when you got plenty of bandwidth to handle future growth?

Ronald Philip O’Hanley

Yes. I would say that the capacity constraint has been particularly with these large complicated client, the really large ones, some of which are -- well, most of which are still being onboarded, the capacity strength has been around onboarding. Over past year in particular, we've gotten better at that. You can -- if you just look at that number, we were roughly at about, as I recall, $3.6 trillion in assets to be onboarded, and we're now down to $2.3 trillion. So you can see we're getting better at that. The real constraint to be specific about it tends to be and how quickly do you onboard the middle office element to that because that often requires engineering and by that I mean, engineering with the client because ultimately, that's a client and it's like any other kind of industrial outsourcing.
A client has an operation, does things in a particular way, wants to outsource that element of it to us, we're not interested in taking somebody's mess for less. I mean, we need to actually work with them to engineer it in a way where as much of it as possible is standardized and that the customization is limited to the kinds of user interfaces or how things are actually applied. And we've just gotten better at that over time. So I would say, looking forward, we don't see that as being a meaningful constraint.

Operator

Your next question comes from Jim Mitchell with Seaport Global.

James Francis Mitchell

Just maybe a follow-up on the outside of sort of the private markets, you've had -- you've ramped up pretty quickly in terms of getting to your $400 million of net of new servicing fee wins. And maybe if private markets are a quarter, can we talk a little bit about the other 3 quarters, where you've seen success? What's worked? What hasn't worked? And what kind of opportunity set do you see maybe even get above the $100 million?

Ronald Philip O’Hanley

Jim, it's Ron. I mean, it's no one thing, but a lot of really important things across the board to ramp up our execution. Where we're seeing it to answer the first part of your question is the core Investment Managers segment still remains strong and active for us. And as some of those firms are facing the same kind of market that everybody else is, they're more interested than actually trying to do more with us and do different things with us.
A little bit of a resurgence in the asset owner marketplace and in particular, amongst asset owners that aren't just pure asset allocators, meaning they're managing some assets themselves or truly actively asset allocating, doing not just listening to a consultant telling them what to do, but either managing money or at a strategic and tactical level, allocating assets, which again requires support.
But in all cases, what we're doing is we're really focused on ensuring that the back office part of all this comes with -- and comes with it in a timely fashion, right? Because as I was saying earlier when I was talking to Gerard, the thing that takes a long time or a longer time to onboard would be the middle office, the outsourcing element of it. Onboarding back office is pretty easy, pretty straightforward. And it, in almost all instances, comes on in a pretty healthy incremental margin given the scale activities to it.
And then finally, just to just talk about regions. We have invested heavily in the capabilities in all of our regions where you see the -- probably the most impact from that over the last couple of years, has been just the very good growth that we're seeing in Asia Pacific. And really, all parts of Asia Pacific from Australia north to Japan and everything in between.
The U.S., we've talked about in the past, we were not pleased with where we were in this past year, particularly the second half of the year. We're actually reasonably pleased with how we've done. Europe has always been strong to us. It was a little softer in 2023, but again, a very strong pipeline. So -- but that regional focus where we're actually pushing accountability down into the country and regional level and making sure that it's very clear who is responsible for what, sharing, obviously, not just the technology and the product, but the best practices in how you move these things forward, but very much decentralizing the accountability.

James Francis Mitchell

Okay. That's all really helpful. And maybe, Eric, just a quick one on the held the maturity book still yielding just a little over 2%. Can you kind of walk us through the maturity profile of that? How long we start to see some pickup in -- or turnover and reinvestment benefits from that portfolio?

Eric Walter Aboaf

Yes, it's Eric. The way I describe it is we've got a natural roll-off in that portfolio. It's about $5 billion a year. So it sort of plays out and that's related to the maturity in the latter, so that will come down over the next couple of years. As that happens, because as you say, it's at a lower coupon relative to our average, right? Our average portfolio yields are in the [3.5%] range. There's real pickup that comes through that line, at least for the next couple of quarters, I guess, is probably for the next couple of years even, because once rates stabilize, we do think that we'll also get some steepness in the yield curve, and that will help through.
So there are some benefits coming that way. It's also a portfolio that obviously will be insulate us from rate moves. I don't think in the next few years, this is the last down cycle versus up cycle, then that we'll see. And so it will serve its purpose then as well.

Operator

Your next question comes from Steven Chubak with Wolfe Research.

Steven Joseph Chubak

So Eric, I wanted to start off with a question just on the fee guidance. And benchmarking your historical fee performance versus the guidance. You've struggled to at least meet or exceed the guide in the absence of significant equity market gains. Sorry, can you guys hear me okay?

Eric Walter Aboaf

Yes.

Steven Joseph Chubak

And I'm sorry about that. So you have a conservative market assumption embedded in the fee guide for the coming year. And just given that historical experience, I was hoping you could just provide additional granularity in terms of growth across the different fee lines that's underpinning that 3% to 4% growth assumption for this year.

Eric Walter Aboaf

Sure. Let me maybe describe it in a couple of ways because 3% to 4% is for the overall franchise. We think that there are some areas of the franchise that will be higher and in some cases, a good bit higher than that. Asset Management, very geared towards the equity markets and the 10% tailwind in equity markets, comes through on literally half of that tends to right through the asset management fee line. And then the flows that we talked about earlier in the call provide a nice tailwind.
So we need to see how markets play through, but the combination of those two, which is exactly how the business is designed, it's market-based and it's flow based, will be healthy. I think software and data processing, we've historically said high single digits, sometimes low double digits. If you look at the last couple of years, you're at the 9%, 10% average full year growth. We've got good visibility there. Part of that is Alpha and part of that is outright software and data sales. And so that's strong.
I think at the other bookend, servicing fees will come in. It will be a bit below the 3% to 4%, now some of that is core organic net new business that we need to drive, which is why we've reshaped and tuned that area, in particular on the sales and how we go to market. You're seeing some of the benefits there and how we measure ourselves. We're being very conscious there. But one of the reasons that one will be lower this coming year is that we had that previously announced transition coming through, which will mute some of what we'd like to see.
And then the markets activities, we're hoping will be somewhere in the middle of the range, whether FX trading and [sec] finance. I think what plays out behind the market dependent areas and sometimes why we don't need is around client -- what we describe as client activity, how much transactional activity, whether our clients are on the sidelines or whether they're all in, that this past year on the servicing fees which are half of our fees, that was worth 2 to 3 percentage points of servicing fee headwind. I mean that literally. So you do the math, that's worth $100 million, $150 million of headwind because we don't have those -- that activity, the transactional activity in derivatives, in international custody, which is very, very valuable to us.
So part of what plays through is these macroeconomic features, equity bond markets on one hand, you've got client, the kind of risk-on risk-off sentiment, I think, is important. You've got volatility levels in FX and agency lending. And so those we have to live through and navigate through. And sometimes those will come in more strongly and sometimes less.
And then I think finally, the piece that we do need to deliver on, Steve, is the part that we can control, which is sales, it's retention. And we've been very clear about our goals and our targets very purposely because that's where we think we need to hold ourselves particularly accountable and where you can hold us accountable. And there's a version of goals and targets in servicing. We spent a little extra time there. But if you go through our line of businesses, we've got similar kinds of goals area by area, and that's on us to deliver, which will help power us through. But the cyclical elements will still come and go.

Steven Joseph Chubak

Eric. That's really helpful color. Just one quick follow-up for me. What's the assumed timing for the large client transition. Just wanted to get a sense as to whether that's reflected in the 1Q servicing fee guide or you're expecting that later in the year?

Eric Walter Aboaf

Let me see how -- let me try to describe this to you in a couple of ways and to be helpful. At this point, on a quarterly run rate basis, and I say that very specifically, we're about halfway through the transition, including a piece that came out in the fourth quarter. So we're halfway through on a quarterly run rate basis. We also, though, have to think about it on a fiscal year-on-year basis. And the way I would describe it on a fiscal year-on-year basis, remember, we said this was worth about 2 percentage points of total fees.
That's what we've disclosed in our Qs and Ks. About 1/4 of that fiscally has come out through the end of '23, about half of it will come out through '24 and about another quarter in '25. So it just takes time to play through. And so we did include that headwind in the first quarter '24 versus first quarter '23 guide and it is important to that guide. And so our guide includes that, and you've got the net guide as a result.

Operator

Your next question comes from Ebrahim Poonawala with Bank of America.

Ebrahim Huseini Poonawala

A very quick follow-up. I know the call has gone on so long. I heard you talk about just the right level of deposits between $200 billion and $210 billion, did you say that you expect the growth we saw in fourth quarter to reverse in 1Q as we think about the deposits shake out?

Eric Walter Aboaf

Ebrahim, it's Eric. No. What I said is that we think we'll operate in the $200 billion to $210 billion range in the first quarter, second, through the year. We expect that to be where we land. I think in fourth quarter on average, right, remember, we also, I think, talked a little bit about the months, we talked there's in-the-period data, which is very volatile. But on average, we ended up at, I think, around $207 billion for the quarter in 4Q.
And so we think roughly flattish deposits into 1Q. It's just hard to tell. There's seasonality at year-end. There is -- there tends to be a low point in February, and then you've got cash building for tax purposes into March. But I'd call it flattish in the scheme of things but with a range of -- with a range around that.

Ebrahim Huseini Poonawala

And just a bigger picture question around NIB mix and NII, do we need to get to a point where QT is short, the Fed is done with cutting rates before we see NII stabilize and maybe the deposit mix shift stabilize as well? Like do we need to get to that point? Or can it happen sooner than that?

Eric Walter Aboaf

It's a fair question. My instinct on this is NIB will begin to stabilize sometime in 2024 by -- we think sometime in the by the middle of the year or third quarter. You've kind of at that point, I'll call it, burn through the largest accounts, those are the ones that kind of on a -- since its peak are down 75% NIB. The smallest accounts are down by about 25% since the peak, and those were seeing stabilize more and more.
So I think we'll see some stability in NIB because clients and funds and fund boards have made their decisions, especially the ones that have $1 million or $2 million in an account, some of them just don't want to deal with the tax reporting, and so you'll get to some stabilization. So we think that will kind of stabilize.
I think the broader question on NII will then come with how -- what -- well, and at that point, I think deposit betas kind of tend to stabilize as well. So I think at that point, in the second half of next year, the real question is what is the direction of interest rates on the front end. So very important question, which is what's going to -- what's -- where is the long end going to go? And where is the long end going to go in the U.S. versus in the international markets. And that is particularly important to the banking sector because with some amount of steepness in the yield curve, and I -- it's hard to remember when we've had steepness, it's been a while, some amount of steepness in the yield curve is quite accretive to NII, and you expect in a good economy to have some. And so that will be a feature.
So there's a series of elements that will come through, and it's hard to I think, to, as a result, predict too precisely.

Operator

Your next question comes from Ryan Kenny Morgan Stanley.

Ryan Michael Kenny

Just a follow-up on the capital side. So you had an 11.6% CET1 ratio. That was a nice improvement sequentially. It looks like that was driven mostly by $6 billion of lower RWA. Can you just help us impact the RWA dynamics a bit? What drove the optimization? And then you also mentioned RWA could be higher this year to support various businesses. Does that mean that the optimization was just temporary?

Eric Walter Aboaf

Sure. It's Eric. Let me describe it in a couple of different ways. We're all -- every bank tries to manage RWA just because it's part of our capital requirements and returns. And we try to report it carefully and we take -- we do it fully to the rules, as you'd expect. What tends to create the volatility because it's a spot measure, it's a one day of the quarter, 1 out of 90-day measure is the market factors. Right? So if you've got an FX or in any of the trading businesses, if you've got a forward book or even a vanilla derivative book, you've got counterparty exposures. You've got that are affected in particular by the currency pairs. And as those move around in the last week of the quarter, you might be in the money or out of the money in those positions and those directly because of how to standardize RWA mathematics work, just goes right through RWA. So that could create a swing of $4 billion, $5 billion on the size of our RWAs. Our RWAs is about 100 -- we printed around $112 billion. About half of that is in the markets area.
And so there's a good bit of variability, and that's literally what happens. And so sometimes it will end up low, sometimes it will end up high. If you look at Page 4 -- Page 14 of the presentation materials, you'll see low point of $107 billion a year ago in RWA, you'll see a higher point of $118 billion last quarter and quite a bit of that is driven by just those market factors playing through into the calculations that we have. And then in addition to that, if you're on a loan book like we do, you'll have overdrafts. Overdrafts, take RWA as well. And so we also saw some amount of benefit there this quarter.
I think the way I would describe the go-forward view is that we ended up particularly low this quarter. We said by it could be $6 billion, $7 billion lower than expected. What would par be, maybe I'll describe it that way, going forward, it might be $118 billion. It might be $120 billion. But you've got to put a plus $5 billion, minus $5 billion band around that. And so we'll -- what we want to do is we want to take -- we want to gently continue to reinvest capital into our businesses because these FX businesses now that we have, have good returns. We've managed them well. They've got 10%, 12% returns in many cases. The securities finance businesses typically are high single-digit return businesses, but that's healthy, and it's very connected to the servicing and the administrative fee business that we have and important to our clients.
And so our view is that these are ways for us to solidify and expand and deepen our relationship with clients. And so we'll gently add RWA each year. How much do we add? We add a few billion dollars, $3 billion to $5 billion of more RWA each year perhaps. But there'll be some volatility around that. And that will be a part of the way we drive our organic growth. We're a high return bank, that's for sure. But we will -- we do want to put some of our capital to work for core organic growth reasons.

Operator

Your next question comes from Mike Brown with KBW.

Michael C. Brown

I guess I noticed that you saw record cash net inflows in 2023. And you mentioned that you actually took share in the institutional money market space. As we head into a declining rate environment here, I guess what's your expectation about how these cash and money fund assets could trend from here? I guess historically institutional money markets, they can act quite differently than retail. So I guess, once the Fed begins to reduce rates here, what are you thinking about in terms of the path of the flows out of money funds could you actually still see some money fund inflows from institutional investors?

Ronald Philip O’Hanley

Yes. Mike, it's a good question and one we think about all the time. So part of way we've attracted more money market funds going back to one of my prior answers is we just have a broader client base. So -- and that helps. We've gained market share, not just in terms of assets, but we've just attracted more clients. And once you have them, whether the balances go up or down, you typically have them.
I think historically, what's happened in terms -- and you've got to look back in history now because we haven't had this kind of a marketplace. But the really sophisticated holders of institutional money market funds tend to hang on, Right? Because the fund itself, depending on its duration, and there is a little bit of duration in it, actually lags -- so it's usually the opposite when rates are rising, the very sophisticated holders are toggling in and out depending on whether they see opportunities to go direct.
Just given the nature of our client base, we don't see a lot of that activity. So we expect to keep them, and it really will be around where do their balances go and they needed for some -- or do they see more attractive investment opportunities. I would expect that we would see if indeed we see a continued risk on environment that itself will cause a little bit of reallocation (inaudible) institutional money market funds because saying that everybody what everybody is talking about that there's so much parked on the sidelines, well, a lot of it is parked here.
But I would go back to where I began the answer, which is it really is about establishing more client relationships, servicing them very well and then continue to grow the number of clients based on that track record.

Michael C. Brown

Okay. Great. The $5 billion share buyback authorization that certainly was a big number. Eric, as you just alluded to in the last question, there's a lot of puts and takes to consider on the capital front in 2024 and into 2025. I guess my question is really just why come with such a large authorization? You're targeting 100% payout ratio. So this would seem to me that you certainly would not need all of that in 2024. It is this just a desire to have kind of a big authorization in place for a multiyear horizon or just to have more flexibility over time. Just love to hear a little bit more about that.

Eric Walter Aboaf

Mike, it's Eric. The background here is that the industry has evolved, I would say, pre CCAR, which is a long time ago, there used to be open-ended authorizations in the banking sector. Once we got into CCAR, remember, there was a very defined annual amount of buybacks that you had to submit. In fact, you had to submit the first year and the second year, and there was a lot of making sure that what you submitted within the Fed CCAR process was actually what you did because I wanted to keep consistency with that. And so the industry moved towards quite a bit of disclosure on a 1-year basis as a result.
And if you recall, a lot of those 1-year disclosures happened right after CCAR was announced at the either at the end of June or in the second quarter earnings in July. What we've seen as we've scanned at least the banking, our peer banks, the G-SIB, the large U.S. regionals is now that CCAR is -- it's still an annual process, but it's really with the SCB and some of the refinements to it, it's really an ongoing process. And what we've realized is that I'd say more than 3/4 of our peers, you probably know, have actually moved to open-ended programs. Over the last 1 year, 1.5 years. And so we just wanted to conform to that. As a result, this one is multiyear, it's open-ended and we'll take it from there.

Operator

Your next question comes from Mike Mayo with Wells Fargo Securities.

Michael Lawrence Mayo

Well, no good deed goes unpunished $5 billion buyback to that last question. But are you assuming that Basel III gets modified and if Basel III didn't exist, how much higher would that $5 billion number be? And at what price do you say buybacks don't make so much sense anymore?

Ronald Philip O’Hanley

Mike, maybe I'll start on the Basel III. I think it's -- where Basel III comes out is very uncertain at this point. The comment period ended January 16. I don't know how many millions of pages were submitted, but there's a lot to be evaluated there. And you all know the various pressure and response that the regulators are getting on this. So it's very hard to tell. I don't know that we would have changed the authorization if we had perfect clarity on where it was coming out, it was a factor, but it's not like we have a -- we think it's absolutely going to be this and therefore. So I hope that helps.
Go ahead, Mike.

Michael Lawrence Mayo

No, just so where your base case, what is the RWA inflation, the most recent updates. We've gotten a few changes here during earnings season due to Basel III?

Eric Walter Aboaf

Yes, Mike, let me describe it this way. The headline that we've previously disclosed for the ANPR as it's written is Basel RWA increase for us at about 15%. So that's what we've shared. I think what we said at the time, and we actually believe even more so now is that it will come in at a portion of that. There's been lots of discussion around, for example, energy tax credits, some of the arcane parts of Basel and how that impacts public policy mortgages, which were not really affected on. There's much more discussion about operational risk literally over the last few months, and that would make us quite optimistic that the increases would be relatively small.
So we've not updated it because it's just -- you got to -- there's a menu out there, but we're encouraged. We think the regulators are trying to navigate public policy and on one hand and the right level of capital in the banking system but we think that the direction of the discussions, in particular, over the last few months are constructive.

Operator

Your next question comes from Brian Bedell with Deutsche Bank.

Brian Bertram Bedell

Most of the questions have been asked and answered. Can you hear me?

Eric Walter Aboaf

Yes.

Brian Bertram Bedell

Okay. Great. Most of questions have been answered. Just one quick one on securities portfolio repositioning. I guess, Eric, what's the desire to potentially do more of those and potentially take losses and look at the sort of the capital usage for doing that and enhancing NII and NIM more versus share buybacks?

Eric Walter Aboaf

Brian, it's Eric. It's something that we continue to think about. I think every bank continues to think about, we included. We're just continuing to just work through how do we feel about the rate levels that we're at, in particular on the up on the curve. We are conscious of that, both in the U.S. and in the international areas. We've got positions in pounds sterling and euros and so forth. So we'll just continue to evaluate it. I think as you indicated from your question, part of the reason we repositioned last year in the third quarter was around rate position. We thought it was a very good entry point. In retrospect, we timed that quite well. So we were quite pleased. And I think we felt like we came out ahead economically with the trade because we remember, we took out some bonds, but also reinvested both in the belly of the curve and overnight. So that was constructive.
And we'll also keep an eye on. We don't have a lot of capital-intensive securities. We've always had a very vanilla book. So there's not an enormous capital motivation, but we'll selectively look at it. And see if it might make sense. But I think we're like many others. It's one of the things we keep an eye on.

Operator

Your next question comes from Rob Wildhack with Autonomous Research.

Robert Henry Wildhack

I wanted to ask about the fee operating leverage target for this year. Hypothetically, let's say, fees come in better than you expect, would you anticipate dropping that down to the bottom line or reinvesting it? And maybe the same question in reverse, fees come in lower than expected. What kind of room is there on the expense side to preserve your fee operating leverage target?

Ronald Philip O’Hanley

Yes, Rob, why don't I start on that. We feel like we've done a very good job this year in terms of -- I'm sorry, in 2023, focusing on BAU cost reduction to help finance and create a very sizable investment pool. Eric walked you through that. So Obviously, if fees are up dramatically more than expected, there are some revenue-related expenses, but I wouldn't foresee I think we've got a lot to invest and execute against and I really won't want to get through that. On the margin, there might be a few things that we would do, but the vast majority of it will go to the bottom line.
On the -- in the case of the -- if the opposite occurs, whatever, a terrible market, geopolitical issues flare and you've just got a very different environment than any one of us anticipate. Again, we'd probably -- you'd see some revenue-related expenses come down naturally, which would help. I think at least my initial instinct would be to try and preserve the investments and look at is there any more to do on BAU, but then obviously, some of these -- we would -- we've got a pecking order for our investments in terms of priorities. And if it came to that, we defer them.

Eric Walter Aboaf

And Rob, it's Eric. I would just add that we've got a pretty industrial productivity plan for this year. Part of that was the repositioning that we announced. But 2/3 of the roles impacted are really around delayering and simplifying State Street. We're actually taking our spans of control in some areas like operations from 5:1 to 8:1. We're taking standard controls in the business and staff functions in some cases, from 3:1 to 5:1, right? So -- and the benefit of that is it actually brings our teams -- our client teams and operational teams even closer to our clients, right? And some of what we're doing with the joint venture consolidation is a catalyst for that because, in some cases, we had too many handoffs and now we can simplify processes and again, bring them closer to our clients.
So there's some real structural changes there. And what we do want to do is make sure we see those through. As Ron mentioned, there's always a little more, we'll look at on the margin. And it -- but we want to be careful. We want to do this right. But on the margin, you continue to work on vendors and so forth, if you look at performance-based incentive compensation, there are always other smaller levers. But we're pretty -- I think we've got a nice work set out and a lot to do. And I think we've got real confidence that this is, I think, year probably 5. I don't think we name our programs with annual versions. But this is probably a year 5 of productivity program and should really deliver quite a bit.

Robert Henry Wildhack

And then on the regulatory front, there was some commentary last week from the FDIC around regulations for large index fund providers. I'm curious if you have any thoughts there on how that can potentially impact your business?

Ronald Philip O’Hanley

From the FDIC. Yes, I didn't see this, Rob. Curious as to the FDIC's role in index funds. I wonder what Vanguard has to say about that. So I'm just not familiar with it, Rob.

Robert Henry Wildhack

Okay. I can send it over to you later.

Eric Walter Aboaf

Yes. Why don't we follow up off-line, Rob, just send it through to Ilene and the team.

Ronald Philip O’Hanley

Yes, it could be, Rob, that GA is already on this. I just haven't seen that.

Operator

There are no further questions at this time. Please proceed.

Ronald Philip O’Hanley

Well, thank you, everybody, for joining the call.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.