Eric Aboaf
Executive Vice President and Chief Financial Officer at State Street
Thank you, Ron, and good morning, everyone. Before I begin my review of our fourth-quarter and full-year 2021 results, let me briefly discuss some of the notable items we recognized in the quarter outlined on Slide 5. First, we recognized acquisition restructuring costs, most of which were related to CRD and whose integration is now complete.
Second, we recognized the net repositioning release of $3 million, which consists of occupancy costs of $29 million as we continue to reduce our footprint and a release of previously accrued compensation costs worth [Phonetic] $32 million, as attrition picked up and we redeployed staff more effectively than anticipated.
Third, we saw an opportunity to correct an imbalance in the competitiveness of our compensation program by accelerating expenses associated with certain deferred cash incentive awards. The impact of the acceleration increased expenses by $147 million in this quarter. This change will allow us to realign the mix of immediate versus deferred cash in our incentive compensation awards in future periods, which will make our pay practices competitive and enable us to better attract talent in an increasingly tight talent market. Our mix of deferred equity remains unchanged.
Finally, you'll see that in the fourth-quarter also benefited from a $58 million gain on sale of legacy LIBOR-based securities previously classified as held-to-maturity. This sale in this quarter is higher than usual tax benefit helped to offset some of the deferred compensation expense acceleration I just mentioned.
Turning to Slide 6, I'll begin my review of both fourth-quarter and full-year 2021 results. As you can see on the top left of the slide, we finished the fourth-quarter with strong revenue growth compared to 4Q, '20. 4Q, '21 fee revenue increased 4%, primarily reflecting strong growth in servicing fees, management fees and CRD revenues, only partially offset by lower FX trading services.
4Q expenses were well managed, delivering positive total operating leverage notwithstanding the significant 2021 NII headwind. 4Q pre-tax margin is up more than 1 percentage point year-on-year and ROE is up almost 2 percentage points.
On the right side of the slide, we show our full-year 2021 revenue performance. As Ron highlighted earlier, 2021 was a record year for us for fee revenues. And despite historically low interest rates in 2021, I'm quite pleased that for the full-year, we still delivered positive operating leverage of more than a percentage point improvement in pre-tax margin and EPS growth in the double-digits.
Turning to Slide 7, you'll see our investment services balanced growth remains strong, as we saw a record AUC/A at the end of the fourth-quarter of $43.7 trillion, a year-on-year increase of 13%, largely driven by higher market levels, client flows and net new business. Quarter-on-quarter AUC/A growth was muted, as markets were pretty mixed.
At Global Advisors, AUM at year-end increased 19% year-on-year and 7% quarter-on-quarter to a record $4.1 trillion. The year-on-year and sequential quarter increases were both primarily driven by higher market levels, coupled with net inflows. Of note, we reported strong net inflows during the fourth-quarter of almost $80 billion. Our global SPDR ETF business recorded the highest ever quarter driven by strong US flows pushing total net ETF inflows to $107 billion for the full-year
Turning to Slide 8, you can see another quarter of good business momentum. Fourth-quarter servicing fees increased 6% year-on-year. The increase reflects higher average equity market levels, client activity inflows and positive net new business again. These items were only partially offset by normal pricing headwinds and about a full point of currency translation.
On a sequential basis, I would remind you that, while the S&P was up on average, international markets were down, so markets were relatively neutral. Servicing fees were down 1%, primarily due to client activity and adjustments and the impact on appreciating US dollar, partially offset by another quarter of positive net new business.
AUC/A wins totaled a solid $332 billion in the fourth-quarter, which gets us to a record $3.5 trillion new wins across client segments and regions for the full-year, and our pipeline remains strong.
At quarter-end, AUC/A won, but yet to be installed amounted to $2.8 trillion with Alpha representing a nice proportion, which reflects a unique value proposition and our competitive strengths, as the only front to back offering from a single provider.
Turning to Slide 9, fourth-quarter management fees reached a record $530 million, up 8% year-on-year and up 1% quarter-on-quarter, resulting in an investment management pre-tax margin of 34% for fourth-quarter. The year-on-year management fee results primarily benefited from higher average equity market levels and strong ETF inflows. These year-on-year benefits were only partially offset by previously reported client asset reallocation and money market fee waivers of $20 million in the quarter. The quarter-on-quarter results were largely driven by a slight uptick in equity market daily averages.
As you can see on the bottom right of the slide, our franchise remains well-positioned, as evidenced by both strong quarterly momentum and full-year results. We are particularly pleased that the actions that we've previously taken over the years in our long-term institutional and ETF franchises delivered growth over the course of 2021.
Regarding management fee money market waivers, we currently expect that they will come in at approximately $5 million less in the first quarter of '22 based on an anticipated March Fed rate hike, which will be included in our 2022 outlook.
Turning to Slide 10. Let me discuss the other important fee revenue lines in more detail. FX trading services was down 7% year-on-year, reflecting lower FX volatility and lower volumes in our standing instruction business. On a sequential basis, FX revenue increased 8%, primarily driven by higher FX volatility, partially offset by lower volumes.
Moving to Securities Finance, fourth-quarter fees increased 16% year-on-year mainly reflecting higher client securities loan balances and new business wins and enhanced custody. On a sequential basis, fees were down 4% quarter-on-quarter, mainly as a result of lower agency balances.
Finally, fourth-quarter software and processing fees were down 4% year-on-year and 2% lower quarter-on-quarter, largely driven by lower market-related adjustments, partially offset by continued growth in CRD, which I'll turn to next.
Moving to Slide 11, I'd like to highlight our CRD and Alpha performance. We delivered strong standalone CRD results in the quarter with year-on-year revenue growth of 13%. Full-year standalone revenue growth was 11% year-on-year, which makes this the second year in a row, where we grew the business revenue in a double-digit range. The more durable SaaS and professional services revenues continue to grow nicely, as we onboarded and converting more clients to the cloud. SaaS clients now represent nearly half of our CRD client base.
In addition, we achieved record new bookings of $62 million for full-year 2021 with a healthy revenue backlog of $117 million at quarter-end, demonstrating the continued business momentum, as we head into 2022, supported by the State Street Alpha value proposition.
Turning to Alpha on the bottom right of the slide, full-year 2021 was a busy year, as we announced 9 new Alpha mandates and nearly doubled the amount of wins we've achieved since inception. At year-end, we have 10 total live Alpha clients.
We've also been busy enhancing our Alpha product offering this year, in addition to launching Alpha for private markets and our acquisition of Mercatus in the third quarter. We also went live with our Alpha Data platform in the fourth-quarter, which is our cloud native platform, providing enterprise data management and access to all the data and analytics that our clients use to perform their daily end-to-end investment processes.
Turning to Slide 12. Fourth-quarter NII was down 3% year-on-year, mainly driven by the impact of a low 2021 interest rates on the investment portfolio yields, partially offset by another quarter of higher loan balances, as well as growth in deposits on the investment portfolio.
Relative to the third quarter, 4Q NII came in 1% lower, primarily as a result of the expected normalization of premium amortization. As you may recall, third quarter '21 include an episodic benefit worth about $7 million, which we previously noted, wasn't expected to repeat in fourth-quarter. We do however see continuing [Phonetic] premium amortization slowing.
We like many of you are excited about the rise we've seen in long-end rates this year. However, short rates have been flat so far, and it's really the prospect of Fed action in the March timeframe, which would have a significant benefit on NII.
On the right of the slide, we show our average balance sheet during the fourth-quarter. Average assets increased 4% quarter-on-quarter, primarily driven by higher deposit levels. We consciously allowed average deposits to float up this past quarter, which we then expect to monetize in a period of rising interest rates.
Turning on Slide 13. Fourth-quarter expenses excluding notable items were up 1% year-on-year, as we previously decided to increase incentive compensation to reflect strong year-on-year performance and pulled forward some investments in the business. At the end of the year, however, we also experienced some higher than expected episodic expenses. Medical costs were higher, as we saw a ramp-up in year-end claims. We saw some elevated IT vendor costs, and we realized higher marketing spend associated with GA volumes.
Compared to 4Q, '20 on a line-item basis excluding notable items, compensation and employee benefits was up 2%, driven by higher incentive compensation and medical costs, partially offset by lower headcount and salaries. Notably, our continued focus on digitization, automation, as well as resource discipline, have helped us reduce our headcount this year by 2 percentage points even as we onboarded larger deals and processed more transaction volume.
Information systems and communications were up 11% due to continued investment in our technology infrastructure and resiliency as well as equipment expenses, as we move more activities to the cloud.
Transaction processing was down 7%, primarily driven by lower market data and brokerage costs. Occupancy was down 6%, reflecting the benefits from eliminating another 5,000 seats and achieving a 115% occupancy rate, and other expenses were down too.
Overall, we're pleased this year with our continued ability to demonstrate productivity and expense discipline. Excluding the impact of currency translation worth approximately 1 percentage point, full-year 2021 expenses would have been flat and in a year, where fee revenue growth grew by mid-single digits, we meaningfully expanded our pre-tax margin and generated positive total and fee operating leverage, despite a challenging interest rate environment.
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 side of the slide. As you can see, we continue to navigate the operating environment with strong capital levels with or without the recent equity raise relative to our requirements. As of quarter-end, our standardized CET1 ratio of 14.2% increased 0.7 percentage points quarter-on-quarter, primarily reflecting an outsized reduction of about $5 billion in RWA related to the impact of FX, mark-to-markets and higher retained earnings.
We expect RWAs to increase in the first quarter to a more normalized business levels and the effects of expected regulatory changes coming in 2022, all of which has been previously considered in our capital guidance.
Our Tier 1 leverage decreased slightly quarter-on-quarter, mainly driven by higher client deposits. And lastly, we returned a total of $209 million to shareholders in that form of fourth-quarter dividends.
As previously communicated, we expect our CET1 and Tier 1 leverage ratios to be at the lower end of our target ranges for the first half of 2022, inclusive of the implementation of SACCR and the expected closing of the Brown Brothers Investment -- Investor Services acquisition.
Turning to Slide 15, you can see a summary of our 4Q, '21 and full-year 2021 results. I've already covered fourth-quarter in detail. So let me say a few words about our full-year results before jumping into our outlook for 2022.
In summary, we're pleased with our strong performance this year. Notwithstanding the challenging interest rate environment, we delivered a 5% increase in total fee revenue for the year with servicing and management fees reaching our highest levels on record.
Our expenses for the full-year remain well-controlled, and despite higher revenue related costs and investments in our business and people. As a result, even in last year's low rate environment, we delivered positive operating leverage, and we're able to drive pre-tax margin and ROE closer to our recently enhanced medium-term targets.
And with that, I'll turn to outlook. On Slide 16, let me cover our full-year 2022 outlook, as well as provide some thoughts on the first quarter, both of which do not yet include the previously announced acquisition of the Brown Brothers Investment Services. We continue to target a closing by the end of the first quarter, although the timing could fall in the second quarter.
We are in the process of obtaining the required regulatory approvals, some of which have already been secured. The process is proceeding at a slower pace than anticipated with many regulators around the world addressing the high volume of global M&A activity. That said, given the current higher equity market step off and new interest rate forward, we now expect about 25% year-on-year EBIT growth for the acquired business for each quarter in the first year post-closing instead of just 15% year-on-year EBIT growth in our original acquisition deal modeling.
Now, as I usually do, let me first share some assumptions underlying our current views for the full-year. At a macro level, our rate outlook largely aligns with the current forward curve and assumes we see three US rate hikes in 2022, but the first hike occurring in March. We are also assuming around 5 percentage point to point growth for equity markets in 2022, as well as further normalized FX market volatility, which influences our trading businesses.
As for currency translation, we expect the US dollar will be stronger for the year, which will be a headwind to revenues, but mostly offset as a benefit to expenses.
So beginning with revenue. For the full-year, we currently expect that fee revenue will be up 3% to 4%, with servicing fees growing 2% to 3% both include about a point of currency translation headwind for 2022. Regarding the first quarter of 2022, we expect fee revenue to be up 2% to 3% year-over-year given equity market expectations and continued business momentum, with servicing fees expected to be up 1% to 2% and management fees expected to be up 8% to 9%.
For full-year NII, depending on the timing of the projected rate hikes, we expect 2022 NII to be up 10% to 12% on a year-on-year basis. Regarding first quarter of 2022, we expect NII to be up 3% to 4% year-over-year and still flattish sequentially.
Now turning to expenses. As you can see in the walk, we expect expenses ex-notables will be up just 1.5% to 2% on a nominal basis in 2022, as we continue to invest in the business and our people, while driving both positive total and fee operating leverage. We currently assume that this includes a 1 percentage point benefit to expenses due to the stronger US dollar.
You can also see on the walk that for full-year '22, we expect another year of growth saves of approximately 3 percentage points to 4 percentage points, which will help fund variable costs and ongoing business investment scenarios like Alpha, digital, tech infrastructure and automation.
Regarding the first quarter of '22, we expect year-on-year expense growth to be largely in line with the full-year guide and includes a seasonal compensation expenses, which occur in the first quarter. All-in-all, our plan is to invest behind the revenues and deliver both positive total and positive fee operating leverage.
Finally, we estimate our effective tax rate to be in the 17% to 19% range for 2022.
And with that, let me hand the call back to Ron.
