Eric Aboaf
Vice Chairman 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 2023 results, let me briefly discuss the notable items we recognized in the quarter on slide five, which collectively totaled $620 million pre-tax or $1.49 of EPS. First, we recognized an FDIC special assessment of $387 million, which is reflected in other expenses. Second, we recognize $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 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 six quarters, and begin this quarter, with roughly two-thirds 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 six, I will begin my review of 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 of 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 specials 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 the 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 for our front office software and data business, which is less exposed to macroeconomic conditions.
Turning now to slide seven. We saw period-end AUC/A increase 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 client transactional activity that drives servicing fees, specials activity and agency lending, and flows and margins in FX trading.
On slide eight 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, and 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. The 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 nine. 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 impacts of a 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 mid-year tax credit investment accounting change, partially offset by the impact 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 implementation.
Turning to some of the Alpha business metrics on the right panel. We were pleased to report four more Alpha mandate wins in the quarter, which means seven 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 five to seven to 10 years. We've also gone live with three more Alpha clients, which brings us to six 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 non-interest-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's reverse repo operation, which seems to have resulted in clients 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 non-interest-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 and 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 and 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, insourcing 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 spend 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 contractor 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 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 and Trust.
In the quarter, we're 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 multi-year 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 aligns 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, though we are still seeing muted volatility in the first quarter. And we expect currency translation to have less than a half a 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 higher market levels and continued business momentum and continued strong growth in front office software and data. This includes a headwind of a little less than one 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 1.7 times last year's growth 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 tax rate should be in the 21% to 22% range for 2024.
And with that, let me hand the call back to Ron.
