Eric Aboaf
Executive Vice President and Chief Financial Officer at State Street
Thank you, Ron, and good afternoon, everyone. I'll begin my review of our first quarter results in Slide 4. We reported EPS of $1.57 or $1.59, excluding acquisition restructuring costs. On the left hand of the slide, you can see we had yet another solid quarter of total fee revenue growth, but strengthened many of our businesses notwithstanding the macroeconomic environment. At the same time, we held total expense is roughly flat year-on-year, as we continue to both invest in the franchise and control expenses. As a result, we generated positive operating leverage of about 5 percentage points in the quarter and continue to improve our pretax margin year-over-year. All things considered, this was another strong quarterly performance demonstrating the progress we are making. As we continue to improve our operating model and drive growth.
Turning to Slide 5, we saw period end AUC/A increased by 4% year-on-year and decreased 4% quarter-on-quarter. The year-on-year change was largely driven by higher period in equity market levels, client flows and net new business growth. The quarter-on-quarter decline was largely the result of lower period end market levels in both equity and bond markets. Similarly, at Global Advisors, AUM increased 12% year-on-year, but declined 3% sequentially. Relative to the period a year ago, the increase was also driven by higher period end market levels coupled with strong net inflows across all three of our franchises, our ETF, institutional and cash businesses. The sequential decline was primarily driven by lower market levels, which was partially offset by strong net inflows of $51 billion in the quarter.
Turning to Slide 6, before I start, I would like to remind you that we are expanding our servicing fee revenue disclosures by disaggregating the line into back office servicing fees and middle office services. With that on the left side of the page, you'll see first quarter total servicing fees were flat year-on-year as higher client activity inflows, average equity market levels and net new business were offset by normal pricing headwinds and a 2% currency translation headwind. We continue to see good growth in both our insurance and official institutions client segments.
Sequentially, total servicing fees were down 1%, primarily as a result of the seasonal pricing headwind and lower average equity market level, partially upset by strong client activity. Within servicing fees, back office fees were flat both year-on-year and quarter-on-quarter, largely driven by the factors I just described. Middle office servicing was down 3% year-on-year and 5% quarter-on-quarter, primarily due to a partial transition from a legacy client and lower professional services fees in the quarter. Notwithstanding the decline in the quarter, middle office is an important component of our Alpha proposition when it comes to both the front office when it connects to both the front and back office. And we expect to see good growth of the medium term, as evidenced by our uninstalled revenue backlog, which I'll talk more about in a moment.
In terms of business momentum, I'm pleased with how 2022 is started. As we report another quarter of solid new AUC/A wins of $302 billion, while AUC/A won, but yet to be installed amounted at $2.9 trillion at quarter end. We continue to be happy with our pipeline. And I'm also particularly pleased to report that our first quarter wins span the good mix of strategically imported premium and preferred clients.
Turning to Slide 7, first quarter management fees were $520 million, up 5% year-on-year, primarily reflecting higher average equity market levels and strong ETF in flows. Management fees were down 2% quarter-on-quarter, largely due to equity market headwind, partially offsite by the tailwind of lower fee waivers and net inflows. Of note, our management fee performance for the quarter was supported by strong net inflows of $51 billion with positive inflows across our entire business franchise, institutional, cash and ETF.
With respect to money market fee waivers, the fee waiver impact management fees for the quarter was roughly $10 million down from about $20 million in the fourth quarter. I would note that following the 25 basis point fed hike, we saw in March of this year, we no longer expect money market fee waivers to be a headwind to management fees, starting in April. As you can see on the bottom of the slide, our franchise remains well positioned for growth, I'm particularly pleased that the strategic actions that we've previously taken in our long term institutional and ETF franchises are now helping to draw inflows, even in the current volatile market environments.
On Slide 8, you can see that FX trading services had yet another strong quarter. Relative to the period a year ago, FX trading services revenue was up 4% year-on-year and 20% quarter-on-quarter, both the year-on-year and quarter-on-quarter performance benefited from high FX market volatility, while higher client FX volumes also contributed sequentially. Part of the revenue uptick has come from about $5 billion in higher risk-weighted assets we put to work this quarter, which demonstrates our balance sheet flexibility and which I'll come back to in a moment.
Our securities finance revenues decreased 3% year-on-year, primarily driven by lower average agency assets and loan, partially offset by solid new business wins and enhanced custody. Sequentially, revenues were down 6% mainly reflecting lower average agency and enhanced custody balances due to the declining market level and fewer special. First quarter software and processing fees were up 26% year-on-year and 7% quarter-on-quarter, largely driven by higher front office software and data revenue associated with CRD, which I'll turn to shortly. Finally, other fee revenue of $29 million almost doubled year-on-year and quarter-on-quarter, mainly collecting fair value adjustments on equity investments.
Moving to Slide 9, we've provided a breakdown of our consolidated front office software and data revenue on the left. We've broken down the revenue into software categories you have seen us use before on-premise, professional services and software-enabled revenue. While CRD represents the large majority of this line, Alpha Data Services, Alpha Data platform and Mercatus revenues are also included here as well. As we've highlighted earlier, front office software revenue growth was particularly strong up 44% year-on-year, primarily driven by on-premise renewals as well as the continued strong growth and software-enabled and professional services revenues.
On the right of the slide, we've provided some key growth metrics enabled by CRD and Alpha. As I mentioned earlier, during today's presentation, you'll notice that we've broken out both the front office and middle office uninstalled revenue backlog, both of which are key components of our Alpha proposition going forward. The front office backlog of $93 million is up 43% and the middle office backlog has more than tripled year-on-year to $63 million. The backlogs reflect expected annualized revenue, which can be compared to the $900 million of annual revenue base in 2020 across both the front and middle office businesses and is an indicator of future revenue growth once fully installed. The Alpha pipeline remains promising despite the current geopolitical environment as clients realize the transformational benefits to their technology and operations infrastructure.
Turning to Slide 10, as we see the start of another rate tightening cycle, first quarter NII increased 9% year-on-year, primarily driven by growth in our investment portfolio, coupled with higher loan balances, which will also benefit us in future quarters. Relative to the fourth quarter, NII was up 5%, which came in better than expected due to higher long in rates. The sequential increase was largely driven by the improvement in both short and long in rates, which benefited our yield together with higher investment portfolio balances.
On the right of the slide, we show our average balance sheet during the first quarter, which has been relatively steady. Average assets were down 3% quarter-on-quarter, largely driven by seasonally lower 1Q deposit balances, which are down slightly from the seasonally high fourth quarter, but up year-on-year.
Turning to Slide 11, first quarter expenses excluding notable items increased 1% year-on-year or 2% adjusted for currency translation. Productivity savings and targeted investments remain on try for the first quarter as we generated approximately $90 million in year-on-year growth savings and self-funded most of the strategic investments we've been making in the businesses, including technology infrastructure, broader automation, Alpha and State Street Digital.
Compared to first quarter, on a line item basis, including notable items, compensation employee benefits was down 1% as lower headcount in high cost locations and the tailwind of currency translation was partially offset by higher seasonal expenses. Information systems and communication expenses were up 5% due to continued investment in our technology infrastructure and resiliency. Occupancy was down 13% due to footprint optimization and lower maintenance costs. And other expenses were up 9% primarily reflecting higher professional fees.
Relative to the fourth quarter expenses were primarily impacted by higher seasonal expenses, partially offset by productivity and footprint optimization savings. Headcount increased slightly quarter-on-quarter, as we began to in-source some technology fund functions from vendors and growth in Alpha. Overall, we remain focused on delivering positive total and fee operating leverage and have demonstrated that, this quarter admits the current macroeconomic environment.
Moving to Slide 12, we show the evolution of our CET1 and Tier 1 leverage ratios. As of quarter end, our standardized CET1 ratio decreased by 2.4 percentage points quarter-on-quarter to 11.9% due to both numerator and denominator effects. RWA increased by roughly $15 billion or 160 basis points of CET1 during the first quarter of 2022, compared to year end, driven by three factors. A modest rebound from an unusually low fourth quarter, a strategic contemporary allocation of additional RWA capital to our markets businesses to generate the higher than expected first quarter revenues that we just discussed and lastly, the RWA impact from the SA-CCR implementation that started on January 1 of this year, which we had planned for.
At the same time, our capital base was also impacted by a substantial reduction in AOCI of about $1.3 billion worth, 110 basis points of CET1 relative to the fourth quarter. As we saw a significant and historic quarter-on-quarter movement in long in rate, particularly, in the belly of the curve. For instance, the rise in the five-year U.S. Treasury of roughly 120 basis points was the largest in the last 30 years.
Taken together, the increase in RWA, coupled with a meaningful reduction in AOCI partially offset by about 35 basis points of earnings accretion, net of dividends drove the decrease in our CET1 ratio this quarter. In contrast, first quarter Tier 1 leverage was down only slightly to 5.9%, mainly driven by the substantial decrease in AOCI, reflecting a significant change in the interest rate environment and a stable balance sheet.
While capital return remains an explicit priority for us and we recognize it's important to our shareholders, given this $1.3 billion move in AOCI related to higher interest rates, we no longer expect to resume our share repurchase program in the second or third quarter, as we operate with a conservative balance sheet philosophy.
Given the volatility and rates and the possibility of further significant increases, we are in the process of taking several actions to reduce AOCI risk by about of half. This primarily includes shifting additional AFS securities to HTM, as well as shortening the portfolio duration through swaps, lowering extension risk and consciously allowing some portfolio runoff. Some of these latter actions can be reversed in the future when we choose to we invest at higher rates.
Turning to Slide 13, we provide a summary of our first quarter results. Despite the continued volatile market environment, I'm pleased with our financial performance, which demonstrates solid underlying trends within our businesses. Total fee revenue was up 4% year-on-year, primarily driven by higher management fees, FX trading, software and processing fees, and other fee revenues. Expenses were well controlled and were held roughly flat year-on-year, demonstrating the progress we are making and improving our operating model.
Next, I would like to provide our current thinking regarding the second quarter outlook and some of our economic assumptions as we look out over the year. At a macro level, while we know that rate assumptions have been moving, our rate outlook is broadly in line with the current forwards, which suggests a year-end fed funds rate of 2.5%. In terms of second quarter of 2022, we expect overall fee revenue to be down about 2% on a sequential basis with servicing fees up about 1% and management fees up 2% to 3% assuming equity markets remain flat to March 31 levels for 2Q and some downward normalization in FX trading revenues. In terms of some of our newer fee revenue line items that we started to disclose this quarter, we would not expect to see a repeat of the size of on-premise renewals in the front office software line, nor the positive equity investment markups and the other revenue line in 2Q.
Regarding NII, we now expect 2Q NII to increase 7% to 9% sequentially, which will be driven by the expected at fed rate hikes, partially offset by the AOCI mitigating portfolio actions that I outlined earlier. For a full year 2022, we now expect to see year-on-year NII growth of around 18% to 20%, depending on fed actions and rate moves, as well as the shape of our portfolio.
Turning to expenses, we remain laser focused on driving sustainable productivity improvements and controlling costs. We expect that second quarter expenses ex-notable items will be up around 2% to 3% on a sequential quarter basis, excluding notable items and seasonal compensation of expenses of $208 million. On taxes, we expect that the 2Q '22 tax rate will be around 20%. We continue to expect to deliver on our goals of margin expansion and positive total and fee operating leverage for the year.
And with that, let me hand the call back to Ron.
