Eric Aboaf
Vice Chairman and Chief Financial Officer at State Street
Thank you, Ron, and good morning, everyone. I'll begin my review of our first quarter results on Slide 4. We reported earnings per share of $1.52 for the quarter, which included a $29 million provision or $0.06 of EPS impact associated with the extension of liquidity for U.S. financial institution as we participated in an industry consortium supporting the banking system. We were pleased to do our part. On the left panel of this slide, you can see that our first quarter '23 results reflected the year-on-year decline in both equity and fixed income markets, but was more than offset by strength in net interest income and strong momentum in our securities finance business. EPS was down just 3% as another quarter of significant buybacks reduced the number of shares outstanding. Against this challenging backdrop, we again held total expense growth to just 2% year-on-year even as we continue to thoughtfully invest in product and client growth initiatives.
Turning now to Slide 5. During the quarter, we saw period end AUC/A decrease by 10% on a year-on-year basis, but increase 2% sequentially. Year-on-year, the decrease of AUC/A was largely driven by lower period end market levels across both equity and fixed income markets globally, which were both down in the 10% range. Quarter-on-quarter, AUC/A increased as a result of higher period end market levels and client flows. At Global Advisors, we saw similar dynamics play out. Overall, our first quarter AUM was negatively impacted by volatile markets. Period end AUM decreased 10% year-on-year, but increased 4% sequentially. The year-on-year decline in AUM was largely driven by lower period end market levels and net outflows. Quarter-on-quarter, the increase in AUM was primarily driven by higher quarter end market levels, partially offset by some outflows.
Turning to Slide 6. On the left side of the page, you'll see first quarter total servicing fees down 11% year-on-year, largely driven by lower average market levels, client activity and adjustments and normal pricing headwinds, partially offset by net new business. Excluding the impact of currency translation, servicing fees were down 10% year-on-year. Sequentially, total servicing fees were up 1% primarily as a result of higher average equity market levels, partially offset by lower client activity adjustments. On the bottom panel of this page, we've included some sales performance indicators, which highlights the good business momentum we again saw in the quarter.
AUC/A wins in the first quarter totaled $112 billion with about a half driven by wins across the growing alternative segment especially in private markets. The fee rate on these alternative wins are generally more than 4 times the total servicing fee average, which makes us a strong one quarter from a projected revenue standpoint. At quarter end, AUC/A won but yet to be installed total $3.6 trillion with Alpha representing a healthy portion, which again reflects the unique value proposition of our strategy. Given the planning and preparation since these deals were announced, we expect significant onboardings of this uninstalled AUC/A next quarter.
Turning to Slide 7. First quarter management fees were $457 million, down 12% year-on-year, primarily reflecting lower average market levels and a previously reported client specific pricing adjustment. Quarter-on-quarter, management fees were flat as higher market levels were partially offset by outflows and day count. As you can see on the bottom right of this slide, notwithstanding the difficult macroeconomic backdrop in the quarter, our franchise remains well positioned as evidenced by our continued strong business momentum. In ETFs, we continue to build-on strategic growth segments, which is reflected in net flows in our SPDR portfolio low cost equity and fixed income suites.
In our institutional business, we saw net outflows while sustaining continued momentum and defined contribution with a target date franchise recording inflows of $6 billion. Across our cash franchise consistent with industry trends late in the first quarter, we saw flight to quality with significant net inflows worth 7% of cash AUM into SSGA money market funds since the week ending March 10, which largely reversed the seasonal outflows experienced earlier in the quarter.
Turning now to Slide 8. Relative to the period a year ago, first quarter FX trading services revenue was down 5%, primarily reflecting lower client FX volumes, partially offset by higher spreads. As a reminder, the start of the war in Europe last year caused some unusually high FX trading activity in 1Q '22. Sequentially, FX trading services revenue ex notables was down 1% with lower spreads offset by 6% higher client volumes. And consistent with the significant increases into industry-wide money market flows, our Global Link franchise experienced an increase of $20 billion or 13% into its money market cash sweep program during the last three weeks of March. Securities finance performed well in the first quarter with revenues up 14% year-on-year, driven by higher specials activity and an active focus on business returns, partially offset by lower balances, which was consistent with the industry. Sequentially, revenues were up 6% again mainly driven by higher specials activity, which was consistent with the market and securities lending industry environment.
Moving onto software and processing fees. First quarter software and processing fees were down 18% year-on-year and 24% sequentially, primarily driven by lumpy on-premise renewals in the front office software revenues, which I'll turn to shortly. Lending fees for the quarter were down both year-on-year and sequentially primarily due to a shift away from products with higher fees, but lower returns. Finally, other fee revenue increased $16 million year-on-year, primarily due to positive market related adjustments and $27 million sequentially largely due to fair value adjustments on equity investments.
Moving to Slide 9. You'll see on the left panel that front office software and data revenue declined year-on-year, primarily as a result of lower on-premise renewals, partially offset by continued growth in software enabled revenue. Timing of installations will vary quarter-on-quarter based on the size and scope of prior business wins and we expect several SaaS conversions and several on-premise renewals to come through in the second quarter. Year-on-year, our annualized recurring revenue was 16%. Our software enabled revenue was up 11% year-on-year, but down sequentially due to the absence of an accounting true up in fourth-quarter.
Turning to some of the other Alpha business metrics on the right panel. We we're pleased to report another Alpha mandate win this quarter in the asset owner client segment. In addition to the reported win this quarter, we expect significant middle office installations in 2Q as we have completed the preparations to begin to onboard a portion of a large mandate won back in 2021.
Turning to Slide 10. First quarter NII increased 50% year-on-year, but declined 3% sequentially to $766 million. The year-on-year increase was largely due to higher short-term rates and proactive balance sheet positioning partially offset by lower deposits. Sequentially, the decline in NII performance was primarily driven by additional client rotation out of noninterest-bearing deposit balances, partially offset by higher short-term market rates from central bank hikes. On the right of the slide, we show our average balance sheet during the first quarter. Year-on-year average assets declined 6% and 2% sequentially. Average deposits declined 3% quarter-on-quarter, which is relatively consistent with our expectation for first quarter seasonality and client pricing preferences during periods of rising rates.
Of note, average weekly deposit levels at quarter end increased 5% as we compare with the week ended March 10. The stress in the regional bank space primarily affected consumer and corporate depositors rather than the institutional asset manager and asset owners that we serve. We in contrast saw some risk off deposit inflows at the end of the quarter. Our operational deposits as a percentage of total deposits remains consistent at 75%. These are determined by regulatory guidance. U.S. dollar client deposit betas were 80% to 90% during the quarter as expected. Foreign currency deposit betas for the quarter continued to be much lower in the 30% to 45% range depending on currency. Our international footprint continues to be an advantage.
Turning to Slide 11. Our first quarter expenses excluding notable items increased just 2% year-on-year or up approximately 4% adjusted for currency translation. In the light of the current revenue environment, we're actually managing expenses while continuing to carefully, invest in strategic elements of the company, including Alpha, private markets, technology and operations automation. Compensation employee benefits increased 5% year-on-year, primarily driven by higher salary increases associated with wage inflation and higher headcount attributable to lower attrition rates and in sourcing. Total non-compensation expenses on the other hand decreased 1% year-on-year as continued productivity and optimization savings more than offset increases in certain variable costs and professional services.
On a line by line basis for non-compensation expenses, information systems and communications expenses were down 2% due to benefits from ongoing optimization efforts, partially offset by technology and infrastructure investments. Transaction processing was down 9% mainly reflecting lower sub custody costs from declining market levels as well as lower broker fees and other expenses were up 9% mainly reflecting higher professional fees, travel and marketing costs.
Moving to Slide 12. On the left side of the slide, we show the evolution of our CET1 and Tier 1 leverage ratios followed by our capital trend on the right of the slide. As you can see, we continue to navigate the operating environment with extremely strong capital levels, which are well above our targets let alone the regulatory minimums. As of quarter end, our standardized CET1 ratio was up slightly year-on-year, but down 1.5 percentage points quarter-on-quarter to 12.1%, which was largely driven by the continuation of our share repurchase program and the expected normalization of RWAs that we discussed last quarter.
Tier 1 leverage ratio was flattish at 5.9%. Our LCR for State Street Corporation increased a couple of percentage points quarter-on-quarter to 108% and 4 percentage points quarter-on-quarter to a 124% for State Street Bank and Trust where most of our business is transacted. We were quite pleased to return $1.5 billion of capital to our shareholders in the first quarter consisting of $1.25 billion of common share repurchases and $212 million in common stock dividends. Lastly, given the high-level of capital across every measure, positive pull to par in AOCI and our strong earnings trajectory, we continue to expect to return up to $4.5 billion of capital in the form of buybacks at pace this year subject to market conditions of course.
Turning to Slide 13, which provides a summary of our first quarter results. While there is certainly still work to do, we are pleased with the durability of our business this quarter against a very challenging backdrop and the continued competitive strength of our global franchise. Next, I'd like to provide our current thinking regarding the second-quarter. At a macro level, our rate outlook is broadly in line with the current forwards, which suggests the Fed, ECB and Bank of England all continue to hike to varying degrees in 2Q. In terms of markets, we currently expect average U.S. equity and global bond markets to be up about 1% to 2% quarter-on-quarter and international equity markets to be flattish.
Regarding fee revenue in 2Q and on a sequential quarter basis, we expect overall fee revenue to be up 4% to 5% with servicing fees up 1% to 2% and management fees approximately flat to up 1%. We expect to see a significant increase in front office software and data revenues as we have line of sight to a number of on-premise renewals and SaaS conversions in 2Q. In our other fee revenue line which we know is difficult to forecast, we intend to adopt in 2Q the new accounting guidance recently issued regarding renewable energy investments.
We would expect to see a sequential quarter uptick in total other revenues of between $5 million to 15 million, so this estimate always depends on market levels. As we adopt this accounting change, our effective tax rate for 2Q '23 is expected to be approximately 21%. The adoption will be roughly neutral to EPS. Regarding NII, we now expect NII in the second quarter to decrease 5% to 10% sequentially, primarily driven by the noninterest bearing deposit rotation and interest bearing deposit betas as quantitative tightening and rate hikes continue into 2Q.
Turning to expenses. We remain focused on driving productivity and controlling costs in this environment. We expect that second quarter expenses will be flat on a sequential quarter basis excluding the 1Q seasonal compensation cost of $181 million. Overall, we will offset some of the 2Q NII trends with higher fee revenues as business momentum builds in 2Q and through the year and we continue to actively manage expenses.
And with that, let me hand the call back to Ron.
