Jul 19, 2013
Executives
Valerie C. Haertel - Senior Vice President of Investor Relations Joseph L.
Hooley - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Risk & Capital Committee Edward J. Resch - Chief Financial Officer and Executive Vice President Michael W.
Bell
Analysts
Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division Howard Chen - Crédit Suisse AG, Research Division Kenneth M. Usdin - Jefferies & Company, Inc., Research Division Brian Bedell - ISI Group Inc., Research Division Alexander Blostein - Goldman Sachs Group Inc., Research Division Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division Josh Levin - Citigroup Inc, Research Division Andrew Marquardt - Evercore Partners Inc., Research Division Gerard S.
Cassidy - RBC Capital Markets, LLC, Research Division
Operator
Good morning, and welcome to State Street Corporation's Second Quarter 2013 Earnings Conference Call and Webcast. Today's discussion is being broadcast live on State Street's website at www.statestreet.com/stockholder.
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 or rebroadcast or distribution, in whole or in part, without the express written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street website.
[Operator Instructions] Now I would like to introduce Valerie Haertel, Senior Vice President of Investor Relations at State Street.
Valerie C. Haertel
Thank you, Stephanie. Good morning, everyone, and welcome to our Second Quarter 2013 Earnings Conference Call.
Our second quarter earnings materials include a presentation that Jay Hooley, our Chairman, President and Chief Executive Officer; and Ed Resch, our Chief Financial Officer, will refer to in their remarks. That presentation, together with reconciliations of our non-GAAP or operating basis measures to GAAP basis measures referenced on this webcast and other related materials can be found in the Investor Relations section of our website.
Before Jay and Ed begin their discussion of our results, I would like to remind you that during this call, we will be making forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in State Street's 2012 annual report on Form 10-K and its subsequent filings with the SEC.
We encourage you to review those filings, including the sections on risk factors, concerning any forward-looking statements we make today. Any such forward-looking statements speak only as of today, July 19, 2013.
The corporation does not undertake to revise such forward-looking statements to reflect events or changes after today. Now I would like to turn the call over to our Chairman, President and CEO, Jay Hooley.
Joseph L. Hooley
Thanks, Valerie, and good morning, everyone. As Valerie noted, our remarks will follow the financial highlights slide presentation that we issued with our earnings press release this morning, and I'll focus my comments on operating basis results and on sequential quarterly comparisons, primarily, since those are of most interest to you.
Turning to Page 3 of our slide presentation that we announced this morning, our operating basis earnings per share in the second quarter 2013 was $1.24, a 29% increase from the first quarter of 2013, which included expenses for retirement-eligible employees. Compared to the second quarter of 2012, our operating basis earnings per share increased 23%.
Our total operating basis revenue on the second quarter of 2013 increased 4.5% from the first quarter of 2013 and 4.9% from the second quarter of 2012, reflecting growth from new business and stronger global equity markets. Revenues were also driven by the seasonal increase in securities finance and increased volume and volatility in the foreign exchange.
Core fee revenue, comprised of asset servicing fees and asset management fees, increased by approximately 3% to $1.48 billion from the first quarter of 2013 and by 11% from the third -- second quarter of 2012. Importantly, we achieved positive operating leverage of 97 basis points compared to the first quarter of 2013, excluding the effect of expenses related to equity compensation for retirement-eligible employees and payroll taxes.
We also achieved 347 basis points of positive operating leverage compared to the second quarter of 2012 due to our continued strong expense management. Before I review additional financial highlights, I'd like to share some insights regarding market performance and how it has affected our clients' investing behavior during the second quarter.
Last quarter, I indicated that client risk-taking moderated somewhat at the beginning of the second quarter. As the second quarter progressed, we had not seen any material change in our clients' risk appetite until mid-quarter, when Federal Reserve Chairman Ben Bernanke signaled a potential tapering of the quantitative easing program.
Following his remarks, there was a selloff in both the global equity and bond markets. As a result, we saw our clients reduce equity and fixed income allocations globally, with notable reductions in emerging markets.
While the domestic equity markets recovered, we expect clients to remain more conservative in their asset allocations, given the current interest rate environment and global market uncertainty. Turning to new business.
Second quarter 2013 new asset servicing wins totaled $201 billion, which compared to $133 billion of new wins reported in the second quarter of 2012. Of the $2001 billion (sic) [$201 billion] of new asset service wins this quarter, about 2/3 were from the U.S., and 1/3 were from outside the U.S.
Also included in our business wins were 30 new alternative asset-servicing mandates, a client segment where we continue to see good, long-term growth potential. With respect to the 2012 and 2013 year-to-date new assets to be serviced, approximately $98 billion remain to be installed.
Total assets under management at SSgA decreased to $2.15 trillion in the second quarter of 2013 from $2.18 trillion in the first quarter of 2013, primarily due to a point-to-point decline in the price of gold in the non-U.S. equity and fixed income markets, as well as the foreign exchange impact of the strong dollar.
We had net outflows of $1 billion in the second quarter, driven principally by $12 billion in outflows from our SPDR Gold ETF as gold prices continued to decline. Excluding gold, we had net inflows of $11 billion, which include positive flows of $7 billion into our ETFs, including the SPDR sector funds, domestic equity and European funds.
We also had a net $1 billion in positive flows into institutional mandates across a range of strategies and a net $3 billion in positive flows into cash products. Looking ahead, our new business pipelines in both asset servicing and asset management remain strong and very well diversified.
If I move you to Slide #4, market-driven revenues were higher on the second quarter as compared to the first quarter of 2013, primarily driven by our securities finance and foreign exchange trading businesses. Compared to the first quarter of 2013, our net interest revenue increased and our operating basis net interest margin was flat at 131 basis points due to continued high levels of client deposits, which we hold at central banks.
While the yield on the 10-year treasury has risen, interest rates are still relatively low, and a high level of cash deposits continue to weigh on our net interest margin. A steepening of the yield curve will be somewhat helpful over time; however, we would benefit more from higher rates at the short end of the yield curve.
Turning to expenses. We continue to control our expenses across the organization, as you can see reflected in our results.
A driver of our expense savings is our Business Operations and Information Technology Transformation Program, which remains on track to deliver its highest planned level of pretax expense savings of $220 million in 2013. We continue to expect our transformation program to deliver approximately $575 million to $625 million in pretax run rate expense savings for the entire program by 2015.
Turning to capital, which you'll find on Slide 5. During the quarter, we purchased approximately 8.5 million shares of our common stock for a total cost of about $560 million.
We have approximately $1.5 billion remaining under our March 30, 2013, common stock purchase program authorizing the purchase of up to $2.1 billion of common stock through March 31, 2014. We continue to believe our share purchase program, combined with dividends, is the best way to return value to our shareholders.
Our financial strength and disciplined approach to capital management has enabled us to maintain consistently strong capital ratios under the Basel I and Basel III standards, based on our understanding of the rules. As you know, we received the long-awaited final Basel III rules.
Based on our present review and interpretation, these final rules appear to be generally in line with what our expectations were. With respect to the leverage ratio, the FDIC has issued a proposed rule and has asked for comments by September.
Given a preliminary review of the FDIC guidance, if enacted as proposed, we believe that we will be able to comply with the new rule in advance of the effective date of January 1, 2018. Ed will provide more detail on the new regulations and proposals in his remarks.
So in summary, we're focused on creating value for our clients and shareholders in the short term and over the long run by growing revenue, diligently controlling expenses and distributing capital to our shareholders, which continues to remain a top priority. Now I'd like to turn the call over to Ed.
Edward J. Resch
Thank you, Jay, and good morning, everyone. I'll begin my comments on Slide 7 of the earnings presentation, which shows a summary of operating basis results for the second quarter.
Unless noted separately, I'll be referencing only operating basis results. The strong results in the second quarter were driven by solid fee revenue growth coupled with disciplined expense management.
Revenue was up 4.5% in the second quarter of 2013 compared to the first quarter of 2013 and up 4.9% from the second quarter of 2012. Expenses decreased 3.3% from the first quarter of 2013 and increased 1.4% from the second quarter of 2012.
We achieved positive operating leverage of 771 basis points compared to the first quarter of 2013. When you exclude the $118 million of equity incentive compensation expense for retirement-eligible employees and payroll taxes recorded in the first quarter of 2013, we achieved positive operating leverage of 97 basis points.
Compared to the second quarter of 2012, we achieved 347 basis points of positive operating leverage. Earnings per share of $1.24 increased 29.2% from $0.96 in the first quarter of 2013 and increased 22.8% from $1.01 in the second quarter of 2012.
The first quarter of 2013 included the negative impact of $0.19 per share of equity incentive compensation expense for retirement-eligible employees and payroll taxes. Return on equity of 11.3% increased from 8.9% and 10.3% in the first quarter of 2013 and the second quarter of 2012, respectively.
We purchased approximately $560 million of our common stock during the second quarter at an average price of $65.73 per share, resulting in approximately 461 million average fully diluted common shares outstanding during the second quarter, a reduction of 1.8 million average shares in the sequential quarter comparison. Pretax operating margin expanded to 32.1% in the second quarter from 26.6% in the first quarter of 2013 and from 29.8% in the second quarter of 2012.
Now let's turn to Slide 8 to discuss first quarter operating basis revenue drivers. Servicing fees increased 2.2% to $1.2 billion in the second quarter of 2013 from the first quarter of 2013, primarily due to net new business and stronger global equity markets.
Compared to the second quarter of 2012, servicing fees increased 10.6%, primarily due to stronger global equity markets, net new business and the acquired Goldman Sachs Administration Services business. Management fees increased 5.3% to $277 million in the second quarter of 2013 from $263 million in the first quarter of 2013 and increased 12.6% from $246 million in the second quarter of 2012.
The increases over both periods reflect stronger global equity markets and net new business. Performance fees in the second quarter were $2.5 million, a decrease from $4 million in the first quarter of 2013 and a decline from about $3 million in the year-ago quarter.
Money market fee waivers were approximately $8 million in the second quarter, up from approximately $6 million in the first quarter of 2013 and up from $3 million in the second quarter of 2012. Total trading services revenue increased 5.3% from the first quarter of 2013 due to an increase in foreign exchange trading, which was partially offset by a decrease in brokerage and other fees.
Compared to the second quarter of 2012, total trading services revenue increased 16.1% to $296 million, driven by an increase in foreign exchange trading. Second quarter 2013 foreign exchange revenue increased 17.1% and 32.6% from the first quarter of 2013 and the second quarter of 2012, respectively.
The increase over both periods was primarily driven by an increase in volumes and volatility. Brokerage and other fees decreased 7.4% to $125 million from the first quarter of 2013, primarily due to a decrease in distribution fees associated with our SPDR Gold ETF.
Securities finance revenue was $131 million in the second quarter of 2013, an increase of 67.9% from the first quarter of 2013, primarily due to seasonal increases during this period. Securities finance revenue decreased 8.4% from the second quarter of 2012, primarily due to lower spreads.
Securities on loan averaged $330 billion for the second quarter of 2013, a seasonally-driven increase from $313 billion in the first quarter of 2013 and a decrease from $337 billion in the second quarter of last year due to lower overall demand. I'd like to remind you that our securities financing trading services revenues have usually declined in the third quarter compared to the second quarter.
Processing fees and other revenue in the second quarter of 2013 increased 6.4% and 23.5% from the first quarter of 2013 and the second quarter of 2012, respectively. The increase over both periods included a $20 million gain from the sale of an investment from one of our company's joint ventures recorded in the second quarter of 2013.
Operating basis net interest revenue of $582 million in the second quarter of 2013 increased 0.9% from $577 million in the first quarter of 2013, primarily due to a $7 million additional interest revenue item associated with the commercial real estate loan pay down. Operating basis net interest revenue in the second quarter of 2013 decreased 7.5% from $629 million in the second quarter of 2012 due to low yields on earning assets, partially offset by lower liability costs.
Operating basis net interest margin was unchanged on a sequential quarter basis at 131 basis points and down from 154 basis points in the year-ago quarter. We don't expect the recent increase in the 10-year U.S.
treasury yield to have a noticeable impact on our net interest revenue this year because the yields on the securities we are buying are still below the yields that are maturing or paying down. In order to prudently manage our interest rate risk position in this interest rate environment, we will likely scale back the reinvestment of proceeds from the maturities and prepayments of our fixed-rate securities for the rest of the year.
We still expect to invest through the cycle at a slightly slower pace than we had previously. The impact on full year 2013 operating basis net interest margin is that we will likely be slightly below 130 basis points.
This assumes that client deposits will remain at or around current levels for the remainder of the year, which will drive the growth in earning assets at somewhere between 5% and 7% on a full year 2013 average versus the full year 2012 average. Turning to operating basis expenses on Slide 9.
Expenses were well controlled in the second quarter. Compared to the first quarter of 2013, we reported positive operating leverage of 771 basis points.
Excluding the effect of expenses related to equity incentive compensation for retirement-eligible employees and payroll taxes recorded in the first quarter, we achieved positive operating leverage of 97 basis points. And compared to the second quarter of 2012, we achieved positive operating leverage of 347 basis points.
As you can see, compensation and employee benefits decreased 11.4% in the second quarter of 2013 from the first quarter of 2013, primarily due to the effect of $118 million of equity incentive compensation expense for retirement-eligible employees and payroll taxes recorded in the first quarter. Second quarter results also benefited from the targeted reduction in force we announced on the fourth quarter 2012 earnings call in conjunction with our expense control measures.
In the second quarter of 2013, we recognized an additional $7 million in savings from the reduction in force, bringing our total savings to $16 million. Therefore, on an annualized basis, we are approximately 70% complete in recognizing the targeted $90 million in annualized savings.
Compared to the second quarter of 2012, compensation and employee benefits expense decreased 2.7%, primarily due to savings associated with the execution of the Business Operations and Information Technology Transformation Program, partially offset by new business and acquisitions. Compared to the second quarter 2012 -- second quarter 2013, information systems and communication expenses increased 13%, primarily related to the planned transition of certain functions to service providers as part of the Business Operations and IT Transformation Program, as well as costs to support new business.
The Business Operations and IT Transformation Program continues to be on track. For 2013, we expect to achieve approximately $220 million in incremental pretax expense savings, resulting in approximately $418 million of expense savings over the life of the program to date.
Our nonrecurring expenses related to our Business Operations and IT Transformation Program were approximately $22 million for the quarter. We expect these nonrecurring expenses to trend lower for the remainder of this year and in 2014 as we near the completion of our program.
Transaction processing services increased 3.3% to $186 million in the second quarter of 2013 from $180 million in the first quarter of 2013. Compared to the second quarter of 2012, transaction processing services increased 8.1%.
The increases from both periods reflect higher equity market values and transaction volumes in the asset servicing business. Other expenses increased 23% compared to the first quarter of 2013, driven primarily by higher professional service fees, sales promotion and legal costs.
Compared to the second quarter of 2012, other expenses increased 3.4%. Looking forward on other expenses, we expect other expenses to be in the range of $270 million to $280 million per quarter for the third and fourth quarters of this year.
As you know, this line is composed of many items, including professional fees, securities processing costs, regulatory expenses and legal costs, and can vary from quarter-to-quarter. Now let me give you some details on our investment portfolio.
On Slide 10, as outlined on the top half of the slide, the key elements of our long-term portfolio strategy remain unchanged. During this dynamic interest rate environment, we remain prudent in our security purchases to meet our high credit standards while we manage our interest rate risk profile.
As of June 30, 2013, our investment portfolio decreased slightly to $115.8 billion from $116.4 billion as of March 31, 2013. We continue to have a solid credit profile with approximately 88% of our portfolio securities rated AAA or AA.
The duration of our investment portfolio was 1.9 years as of June 30, 2013, up from 1.7 years at March 31, 2013. The increased duration from the first quarter is related to the recent rise in interest rates.
While the current portfolio duration is above our target, it is still consistent with our overall risk appetite. As of June 30, 2013, 55% of our investment portfolio was invested in floating-rate securities and 45% in fixed-rate securities.
During the second quarter, we invested about $7.8 billion in primarily AA- rated securities at an average price of $103.37, at an average yield of 1.6% and a duration of 3.08 years. Of the $7.8 billion, we invested approximately $2.4 billion in agency mortgage-backed securities, $2.7 billion in asset-backed securities, $1.1 billion in municipal securities, and the remaining $1.6 billion of investments were spread among various asset classes.
The aggregate net unrealized after-tax loss in our available-for-sale and held-to-maturity portfolios as of June 30, 2013, was $123 million compared to a net unrealized after-tax gain of $817 million as of March 31, 2013. The decline in the unrealized gain from March 31, 2013, was primarily due to an increase in interest rates.
While the mark-to-market deteriorated in the second quarter, we remain focused on our strategy of investing through the cycle although, as noted earlier, we may do so at a slightly slower pace. A hypothetical 100 basis point increase in rates with no change in credit spreads would result in an additional approximately $1.3 billion after-tax unrealized loss within our investment portfolio at June 30, 2013.
We remain confident in the credit quality of our investment portfolio and believe any increase in the unrealized losses as at June 30, 2013, is largely due to a change in interest rates. Other-than-temporary impairment related to credit was 0 for the second quarter of 2013.
The duration gap of the entire balance sheet as of June 30, 2013, was 0.42 years, up slightly from 0.41 years as of March 31, 2013. The duration gap would have been close to 0.47 years if you remove the influx of $24 billion of additional client deposits on the last day of the quarter.
In addition to using the duration gap as a measure of interest rate risk, we also use the concept of economic value of equity, or EVE. You may already be familiar with it, since we report our EVE results in our quarterly 10-Qs and annual 10-Ks.
With the recent backup in interest rates, we thought it will be helpful to you to point out that this measure of risk improved as of June 30 with the decline in EVE in an up 200 basis point shock scenario, slightly less negative at a minus $2.3 billion level or 14.7% of total regulatory capital versus March 31, where it was minus $2.5 billion or 17.1% of total regulatory capital. These compare to our regulatory guidelines of less than 20%.
Turning to capital. Slide 11 summarizes our strong capital position.
As of June 30, 2013, our tier 1 common ratio was 14.9% under Basel I. On July 2, the Federal Reserve announced Basel III draft final rules, incorporating various changes from last year's NPRs.
Under the final rule, we expect to manage to the lower of the tier 1 common ratios calculated under the Basel III standardized and Basel III advanced approaches. Based on our preliminary interpretation of the final rule, our estimated pro forma Basel III tier 1 common ratio would be 10% based on the standardized approach and 10.9% based on the advanced approach as of June 30, 2013.
These estimates are preliminary and subject to, among other things, further interpretations, evaluation and increased understanding of the final rule. In addition, in the last few weeks, both the Basel committee and the U.S.
regulators published new proposals for the Basel III supplementary leverage ratio. The U.S.
NPR proposes a minimum supplementary leverage ratio of 5% at the holding company level and 6% at the bank subsidiary level. There is a 60-day comment period, and the proposed rule is therefore subject to change.
If adopted, the proposed rule would take effect January 1, 2018. We estimate our supplementary leverage ratios under the July 2013 NPR are approximately 5.4% at the holding company, which exceeds the proposed minimum, and approximately 4.9% at the bank, which we believe is a manageable shortfall.
Based on our present interpretation of the NPR, we also believe that we would achieve compliance in advance of the proposed effective date. We have a number of levers we can pull if necessary and a lot of time available to us to meet the minimum supplementary leverage ratio.
Our estimates and other remarks reflect our current interpretations, expectations and understanding and are subject, among other things, to further review and regulatory guidance. There continues to be significant uncertainty regarding how the final capital rules will play out in the U.S.
It is likely that there will be several other NPRs issued in the coming months. All final rules will need to be evaluated and calibrated in conjunction with each other to assess their overall impact.
So to summarize. Second quarter results were driven by solid fee revenue growth, including seasonal factors related to securities finance, coupled with continued expense control.
Finally, and importantly, we plan to continue to optimize our strong capital position. We remain focused on executing our capital plan that we submitted in conjunction with the 2013 CCAR, which includes our authorization to purchase up to $2.1 billion of our common stock through March 31, 2014.
Now I'll turn the call back to Jay.
Joseph L. Hooley
Thanks, Ed. Let me briefly close our call with a few points.
In the second quarter, we delivered good results despite the persistently low interest rate environment. We believe we're taking all the right actions to manage our business through this period of economic recovery, yet we remain cautious on a number of fronts, including: uncertainty of client risk appetite; the interest rate environment, including the continued high level of client cash deposits; and capital regulations, portions of which still remain in flux, as I just mentioned.
We remain confident in the secular trends that underpin the prospects for growth in our business, and I believe that we are focused on the right value drivers in the near term. Before we open the call to questions and answers, I just want to take a minute to extend my thanks to our outgoing CFO, Ed Resch.
He's done a wonderful job leading our finance organization through one of the most challenging times in the history of our industry. I'd like to thank Ed for all of his contributions and wish him well in retirement.
I'd also like to just take a minute to introduce Mike Bell, who will become our next CFO when Ed Resch retires this summer. Ed is currently working with Mike to ensure a seamless transition of his responsibilities.
I'm pleased to have Mike join the State Street team. He brings a wealth of experience, having been a CFO of 2 large and complex global organizations previously, Manulife and Cigna.
Pleased to welcome Mike on board, and I'd like to ask him to just say a few words. Mike?
Michael W. Bell
Thank you, Jay. Good morning, everyone.
I am very pleased to join State Street, and I'm impressed with our leadership team, our strong market position and our global capabilities. After 30 days in the organization, I am confident in the direction that Jay and our senior team have established for our company.
We also have a thoughtful financial management plan, and I'm pleased with the quality of our investment portfolio. In addition, we're making good progress with our Business Operations and IT Transformation Program, which is enabling us to capture expense savings and which we expect to be an important competitive advantage moving forward.
So in summary, I'm pleased to be here and am confident in our current direction, and I look forward to meeting all of you in the months to come. Now I'll turn it back to Jay.
Joseph L. Hooley
Thanks, Mike. I just wanted to mention that since Mike just joined us, he'll not be entertaining questions on the call.
But I can assure you, you'll have plenty of time to meet him in the forward weeks and months. Now Ed and I would be pleased to entertain your questions.
Operator
[Operator Instructions] Your first question comes from the line of Robert Lee with KBW.
Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division
I guess my first question, Jay, maybe going back to your comments about client behavior since, I guess, kind of mid-quarter, kind of reduced risk appetite. How should we be thinking about that at all about -- or how are you thinking about that in terms of how it could impact some revenue trends in asset servicing and elsewhere if clients are going to become a little less active, have a more conservative stance?
I mean, certainly, that's going to have some in-term [ph] negative kind of fee connotations to it. Or what are your thoughts?
Joseph L. Hooley
Yes, let me try to frame it up a little bit, Rob. The second quarter, pre-Ben Bernanke's announcement, was -- the flows were pretty good, I would say, elevated from past years.
Not as good as end of year and first part of 2013, but pretty good. And then the announcement came.
There was a little bit of a selloff. And I always point, even though it's not the perfect proxy, if you look at U.S.
fund flow data, you saw a retrenchment both in equities and fixed income instruments. Post that, there was some moderation.
Flows improved, but still negative on the fixed income side, improved to positive on the equity side. So I point that out just to say that I do believe that this year is different than the past couple of years with regard to investor confidence, but there's still some choppiness based on the interest rate environment and the signals that, largely, the market is getting from the Fed.
So I would put it at, Rob, better than past years as far general flows, but still with some choppiness. And I suspect, given the mission the Fed has, that we'll continue to see some volatility in markets.
I think as opposed to years past, I think there's a little bit more resilience in the market, so I wouldn't expect severe changes, but I think there could be some volatility.
Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division
All right, great. And maybe just a follow-up question.
I appreciate the color on the leverage ratio. And I'm just curious, I mean, obviously, we're not there yet, but by the time we get to the third quarter call, we would be well into the kind of the next 2014 CCAR process.
But is there any thought at this point that, that could change kind of how you're thinking about what you could ask for? I mean, you're returning pretty much 100% of earnings at this point.
And even though you seem to be in good shape based on what's been put out so far, is there any thought that this is something that's going to impact what you can ask for or how you ask for it going forward?
Joseph L. Hooley
Rob, you're right. In the third quarter call, we will be gearing up for the next cycle of CCAR.
And as you know, that begins with input from the Fed, which is a reflection of their view of the economic environment. So that plays a part in that.
I think with regard to leverage ratio in particular, given the fact that it's out in 2018, I don't see that having a lot of bearing on the next cycle of CCAR. But obviously, the final Basel III rules, and if anything else comes out, would all be factored into how we approach the CCAR next year.
Ed, I don't know if you would add much...
Edward J. Resch
I agree. I think it's actually too early to tell what the criteria will be for the next CCAR, and we'll have to see how the rules play out and what other NPRs are issued.
Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division
All right. And maybe just one last follow-up on new business.
Is it possible to get a little bit of color on maybe the complexion of, not so much the pipe, but maybe geography of where you're seeing new business flows? I mean, if we look at -- and I know it's far from perfect, but if we look at growth of the AUA and AUC, I mean, domestic assets have been growing a little bit faster than global, which I guess is at time, maybe a little bit at odds, in a way, when you think about where some of the growth opportunities have been talked about over time outside the U.S.
So are you just seeing -- whether it's the mutual fund business or what have you, just seeing kind of a -- more recently, more activity among U.S. clients making decisions and outsourcing compared to non-U.S.?
Or any kind of color on that, I think, would be helpful.
Joseph L. Hooley
Sure, happy to do it. You saw the $200-ish billion in new asset servicing commitments be 2/3:1/3 U.S.:non-U.S., and I think that's been the trend the last couple of quarters.
And I would say that the simple explanation for that, and nothing's ever simple, is that Europe has really slowed down. I think that, while I think it will restart and I think that decision cycles will pick up, for the last several quarters, I think, somewhat as a result of the continued disruption in Europe, the decision-making around European new business has been slow.
We have a big presence in Europe. I would say in contrast to that, in addition to the U.S., Asia, with a little bit of an emphasis on Japan and Australia, for us, continue to be strong markets.
I think if you look at it across product areas, I continue to call out the alternatives and, more specifically, hedge fund, where we think we have an advantaged position that the assets continue to grow, and there continues to be more outsourcing in that space.
Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division
Ed, good luck in retirement, and enjoy the beach.
Operator
Your next question comes from the line of Howard Chen with Crédit Suisse.
Howard Chen - Crédit Suisse AG, Research Division
Congratulations, Ed. Welcome, Mike.
Michael W. Bell
Thank you.
Edward J. Resch
Thanks.
Howard Chen - Crédit Suisse AG, Research Division
You've all done a really good job of driving positive operating leverage. I think through the first 6 months, by my measure, you've achieved about 165 basis points in margin expansion versus last year.
So if the market rates don't move and you remain on plan with Business Ops and IT Transformation, do you expect that 165 to get even larger as we finish out 2013?
Edward J. Resch
Again, Howard, it goes back to the "all else equal" type of analysis. I mean, we're confident we're going to get the rest of the year's target, which is approximately $100 million, for the Ops and IT program.
It depends on how the revenue landscape looks in the second half of the year, but I would expect that we'll show improvement relative to Ops and IT, all else equal.
Howard Chen - Crédit Suisse AG, Research Division
Okay, great. And, Jay, just a follow-up on your commentary before.
You mentioned notable client reductions in emerging market allocations. Can you just discuss some of the positives and negatives as that played through the results?
And specific to EM, is there anything mindful -- we should be mindful of going forward?
Joseph L. Hooley
Yes, I think the -- I would first say that the effect and impact of emerging markets is meaningful. Not only do we derive a higher revenue per unit of asset in the servicing fee line, but it enables foreign exchange and related activities.
So it is a meaningful part of the revenue line, which is why I call it out. I think the -- with regard to the whole flow situation, it's a little bit what I mentioned before, which is more volatility in the second quarter than we saw in the first quarter.
You saw, more recently in the second quarter, more recent flows positive on the equity side -- actually, positive on the global equity side. So it was really the emerging markets piece that hasn't really come back.
Is that helpful, Howard?
Howard Chen - Crédit Suisse AG, Research Division
Yes, that's helpful. And then finally, Ed, thanks for the thoughts on the leverage ratio.
I know its early, but you alluded to potential mitigating actions. I was hoping you could just frame out what fits in that mitigating action bucket.
And the early view, does that change all of how you do business?
Edward J. Resch
Well, I mean, the early view is that we don't think these actions would change how we do business. Obviously, they're in the process of being fully, fully vetted, but some of the thoughts that we're looking at are repricing potential commitments, which are drawing leverage requirements; obviously, scrubbing the balance sheet with a closer eye toward leverage and jettisoning low-return assets that our consumers have leveraged; possibly moving some activities that we can out of the bank, and given that we have a, obviously, a positive position at the holding company and a slight shortfall at the bank; and then lastly, some of things we're thinking about are optimizing our capital structure with an eye toward the leverage calculation, specifically.
So no conclusions yet. We're obviously trying to evaluate them in light of leverage as well as whatever else is in front of us from a capital or leverage or other perspective as these NPRs unfold in the succeeding months.
Joseph L. Hooley
Howard, we also have some -- I would say it's hope. It seems like a reasonable thing to look for is some relief on deposits left at central banks.
So that would obviously have some impact on the leverage ratio as well.
Operator
Your next question comes from the line of Ken Usdin with Jefferies.
Kenneth M. Usdin - Jefferies & Company, Inc., Research Division
Ed, just a follow-up on the capital return question. Rob's question was about the supplemental leverage, but you guys have also had a 10% Basel III goal, and you're saying you're going to manage through the bottom end.
Previously, you had said that you would consider managing below 10% because that's your self-imposed guideline. So I just wanted to ask you to kind of give us your updated thoughts on how you're going to be looking at all these ratios and how that, in fact, could in fact weigh or not weigh on your ability to continue to see 100%-plus type of capital return?
Edward J. Resch
Yes. Let's just recap in terms of the Basel III Tier 1 common 10% target, okay?
We said that 3 things had to happen: normalized rate environment, which we define to be 3% Fed Funds and 5% 10-year, so we're a ways away from that; we need to get the Ops and IT savings, which -- midpoint, $600 million, which we're on track to get; and then we needed to be able to manage our capital down to 10%. Now we said that, and that was predicated on our assuming that we'd be an advanced approach bank.
That was the case, we felt, in the NPR, where the buffers did not apply. Now that we have the final rule clarification -- actually, we believe, a change that the buffers do now apply -- we have to go about it a different way and look at both standardized and advanced in order to calculate capital.
And there's a chance we could be moving back and forth quarter-to-quarter, if you will, depending on how things sort out. So it's very early, it's very preliminary to be thinking about the 10% level, the 10% Basel III Tier 1 common target, given all the uncertainty out there.
Our thinking right now is to keep it at that level. We need to evaluate the pending NPRs and whatever else is issued.
And we're looking at optimizing around both the advanced approach, which is the one we've done a lot of work on, as well as the standardized approach. So we're looking at various balance sheet strategies.
We're looking at low-risk, low-return businesses where we have certain securities lending relationships, for example, that drive a penalty under the standardized approach. And we need to optimize around both of those criteria.
So once we do that, we'll be able to update. And this is, I think, probably a ways out into the future, given what's in front of us from the standpoint of NPRs.
We'll be able to update where we think the 10% target goes and then how that translates into, ultimately, the buyback target. I mean, we're confident that the buyback, as we said in our comments, will be maintained through 2014.
We'll -- our expectation is to execute on that plan. Obviously, things could change, but we don't anticipate anything changing.
And lastly, I would point out that relative to everything that we just talked about, Basel III leverage and some other things, there's a long runway to go here, okay? So there's still a lot of time to pass, a lot of comments to be made, possibly some revisions, and we're looking at starting all of that from one of the highest Basel III positions in the industry
Kenneth M. Usdin - Jefferies & Company, Inc., Research Division
Yes, okay. And then secondly, the biggest delta to your Basel III is this OCI component, which is definitively going to count.
So you gave that sensitivity too high a rate [ph]. What can you do, if anything, to perhaps mitigate that swing?
Would you consider moving to HTM just because of the asymmetrical nature of it doesn't really affect you on the other side of the balance sheet? If -- how do you continue to -- how can you mitigate on that side of things, if at all?
Edward J. Resch
Yes, absolutely. HTM -- and we have some securities in HTM now.
We've developed a strategy around the advanced approach. As I said, we did a lot of work -- we've done a lot of work on the advanced approach so far.
HTM is absolutely one of the levers we could pull. Additionally, we've looked at ways in which for us to get the same economic exposure in a nonsecurity form, i.e.
something that is not mark-to-market, on our balance sheet, but one that has the same or approximately the same return. So if we could move exposures from securitized form into, let's say, some type of a loan form or secured lending form, that's something that we're also looking at doing in order to manage under the AMA.
Kenneth M. Usdin - Jefferies & Company, Inc., Research Division
Okay. And then last question for me.
Just, Ed, you mentioned that you might be pulling back a little bit on your reinvestment for now, and it wouldn't -- the higher rates wouldn't necessarily help this year. But can you talk about as you -- at what point do we kind of get past that higher rate securities rolling off versus what you're putting back on and what it means potentially for next year's either NIM or NII?
Edward J. Resch
Well, I mean, too early to give you guidance on 2014, Ken, as I hope you appreciate. But as we've said in the past, the -- if rates stay lower longer, we'll be driving to a lower net interest margin in 2014 than we're projecting for 2013 just as the last portion of the portfolio that's fixed-rate cycles through into the lower rate environment.
So I think that, that's about the best I can say at this point as we roll through the remainder of the fixed-rate portfolio through the rest of this year and into 2014.
Operator
Your next question comes from the line of Brian Bedell with ISI Group.
Brian Bedell - ISI Group Inc., Research Division
Congrats again, Ed, and also welcome, Mike. If I could just go back to the -- just follow up on Ken's question on the balance sheet.
Maybe if you can just talk, Ed, a little bit about the impact of premium amortization on the agency MBS portfolio in the second quarter. And then with the likely slowdown in prepayment speeds, how you see that impacting the run rate into the third quarter and the rest of the year?
Edward J. Resch
Yes. Our thinking in terms of the prepayments is along the following lines, and it's one of the main reasons why we've offered a little bit of commentary on potentially slowing down.
I mean, we've seen slower prepayments in the latter portion of the second quarter. We had the pipeline of prepayments that came through earlier in the quarter that really were at the higher rate.
But in June, we saw, just to put a number on it for you, Brian, a 27 CPR, okay? And that's actually been fairly steady between 26 and 31 since August of last year so almost, for a full year.
Now we expect that to slow to 18% and 19% in July and August. And that's part of the reason, again, why we're being cautious as we move through the rest of the year, and it drives the expectation of a slightly lower NIM below the 130 basis point level.
Brian Bedell - ISI Group Inc., Research Division
Right, right. But do you -- you should be booking less premium amortization, so that would theoretically help.
I know that the reinvestment pace is much slower, which actually hurts. But so you don't think you're going to get a significant benefit from the lower premium amortization?
Edward J. Resch
No, we don't think so.
Brian Bedell - ISI Group Inc., Research Division
Okay, okay. And then just over to -- on the comp expense line.
Anything unusual in the second quarter in terms of accruals? I mean, this is the lowest comp expense ratio you've had since early 2009.
And I know a lot of it's due to the, putting the 1Q seasonality aside, the cost saving program. But as we move into the second half, I guess, my question is are you accruing at the normal pace here and if we assume revenue goes down seasonally in the third quarter, we would be at a lower comp level in the third quarter?
Edward J. Resch
There's nothing unusual, Brian. I mean, we accrue on the basis of our expected achievement for the year.
And we'll adjust it as needed, whenever that is. I mean, we have not made any significant adjustments one way or the other in the second quarter to our comp expense.
Brian Bedell - ISI Group Inc., Research Division
Okay, great. So that implies a good trend in the second half.
And then just lastly, on the -- it sounds like from what you're saying on the capital rules, obviously, everything's preliminary. It doesn't sound to me like there's any change in your philosophy about returning something around 100% of earnings to shareholders for your buyback and dividends.
Is that correct? As we think about the CCAR process, I know it's early, but -- the CCAR process for next year?
Joseph L. Hooley
Let me start that one, Brian. I would say with regard to philosophy, we're always looking at the best return on capital for shareholders, and it still feels like returning capital through buying back shares and dividends is the best approach given the lack of better alternatives.
So philosophically, nothing's changed. I do think that, as Ed mentioned, we feel comfortable with where we are in the calendar year through the first quarter of 2014 based on what has been approved by the board.
But there's just a whole lot of open questions, from the Fed's input to CCAR to these NPRs that are rolling out. So it would be premature, I think, to -- other than to say philosophically, we're still in the same place with regard to capital deployment through share buybacks.
Operator
Your next question comes from the line of Alex Blostein with Goldman Sachs.
Alexander Blostein - Goldman Sachs Group Inc., Research Division
So I wanted to talk about the balance sheet management for a second again. And when we kind of think about the risk-aversion levels remaining, I guess, pretty high, and it sounds like, Jay, you don't anticipate that changing in the near term, can you guys talk a little about the appetite to maybe move some of the cash into the securities portfolio, even pick up a little bit of spread in the near term, since it feels like the "excess deposits" are sticking around for a little bit longer?
Edward J. Resch
Yes, Alex, the -- that's something we look at regularly. The question of how transient versus more stable various deposits are is something that the treasury group looks at.
I mean, in point of fact, our elevated deposit level on average this quarter increased from the first quarter by about $3 billion, up to $22 billion. But also, cutting the other way, on June 30, we actually had $24 billion come in, and it went out on July 2.
So we're very cautious. We've taken a view that some of the deposits that we previously thought may be excess have stuck around a little bit longer, so we've put them to work very carefully at the short end in floating rate securities in the portfolio.
But if there's a question as to whether or not something is more core or more transient, we opt for the conservative answer and put it at the -- at a central bank.
Alexander Blostein - Goldman Sachs Group Inc., Research Division
Got you. And then a question, I guess, on the emerging markets exposure.
If my memory serves me right, you guys aren't considerably more into the custody and administration business on the emerging fund assets. Is there a way to kind of get a sense of what percentage of total custody assets that is and what the pricing differential is between that and, call it, kind of your 2-basis-point rate on everything else?
Edward J. Resch
No. I mean, the way -- that's not at hand, Alex.
I mean, the way that the numbers are presented is by location where the assets are serviced. So you could have different assets serviced in different locations that may not necessarily be "emerging market assets", so there isn't something that we can point you to, to answer that question.
Operator
Your next question comes from line of Mike Mayo with CLSA.
Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division
You're at your pretax margin target in the quarter but with about $200 million IT Transformation savings to come, and that would imply it be 200 basis points better. So why no change to the pretax margin target?
I guess its either there's -- you're being conservative; or you're unsure about the IT progress, you just want to wait; or there's some reason it's not hitting the bottom line.
Joseph L. Hooley
Yes, I think the -- we're certainly -- there's no lack of confidence that we're going to get the IT and Ops program complete and realize the savings, so let me just start there. I think the pretax margin this quarter was 32% and -- 32% and change, and I think if we anchor off this quarter, you got to consider that the second quarter has seasonal revenue uplifts.
So that wouldn't be a realistic point to depart from. I think if you looked at the full year margin and then looked at the incremental benefit from the IT and Ops, again, if everything else stayed the same, we would expect that to flow to the margin.
Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division
All right. Are you -- would you consider raising the target, if you were more confident?
And -- because you just run through the numbers, you can take first half of year numbers and give you guys the rest of the benefit, you're kind of there.
Edward J. Resch
You want me to try to take that, Mike? Because I've looked at this many, many different ways.
And one way to look at it is that through June 30 of this year, we're halfway through the program, okay? So using round numbers, we're at about $300 million of savings, okay?
We got $200 million through 2012 and got $105 million for the first half of this year. The margin, as I calculated, is up about 190 basis points.
So we have a year-to-date margin this year of 29.4%, and I compare that to the starting point, which is the 27.5% number. That's the adjusted for the securities gains and onetime items in 2012 -- 2010, excuse me.
So we said all else equal, right? So we have a 190 basis point expansion in margin halfway through the program.
We still have halfway to go. That's another $300 million.
Our estimate is that, that should drive about 200 basis points of margin expansion, bringing the midyear margin for 2013 up to 31.5%, which is right on what we said, a 400 basis point margin improvement over the life of the program, okay? That's how we're thinking about it.
You can say that we're being conservative. I mean, we're confident we're going to get the Ops and IT savings, but we have said, all else equal to 2010, which you may take as conservatism, but the fact is that the revenue mix matters a lot to the margin achievement, ultimately.
Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division
Let me try one more time. I have the firm's technology analyst on the line with me, Ed Maguire.
If he can just follow up on my behalf. Go ahead, Ed.
Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division
You guys have talked quite a bit about your cloud project, which is a multiyear effort. And we'd be interested just to get your perspective on how that's tracked relative to your expectations.
And also address some of the direct business benefits that you've been getting from the implementation of the technology and, potentially, some of the challenges you might have had in getting it right.
Joseph L. Hooley
Yes. Great, Ed, happy to do that.
The -- as a very integral part of the IT and Ops Transformation is a migration to a cloud environment. And if you look at where we are in the migration of IT and Ops, most of the operational-related transformation has occurred or is winding up.
And where we are right now, if you look at the -- from here to the end of the program, it's largely around rewriting applications in the cloud. And the rewriting of applications makes the function more efficient, but it also results in us having more of our application set in a cloud environment.
And I think today, of 200 applications, Ed, there's probably 1/3 that are ported onto the cloud already. So we've made headway.
We feel good about where we're heading. The impact of the cloud, I think, is the transformational aspect of, when we say an IT and Ops Transformation, of this initiative.
Because I -- when you look at this business, transaction processing technology is a huge enabler, and I think cloud computing is a real breakthrough, generally, but specifically to the transaction processing business. And I say that for a few reasons.
It's less about the application rewrite and the efficiency it has on the operations. It's more around, once you move to a cloud environment, the nimbleness and speed to market to introduce new products.
So I'll give you an example or 2. Recently, in the past 6 or 9 months, as new regulations came out around private equity, there was a report, this PF report that was required to be developed.
In the past, that would have been a multi-month effort. On the cloud, we introduced it in 2 to 4 weeks.
So there's a speed to market with new analytic and information products that is integral -- and technologies, so I hope you appreciate that. So that's going to be a big benefit.
The other big benefit of moving to a cloud is, as we move to the cloud, we're cleansing our data. So there's less breaks in the data, and as a result of that, the information that's -- our client information available ultimately to them is available on a more realtime basis.
And if you think about some of the great challenges that front offices have today, it's around availability of realtime data for decision support. So as we move through this cloud, I think we reposition the firm with regard to the data and the information and analytic products that we can introduce to the front office of our customers.
So what hasn't gone so well, what are some of the challenges? I would say specific to the cloud, largely, the issues have been minor.
When I look at the 70 or so applications that we've already rewritten on the cloud, it was all based on estimates. Some were behind schedule, some were ahead of schedule.
On balance, kind of worked out. But anytime you're rewriting applications anywhere, never mind on a cloud, there's always room for slippage, and we've seen some of that.
I'd say in aggregate, it's been -- the balance has worked out, and we were probably pretty conservative in our estimates, but it's a change. I would say the other thing, which is a little less cloud-oriented and more around the operational side of the IT and Operations, is probably the biggest challenge that we had was the cultural challenge of getting people to deliver operational services in a dramatically different way.
And I think we've broken the back of that one. I think we have broad-based support in the organization for this being the way of the future and this being good for clients, service levels and the like.
Let me pause, Ed, and see, did I capture the...
Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division
No, that's very helpful.
Operator
Your next question comes from the line of Josh Levin with Citi.
Josh Levin - Citigroup Inc, Research Division
Going back to the capital. As you think about this -- the 10% ratio being sort of your capital constrained here, does this affect how you think about normalized ROEs for your business?
Edward J. Resch
Well, again, it depends on how the rules ultimately sort out. And it goes back to the optimization points I was trying to draw out earlier.
I mean, clearly, if the rules are adopted as proposed, we'd need to do -- we'd need to take some actions over the next 4 years or so, 5 years, to drive to compliance at the bank level on the leverage ratio. And those actions may change our thinking in terms of certain ROE targets at certain business unit levels, for example.
But way too early to conclude anything at this point.
Josh Levin - Citigroup Inc, Research Division
Okay. And my second question is about asset sensitivity.
If you look at the disclosure on your Q, it looks like you're asset sensitive for a 100 basis point shift in rates. But I think, Ed, you said at conferences that when the Fed starts to raise rates, you're basically liability sensitive until the Feds stops raising rates, if my memory is correct.
Could you just sort of reconcile the 2 sort of comments about -- how should we think about your asset sensitivity?
Edward J. Resch
Sure. The disclosure that you're referring to is the usual disclosure in our SEC filings, up or down shock ramp disclosure.
And that's assuming a static balance sheet. It assumes the balance sheet as of the statement date does not move and the rate shock is applied, okay?
So the results you see are just assuming no customer deposit behavior changes, no changes on our part relative to the investment portfolio, et cetera. When I talk about what we think is going to happen if, in fact, the Fed starts raising short-term rates and there's a 25 basis point per quarter ramp and we say that our assets lag in terms of reinvestment or liability repricing, that's a giving effect to an assumption, on our part, of changed behavior relative to client deposits and/or the investment portfolio.
Operator
Your next question comes from the line of Andrew Marquardt with Evercore.
Andrew Marquardt - Evercore Partners Inc., Research Division
Just a couple of ticky-tack questions. On -- back to expenses, helpful on the IT ops program color that you shared.
But then also, in terms of the additional actions that you took late last year in terms of headcount reduction, and you had then talked about a $90 million benefit over the next 18 months, if I recall correctly, where are we on that front? I believe in first quarter, maybe you were maybe only 10% through.
Where are we today on that?
Edward J. Resch
Yes. We said that we were -- we achieved $9 million in the first quarter, Andrew.
We achieved another $7 million this quarter, so that's obviously $16 million through the first half of the year. If you annualize that $16 million, we're at $64 million on an annualized basis.
So we're about 70% of the way through against the $90 million target.
Andrew Marquardt - Evercore Partners Inc., Research Division
Great. And then separately, in terms of -- I know there's a lot of regulatory issues in terms of capital advance versus standardized.
And then also, we have the LCR coming up, but you guys screened particularly well on that. And then also, OLA bail-in debt, how do you guys think about that last component in terms of the potential of additional bail-in debt kind of on top of the capital stack?
Edward J. Resch
Well, again, we're dealing with rumors, and there's nothing that's been official that's been published out there. Rumors, discussions, et cetera.
But the way that we're thinking about it is that if, in fact, the rule for bail-in debt gets finalized around a risk-weighted asset function and not a GAAP asset function and that the percentage applied against our Basel III risk-weighted assets is in the 15% to 18% type range, that the -- our expectation, assuming that senior debt is counted in the sources of capital, is that we'd have a modest amount to raise, a couple of billion dollars, possibly, Andrew.
Operator
We have time for one final question. Your last question comes from the line of Gerard Cassidy with RBC.
Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division
Is it safe to say that, if the banks are successful in convincing the regulators that the deposits at the central bank should be excluded from the calculation for the SLR, that your bank ratio would easily exceed the 6%?
Joseph L. Hooley
Well, I think...
Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division
Or 5%.
Joseph L. Hooley
Yes. We think it's a rational argument.
Whether it would be successful or not, I don't know. And the sensitivity, Ed, on the ratio?
Edward J. Resch
It halves the size of the shortfall, approximately. So there'd still be a gap to close, but if in fact we could get that carved out, that would be very beneficial to achieving the ratio.
Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division
Okay. And another question was, can you share with us any color on how your ETFs performed in June during that volatility?
Like the Gold SPDR -- I believe some of these might be trading in discounts, but in terms of the liquidity of the market, did they perform as well as you'd like?
Joseph L. Hooley
Yes, I think there were no issues with regard to liquidity in the particularly volatile gold cycle and the Gold ETF, so no issues with regard to creating liquidity. And as you know, those -- that gold fund is backed up by real bullion in vaults.
I just -- since you brought up ETFs, we had the $12 billion negative flow on the Gold ETF. But I would highlight, because I think it's a good number, the $7 billion in positive flows into ETFs into a pretty diversified area of product with, I'd say, Europe as one thing I would highlight.
So we continue to introduce new ETF products, higher yielding from a revenue standpoint, and the flows are pretty good. Obviously, gold is an offset to that, for the obvious reasons.
Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division
And then, Ed, I guess, you gave us the color on the AOCI for the portfolio. And obviously, with rates going higher, that's what's affected the value.
But was there anything else -- or was there certain types of securities that you own that seemed to get hit a little harder? Because the difference from March to June, obviously, was quite, quite large.
Edward J. Resch
I can point out a couple of areas that got hit harder. Again, this is at June 30.
I mean, in terms of the attribution, the government agency component of the portfolio is -- it got hit. Our student loan element of the portfolio moved down.
It was in an unrealized loss position at March, it moved further down. And the remaining subprime that we have, which is $1.4 billion in total, moved down -- continued at an unrealized loss, is a better way to say it, in the second quarter, Gerard.
Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division
Okay. And then just finally, Jay, in the past, you've given us color on what you're seeing in mergers and acquisitions.
I know that may not be a top priority today, but are you sensing that Washington or the regulators are maybe not as encouraging of M&A? We've seen that more with the traditional banks, not so much with the custody banks.
But just any color that -- what you're sensing on the M&A market for [indiscernible] .
Joseph L. Hooley
Happy to do that, Gerard. I would say -- I suspect your question is largely targeted at the custody segment.
Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division
Correct.
Joseph L. Hooley
In which case, very quiet. It's quiet in Europe, it's quiet in the U.S.
I think, maybe not surprising that the custody banks, given the asset-based activity, have performed pretty well. So that's maybe some reason why you don't see much consolidation.
So I'd say quiet on the front of prospect for acquisition. And I would say from a regulatory standpoint, hard to say.
I think that most people are trying to get through this period of new set of rules around capital to determine what that looks like and how regulators would view consolidation, particularly in some of the bigger players, although nothing known at this point.
Valerie C. Haertel
Okay, I think that ends our call for today. I'd like to thank you very much for joining us.
And I'd also like to let you know that our third quarter earnings call will be held a little bit later than usual. It will be scheduled for Tuesday, October 22.
And as always, we look forward to speaking with you after the call and continuing our dialogue in the coming months. And we'll talk to you again next quarter.
Thank you very much.
Operator
Thank you. This concludes today's conference.
You may now disconnect.