Q2 2021 State Street Corp Earnings Call
Okay.
Good morning, welcome to State Street Corporation's second quarter 'twenty 'twenty, 1 earnings conference call and webcast. Today's discussion is being broadcasted live on state Street's website and investors that state Street Dot com.
This conference call is also being recorded for replay feature.
The conference call is copyrighted and all rights are research.
This call may not be recorded for rebroadcast or distribution in whole or in part without the expressed written authorization from State Street Corporation the only.
And the authorized broadcast of this call will be housed on the state Street website.
Now I'd like to introduce Eileen Bieler global head of Investor Relations at State Street.
Good morning, and thank you all for joining us on our call today are CEO Ronald Hanley will speak first and then Eric Adblock, Our CFO will take you through our second quarter 2021 earnings Slide presentation, which is available for download from the Investor Relations section of our web site investors that state Street Dot Com afterwards, we'll be happy to take.
During the Q&A, please limit yourself to 2 questions and then re queue.
Before we get started I would like to remind you that today's presentation will include results presented on a basis that excludes or just 1 or more items from GAAP reconciliations.
Reconciliations of these non-GAAP measures to the most directly comparable GAAP regulatory measure are available in the appendix to our slide presentation.
In addition, and today's presentation will contain forward looking statements actual results may differ materially from those statements due to a variety of important factors such as those factors referenced in our discussion today and in our SEC filings, including the risk factors and our form 10-K and forward looking.
Statements speak only as of today, and we disclaim any obligation to update them, even if our fees change now let me turn it over to Ron.
Thank you Eileen and good morning, everyone earlier. This morning, we released strong second quarter financial results, which demonstrate the meaningful progress we are making towards achieving our medium term targets as we continue to execute on the multiyear strategic pivot of our business to that of and enterprise outsource solutions provider.
I am, particularly pleased with our results as quarterly total fee revenue exceeded $2.5 billion for the first time and the company's history.
We delivered a fourth consecutive quarter of servicing fee growth with servicing fees at the highest level and 3 years propelled by both strong equity markets and the impact of our actions to strengthen relationship management and sales effectiveness.
We continue to differentiate state street through our unique product and operational capabilities as well as through delivering enhanced client service quality and our pipeline continues to deliver as evidenced by another strong.
Another quarter of strong servicing and alpha client mandates, which I will discuss shortly.
Additionally, we continue to invest and our business and innovate across the franchise to drive growth and enduring shareholder value creation.
For example, we announced the formation of State Street digital and the second quarter, a new division focused on addressing the industry's evolving shift to digital finance, both its product offerings and as a business model.
This is just 1 example, and a long history of innovation that State Street has and is continuing to drive within our industry. We also continued to develop state Street Alpha our front to back offering. This unique capability is created and an attractive value proposition that is resonating with both new and existing claw.
<unk> as well as contributing to client retention and growth opportunities, which I will also discuss shortly.
Turning to slide 3 I will review, our second quarter highlights before handing the call over to Eric will take you through the quarter and more detail.
Second quarter EPS was 2 O 7 or 197, excluding notable items, despite the impact of art of.
Interest rates on our NII earnings per share ex notables reached the highest level since for 2019, when quarterly and I I was notably higher more than 35% more.
And then it was in <unk> 'twenty 1.
Relative to the year ago period quarterly total fee revenue exceeded $2.5 billion for the first time, increasing 6% year over year, driven by solid servicing and management fee growth, which increased 10% and 14.
Per cent year over year, respectively, as well as better Securities Finance results.
This strong performance was partially offset by the year over year impact on total revenues from lower software and processing fees continued moderation of FX market volatility and ongoing interest rate headwinds.
Even with record quarterly fee revenue expenses were well controlled while second quarter total expenses were up 1% relative to the year ago period, they were down almost half a percentage point year over year, excluding notable items and currency translation as our productivity improvements continued to yield results we have.
Creating a culture of expense discipline over the last 2 and a half years and we remain confident and our ability to effectively manage core operating costs over the remainder of 2021.
Our strong fee revenue performance, coupled with continued cost discipline delivered a 200 basis point improvement toward pretax margin year over year, which reached nearly 30% and the second quarter. Excluding notable items further return on equity was 12, 6% or 11.9 per.
And excluding notable items in the second quarter.
AUC a increased to a record $42.6 trillion at quarter and supported by higher period and equity market levels and new business Onboarding new.
New asset servicing wins increased to $1.2 trillion for the quarter, including the large alpha mandate with Invesco announced in April.
We reported 2 new alpha wins, and the second quarter, taking the total number of alpha clients to 15.
After the second quarter close we also entered into and Alpha mandate with legal and general.
And while Invesco is an example of how alpha is helping to expand and deepen existing client relationships the legal and general win demonstrates how the alpha strategy is also helping us forge new client relationships with the world's most sophisticated investors.
Our experience to date gives us confidence that alpha relationships will drive stronger retention rates for existing clients, while also allowing us to broaden and deepen those relationships as we add additional products and services to these existing mandates.
Additionally, we are signing alpha clients that are new to state Street, demonstrating that alpha is enabling us to reach new clients and deliver front middle and back office services and a differentiated manner.
We also created new relationships to help drive revenue growth of course across client segments and regions. For example earlier this week, we announced a new strategic alliance with first Abu Dhabi Bank. The alliance will create a full service enterprise offering for institutional investors and the middle East.
And North Africa region. It will provide investors with extensive reach into more than 100 markets around the world clients will have access to state Street's full suite of front middle and back office capabilities. In addition to our extensive data management and analytics solutions, which seamlessly integrates with first Abu Dhabi.
Banks regional suite of Securities services products, local expertise and regional direct cost to the network.
At CRD annual recurring revenue increased 11% year over year to $230 million and we remain pleased with how the business is performing while also enabling and propelling our alpha strategy.
Global Advisors continued to demonstrate strong performance.
AUM increased to 3.9 trillion and management fees increased to $504 million.
Both records benefiting from strong second quarter flows of 83 billion across the ETF institutional and cash businesses as we continue to leverage to leverage the strengths of our asset management franchise.
And Etfs are low cost and sector funds as well as our ESG and commodity products continue to enjoy good market share with low cost Etfs expanding share and the second quarter.
And and institutional our sales force and relationship management realignment, coupled with a strong product set and led to good revenue growth.
Turning to our balance sheet and capital we've returned over $600 million of capital to our shareholders. During the second quarter inclusive of 425 million of common share repurchases consistent with our limit limit set by the federal reserve.
I am pleased with yet another strong performance under this year's annual stress tests and.
The new Seb framework provides us with additional flexibility to manage our capital base as examples yesterday, we announced that our board of directors has approved a 10% increase of our third quarter common dividend to <unk> 57 per share and authorized a common share repurchase program of up to $3 billion.
During the third quarter of 2021 through the fourth quarter of 2022.
To conclude we had a very strong quarter business momentum is building and we are demonstrating meaningful progress towards our medium term financial targets as I look ahead to support our strategic vision and help us achieve those targets, we're continuing to prioritize improvement and our fee revenue growth, while controlling costs by <unk> <unk>.
Transforming the way, we work and building a higher performing organization for the future.
And with that let me turn it over to Eric to take you through the quarter and more detail.
Thank you Ron and good morning, everyone.
I'll begin my review of our second quarter results on slide 4.
We reported EPS of $2 or $2.7.
And for $1.97, excluding the <unk> positive impact from notable items, which was driven by a previously announced sales the majority stake and our legacy business.
On the left panel of this slide you can see strong results as we continued to drive fee revenue growth, while controlling expenses, we delivered pre tax margin expansion and solid earnings growth.
As a result of the weaker dollar relative to the year ago period, we continue to show our year on year results, excluding the impact of currency translation and the right column. We also show results. Excluding notable items from a bottom of the slide.
And.
Turning to slide 5 you'll see our business volume growth period, and <unk> increased 27% year on year, and 6% quarter on quarter to a record $42.6 trillion.
Both the year on year and quarter on quarter increases were largely driven by higher period and market levels net new business growth and client flows.
And global Advisors, AUM increased 28% year on year, and 9% quarter on quarter to $3.9 trillion dollars also a record.
The year on year and quarter on quarter increases were both primarily driven by higher period and market levels, coupled with net inflows.
Turning to slide 6 you can see another quarter of strong business momentum.
Second quarter servicing fees increased 10% year on year, including currency translation, which was worth approximately 3 percentage points year on year.
The increase reflects higher average market levels positive net new business on boarded and client flows only partially offset by normal pricing headwinds and the absence of elevated prior year client activity.
AUC wins totaled $1, 2 trillion and the second quarter substantial substantially up from recent quarters, primarily as a result of the large alpha client mandate announced last April that John that Ron just mentioned.
<unk> won but yet to be installed also amounted to $1.2 trillion at quarter and as we smoothly on boarded over 400 billion of client assets this past quarter.
We.
And focused on reigniting business growth across both client segments and regions.
This quarter, we had strong growth and the EMEA region aided by our intense coverage efforts, which now extends to approximately 350 overall of our top clients.
We continue to estimate that we need at least 1.5 trillion and growth of UCA wins annually and order to offset typical client attrition and normal pricing headwinds and we've clearly exceeded that mark this year.
I will remind you that inflation is typically occur in phases and overtime and deals will vary by fee and product mix.
At this time, we expect the current 1 but yet to be installed day UCA will be converted over the coming 12 to 24 month time period with the associated revenue benefits beginning in 2022 and the majority occurring in 2023.
As we said in June we are pleased with our pipeline and our momentum.
Turning to slide 7.
Second quarter management fees reached a record $504 million up 14% year on year inclusive of 2 percentage point impact from currency translation and were up 2% quarter on quarter, resulting in an investment management pre tax margin approaching 35%.
Both the year on year and quarter on quarter management fee performance benefited from higher average equity market levels and strong ETF flows.
These benefits were only partially offset by the run rate impact from the previously reported idiosyncratic institutional client asset reallocation as well as about $25 million of money market fee waivers this quarter.
While we previously estimated that money market fee waivers on our management fees could be approximately $35 million per quarter.
As a result of the recent improvement and short end rates. Following the June <unk> meeting, we now expect that they will be about 20% to $25 million per quarter for the rest of the year, which is about a third lower than we had previously expected.
Global Advisors reported solid flows across institutional Etfs and cash for the quarter with a total amount amounting to 83 billion.
We have taken a number of actions to deliver growth and our long term institutional and ETF franchises, which are driving this momentum as you can see on the bottom right of the slide.
Turning to slide 8 let me discuss the other important fee revenue lines and more detail with and FX trading services were pleased that we continued to generate strong client volumes, which remain above pre pandemic levels and the second quarter.
Relative to a strong second quarter and 2020, FX revenue fell 12% year on year as declining FX market volatility compared to the COVID-19 environment last year more than offset higher client volumes.
FX revenue was down 17% quarter on quarter, driven by a moderation in client volumes from index rebalancing and experienced in the first quarter and lower market volatility.
Our Securities Finance business reported strong revenue growth with fees, increasing 18% year on year, and 10% quarter on quarter, mainly as a result of fire enhanced custody and agency balances as client leverage rebounded.
Finally, second quarter software and processing fees were down 12% year on year, largely due to the absence of prior year positive mark to market adjustments.
Software and processing fees increased 24% quarter on quarter, mainly as a result of higher CRD revenues.
Moving to slide 9 I'd like to provide some further updates on our CRD and alpha performance.
We delivered strong standalone CRT results and the quarter, primarily reflecting higher client renewals and episodic fee revenues.
More durable SaaS and professional services revenues continued to grow nicely and were up 10% year on year, resulting in an increase and standalone annualized recurring revenue to $230 million.
This quarter marks a 3 year anniversary since announcing the CRD acquisition and we're very pleased with how the business has performed we're winning and part thanks to state Street brand and reputation and the benefit of clients of our integrated alpha offering.
On the bottom right of the slide we show some of the second quarter highlights from State Street Alpha mandates.
We reported 2 new alpha mandates during the second quarter as the value proposition continues to resonate well with clients.
Notably since inception through the second quarter, we now have 5 alpha client mandates that are live.
Although alpha deals usually take somewhat longer to implement given the size and scope the payoff outweighs the longer implementation period as we are able to further expand share of wallet to generate attractive revenue growth rates and increased the contract lengths, which can be up to 10 years in length for alpha services that span the front and middle office.
Turning to slide 10 second quarter NII declined 16% year on year, mainly as a result of the effects and lower interest rate environment, and our investment portfolio yields and sponsored member repo product. These impacts were partially offset by balance sheet expansion driven by higher balances.
Relative to the first quarter, However, NII was flat as lower investment portfolio yields and the impact of short and rates were offset by further expansion and the investment portfolio and lending activity.
On the right side of the slide we show the growth of our average balance sheet. During the second quarter total average deposits increased by $16 billion and the second quarter or an increase of 7% quarter on quarter, reflecting the continued impact of the federal reserve's expansionary monetary policy.
While we continue to remain mindful of OCI risk and the current rate environment. We tactically added about 5 billion quarter on quarter to investment portfolio, a few months ago before the recent downdraft in rates.
We also increased our average loan balances by approximately 5% quarter on quarter to over 29 billion driven by higher utilization by asset managers and private equity capital call client.
We also have a number of initiatives in flight to reverse and reduce this recent deposit uptick that we saw during the quarter.
Turning to slide 11 second quarter expenses, excluding notable items increased 2% year on year, mainly driven by the weaker dollar.
Excluding the impact and notable items and currency translation total expenses were down nearly half a percentage point year on year as productivity savings for the quarter more than offset higher revenue related expenses.
And targeted investments and client on boarding costs.
Compared to <unk> 20 on a line item basis, and excluding notable items and the impact of currency translation compensation employee benefit costs was flat as we reduced high cost location head count, which offset higher medical costs as claims began to normalize to pre pandemic levels.
Information systems, and communications were up 5% due to continued investment and our technology is state.
Transaction processing was up 10%, primarily driven by higher revenue related expenses for sub custody balances and market data costs.
Occupancy was down 13%, reflecting benefits from our footprint optimization efforts and some timing benefits.
And other expenses were down 11%, primarily driven by lower than usual professional services fees.
Relative to the first quarter expenses were primarily impacted by the absence of seasonal and deferred compensation reported and the first quarter.
So overall, we are pleased with our continued ability to demonstrate expense discipline as we have effectively managed total expenses ex notables and currency down year on year, and the second quarter, while driving strong total fee revenue growth.
Moving to slide 12.
And the right of the slide we show our capital highlights we are pleased with our performance under this year's CCAR with a calculated stress capital buffer well below the 2.5% minimum resulting in and preliminary FCB at that floor.
The new Seb framework provides us with additional flexibility to deploy our capital base and a number of different ways, including investment opportunities dividends and buybacks.
For example, yesterday, we announced a 10% increase to our third quarter common dividend to <unk> 57 per share and our board has authorized a common share repurchase program of up to $3 billion from the third quarter of 2021 through year end 2022.
In addition, we're also pleased that the federal reserve has provided phase III with 1 additional year until January 1.2024 to retain its current G SIB surcharge of 1%.
To the left of the slide we show the evolution of our CET, 1 and tier 1 leverage ratios as you can see we continue to navigate the operating environment with strong capital levels and excess of the requirements.
As of quarter, and our standardized CET, 1 ratio improved by 40 basis points quarter on quarter to 11, 2% as we had expected and sits above the upper and if our 10% to 11% CET 1 target range.
The improvement was driven by solid capital appreciation and we also managed down our <unk> despite balance sheet growth.
Our tier 1 leverage ratio remains well above the regulatory minimum but declined by 20 basis points quarter on quarter to 5.2% primarily as a result of the further increase in average client balances as the feds quantitative easing continues.
We continue to think that a tier 1 leverage ratio and the fives as appropriate for our business model.
And we can operate at the lower end of this range for a number of quarters, while we consciously limit and reduce client deposits and offer them a range of liquidity alternatives.
Turning to slide 13 in summary, our quarterly performance demonstrates solid business momentum on our top line and the scale, we are driving within our operating model.
Total fee revenue was up almost 6% year on year and exceeded $2.5 billion for the first time with double digit growth and servicing and management fees. Despite the year on year headwind from the strong FX trading services results, we had and the second quarter of last year during Covid.
Our expenses remain well controlled as a result of our productivity program.
As a result, we are able to drive pre tax margin and ROE close to our medium term targets notwithstanding the low rate environment.
Next I'd like to update you on our economic outlook for the remainder of the year and provide our current thinking regarding the third quarter outlook.
At a macro level our rate view broadly aligns the current forward rate curve and assumes that short end rates remained low and there is some modest steepening yield curve.
We're also assuming global equity markets will be relatively flat to quarter and for the rest of the year as well as continued normalization of FX market activity.
In terms of the third quarter of 2021.
We expect overall fee revenue to be up 7% to 8% year over year with servicing and management fees, each expected to be up 7% to 9% year over year.
This means full year fee guidance is likely to be better than the upper and as a full year range. We previously provided.
Regarding NII, despite the recent flattening and the yield curve, we have seen an increase and short and market rates and we now expect a modestly improved quarterly NII range of $460 million to $470 million per quarter for the rest of the year, assuming rates do not deteriorate and premium amortization continues to attenuate.
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Turning to expenses, we remain confident and our ability to effectively manage core operating cost.
We expect that third quarter expenses ex notable items will be flattish plus or minus half a percentage point year over year and <unk>.
These fee and expense guide for <unk> include approximately a point of currency translation year over year.
On taxes, we expect that the <unk> 21 tax rate will be in the middle of our full year range of 17% to 19%.
And with that let me hand, the call back to Ron.
And.
Thank you, Eric and with that operator, we can now open the call for questions.
Thank you at this time, if you would like to ask and audio question Press Star followed by the number 1 on your telephone keypad again that is star 1 for questions. Your first question comes from the line of Betsy <unk> with Morgan Stanley.
Hi, good morning, Thanks very much.
Hi, Betsy.
Alright, just started and wanted to start off by talking a little bit about the fee guide that you just went through.
Could you just give us a sense as to the major drivers I mean I realize it throughout the call you were talking about pipeline shop.
You've got reinvigorated sales effort going on.
Is that what's driving this so quickly or is there something else that's happening.
And as a fee guide race. Thanks.
Yes.
Why don't I start and Eric growth.
Come in I mean, it's.
Yeah.
I wouldn't describe it as so quickly I mean, what youre, what youre seeing here is the product of <unk>.
A lot of months and years of work.
Now coming together and starting to bear fruit so.
And not that we're done we have more work to do but I think really and it's about some of the things that we've told you in the accounts that we've been up to that are coming together and.
And and.
And starting to have the desired impact here.
Okay. Thanks, and then maybe you could just refresh how you're thinking about.
And the asset management business, and where you would like to lean and 2 gross what pockets you're looking to invest in and.
And if thats by geography to that'd be helpful.
Yeah.
I mean, we think of the business as having 3 core.
Elements to it and the ETF business, the institutional business and the cash business and both are well established franchises.
The areas that we like to lean into.
Or the institutional business first and I'll come back to the ETF business, but the institutional business.
As very strong client relationships around the world, but a limited product set.
So what we've spent a lot of time thinking about is how do we take those relationships and.
And that distribution channel and leverage and in some way through enhancing our product capabilities and the ETF side, we have been on a long path to developing.
Other products up there as well as deepening our presence and geographies outside the U S. You've seen a lot of.
Payoff from that particularly in EMEA.
And we'll continue to grow that areas of growth include.
ESG, which for US continues to do very nicely as well as just continuing to emphasize.
The advantages of our Corp <unk> it.
It was and it's an institutionally designed products.
A lot of liquidity to it.
Liquidity is important to many investors. So it's emphasizing what we have there and then the cash business is obviously, it's a function of interest rates.
But we have a very sophisticated cash business that works and different interest rate environments, and we'll continue to.
To present that to both existing and.
Asset management and asset servicing clients as well as clients that don't have either of those relationships with us.
Thanks, Ron and thanks Sarah.
Your next question comes from the line of Brennan Hawken with UBS.
Hi, Brian and good morning, Thanks for a.
How are you run a year.
And so another follow up on the updated outlook.
I notice Eric said.
You said youre going to be above the upper end of the range for the full year, which.
And does it doesn't seem that challenge and given how strong things where it here and the second quarter and given how good <unk> works at this point.
Is it is it possible to narrow that.
Full year fee revenue outlook, there's something more specific than just a greater than sign.
How are you thinking about it and how should we think about it and then also.
What are your assumptions for balance sheet size embedded and the updated NII outlook. Thank.
Thank you.
Sure Brett and it's Eric Let me, let me describe it this way I think we're seeing.
And good performance across.
A number of our businesses.
In addition to some of the.
Tailwind, so you get from equity markets and.
It's a combination of both equity markets were up globally.
Quarter on quarter.
And 5% so that gives us another.
Step up for <unk>.
Servicing and management fee businesses, but in addition, I think what we are seeing is strength and net new business revenues last quarter. I said, we were relatively neutral and net new business and servicing fees this quarter were <unk>.
Nicely positive on that front.
On the servicing fee side.
And management fees, you know we've been.
And booking a couple of quarters here and a row of very nice inflows they've come with annualized net new revenues that are.
That are.
Solidly.
Positive and create a tailwind as well and then you saw you know.
Had good performance across our SEC lending franchise.
<unk> had another good quarter and so we're comfortable.
Comfortable with a higher guide I think I gave you primarily third quarter.
Information and then maybe just.
Try to answer the question directly the full year fee guide. If you recall was taken up last quarter to 2 and half to 4% year over year number that includes the lapping ourselves from the Covid bump from FX a year ago. So our guide had been 2.5% to 4% for total fee growth and I think now you.
Can count on around 5% growth so on and go from that range too.
Another point up over the top end of that range for the time being given given what we know today.
Okay, Great that's fair and then the.
The balance sheet size piece of the NII.
Yes, the balance sheet as always.
And has as has.
And as puts and takes and ins and outs and this environment of quantitative easing and what you've seen US do is we've.
Tried to put some of the additional deposits to work you've seen us take advantage of the.
Increase in Io and.
And.
The fed.
Floor on the on repo rates. So that's been constructive we do need to manage also the size of the balance sheet, because as we compressed the balance sheet that frees up leverage ratio capacity and then that feeds back into our ability to return capital and so we are pretty serious about.
About compressing some of those deposits we had more of an uptick in May and June April has kind of been roughly in line with the first quarter and so we're starting to.
Chip away at that and we see a path to do that I don't think that will have much of an effect on NII member at these low rates deposits and yet.
The incremental deposit is worth a little bit, but not a lot, but it won't be the right way to manage the balance of NII.
Which I think all comfortably sit and that new range that we provided while also freeing up.
Face for capital return, which is an important priority for us.
Great. Thanks for thanks for providing that clarification. Eric you also in your prepared remarks mentioned that fee rates vary and.
You think about the nice uptick in your won but not funded.
And a tier 1.
And as those fee.
Dynamics look like how should we think when we're starting to think about modeling building those out from here are those does the success of alpha that you've had and Charles River, which we thought and.
And the results today does that help.
Port the fee rates for the businesses that youre looking or is the competition just still so intense that.
And that's just too too optimistic how should we think about those those fees that are upcoming.
Sure Brennan, it's Eric again, I think Theres, a real range here.
What you tend to get it's not whether it's alpha deals or classic cutscene accounting deals.
It's really the size of the deals tend to come at different fee rates and so.
We saw some larger deals this quarter and because it's the denominator of assets is larger will come up a little lighter in terms of fee rate on the other hand, and first quarter, we had a set of wins that were.
And well above our our traditional fee rate and so.
You kind of have a number of combinations and what we're always still 1 is on a profitability basis and.
And Ah and Ah.
<unk>.
Incremental basis always making sure that as we add revenues, we do it at healthy margins.
We use it as a way to control our costs and be disciplined and so I think fee rates will bounce around for wins and 1 quarter versus the next but we're actually quite pleased with the fee rate for the first half of the year as well in line with our overall fee rate for the company and.
And.
And that.
And that bodes well as we leg into and implement some of these some of these are.
And new wins.
Great. Thanks for that color sure.
Your next question comes from the line of Ken <unk> with Jefferies.
Thanks, Good morning, Eric.
And Ron just wanted to ask a little bit more on the capital return just in terms of how you land on.
And on the $3 billion number vis vis your <unk>.
Balance sheet potential uses and also your capital ratio targets.
Are you aiming for a total return payout how are under this new SCB. How do you how do you kind of land on that number and how should we be thinking about whether there would be potentially no more room, depending on some of those other factors. Thanks.
Ken and Tara Theyre always facts and circumstances on individual capital return.
And any.
At a time and place, but let me let me give you the kind of the.
And the envelope and how we think about it from from our standpoint about what's possible and what we'd like to do now.
And that Theres always.
You always have to manage to the individually to the quarters, but the SCB does give us some flexibility. So let me let me do it and in the following way.
1 of the things we start with is what is our CET 1 ratio and you saw we put in and 11, 2%.
First thing you can do is compare that to whats the target range, 10% to 11% you can say look first step is how do we.
Note down that that ratio to the mid point of that range and that provides 700 and $800 million of capital return capacity. So that's 1 piece.
Secondly.
Go through earnings earnings next quarter or the quarter. After you guys all have projections of earnings and.
And what we do with those earnings and say, how do we give those earnings back to shareholders and a form of capital return. So 1 part of that is the dividend and then the balance of the earnings can often be returned as buybacks.
And intention.
And we often have so you can add those buybacks that cover the difference between earnings and dividends for the next 23456 quarters, because we gave you and kind of a 6 quarter view and then finally, the 1 thing you have to keep in mind is the balance sheet always grows a bit.
Not at the same intensity that that lending oriented bank does but our balance sheet might grow risk weighted assets by 5%. So theres kind of a there is always a bit of capital retention that is necessary just to fund.
Now on $120 billion, and <unk>, 5%, you always need to <unk>.
Retain maybe $600 million typically in a year of capital too to hold against that so if you go through those pieces, it's literally the down the floating down it's the what earnings can support net of the dividend goes into buybacks and then it's the modest amount of retention you need force.
Some good underlying growth, which I think pencils out to that up to $3 billion.
Range.
Got it thanks for that color and second question just on your NII Guide and the range you mentioned that premium am would continue to attenuate and I was wondering if you can help us understand how much attenuation would you expect and where was it this quarter.
<unk> and some of the other factors that are kind of working against it to kind of keep us and the zone.
Yes premium amortization actually is a bit.
Bouncing from 1 quarter to the next just given kind of where you are with individual bonds and so forth, but whats happening is you've got the grind on the investment portfolio, which can be and the.
$15 million to $25 million range, and then premium amortization can work and the opposite direction and the upcoming quarters, we're thinking it's and the.
$15 million range, but it'll bounce around and so you kind of have this.
Headwind if rates just floating through premium amortization going the other way.
But it can bounce around plus or -5 million box easily from 1 quarter. The next and that's the kind of thing we just want to be careful of.
What is nice is we're starting to get to a leveling off of the net yields on the portfolio is roll offs are starting to get better matched with rolls roll ons I think that's a good word to use roll offs and roll on of bonds and so you saw that we printed.
Net yield and the investment portfolio without a 1 point.
<unk>.
And $1.1111, 2%, we're pretty close to the bottom of that yield and Thats what gives us comfort that were in this range.
For the time being though is as you could see from my prepared remarks, we took the that the upper end of that range up a bit just because of the.
The improvement and front end rates.
Understood Okay. Thanks, our share.
Your next question comes from the line of Glenn Schorr with Evercore ISI.
Okay.
Hello there.
Glen.
Hello there.
And it's good to see the margin back to the 30% range and.
And listen.
Now to casually I hear good markets and organic growth.
Better commentary about fees, NII and fee waivers and continue to control expenses. So.
And the question is is the 30% ish margin here to stay for now.
Because it.
It sounds like.
And things moving and the right direction right now.
I think Glenn it's Eric I think are here to stay as a pretty definitive.
Term I think what you can see is a solid progression over time, and our margin and while 1 quarter doesn't make a.
Year doesn't isn't.
The intention that we have I think you could see progress I think can see progress over quarters, you can see progress over a year. So I think there was a time when we would have taken the equity market tailwind and years ago. You would have seen expenses creep up a lot more than they did this quarter and.
So I think youre seeing and discipline that that's pushing margin and the right direction and.
And.
I think we're pleased with our performance wed like to do it again and again, but.
And that's that's the I think the focus on the intensity, we we bring but yes.
Good result, I think right direction and.
We.
As Ron said in his remarks, this is taken and quarters and years to get to this point, but we need to we need to keep at it to consistently deliver.
And this kind of result.
And what I would add too as you know.
Margin is part of our medium term targets, we laid out those targets at a time when there was a very different and I picture. So it's taking longer than we would've liked but it's very much part of what we said we were going to deliver.
And it's built into management compensation. So I think that you should expect as much intensity around it.
And tomorrow as you've seen up to now.
I appreciate that just 1 quick follow up.
<unk>.
And I just want to understand this.
And this will eventually.
Pacing outsourcing global custody and the region.
The broader handle the other 1 I wonder if you could expand on what you expect or hope and relationships.
So I mean, we've talked in the past about our intensified efforts in the middle East and we've been there for a while but we've.
We've taken a number of steps to to augment our presence there we've got full licenses, we've got licenses now and Saudi Arabia.
Think of first off with Dolby is.
And doing 2 things 1 we become the global custodian for their client base.
2 they become our sub custodian and.
The regions and parts of that region, where we don't have local custody so replace.
Other.
Sub custodians, and our and our network.
How quickly can that happen.
And what pieces.
And it's starting now and then we'll start there's contracts that need to move and things like that but it will it will happen pretty quickly over and over months and a couple of quarters not years.
Excellent. Thank you for all that I appreciate it.
Your next question comes from the line of Alex Blaustein with Goldman Sachs.
Hey, good morning, everybody Friday.
Was hoping to get a couple of questions on CRD I guess, 1 can we get an update on the uninstall revenue backlog and $93 million, what's the typical timeframe of those installations and when it comes to new bookings to $19 million and.
Any color you guys can provide around client types and service types that are embedded with 19 would be helpful.
And then I guess, just just and Amira question and sorry, if I missed it Eric did you guys mentioned the episodic benefit how much that contributed to the quarter.
And CRD specifically.
Sure Alex It's Eric Let me, let me touch on each of those because we're real pleased with and CRD performance. Both in terms of this quarter's wins the backlogs I think the momentum and <unk> and obviously, how it contributes to the broader state Street hole.
Just to take through the new bookings $19 million for the quarter was.
5 quarter high.
Some of that I think you could.
And <unk> ascribed to the Invesco win which was front office Middle office back office.
As we continue to.
To expand that relationship and you have within the 19, the front office piece of that.
That win on.
The uninstall backlogged and 93, it's a mix of installations that come over 6 months 12 months 18 months and some cases 24 months.
I will remind you is that the longer installations tend to come with professional.
Professional services fees.
As you.
As you.
As you prepare and and and do those implementations.
Classic and the classic software sense of those get those get reimbursed and paid as part of many other contracts until you get to the go live period, which in some cases, a short for smaller installations and other cases takes it takes longer just given the <unk>.
<unk> and complexity of what we're on boarding.
And then I think finally, you asked about the total revenues the on premise revenues.
Sure.
Hit a high of another high just like a year ago <unk> family of $63 million.
Some of that was the classic re upping of installations.
And.
And that renew from 3 year old contracts 5 year old contracts that kind of stuff I think some of the most episodic.
Items and there are probably in the 20.
20% to $25 million range. So.
And I just encourage you guys to take an average of quarters over 5 quarters 9 quarters that kind of thing and that will give you a better sense for what's typical.
And in that path.
Pat.
On premise line, but maybe that's enough to to start with yes.
Yes that makes sense and then just a quick follow up around capital and just a follow up to Ken's question earlier.
The fact that you guys are a little bit below the low end of your target and tier 1 leverage and it sounds like theres room to manage those deposits out over time, how does that inform just the pace of buybacks from here the $3 billion and you guys got authorized last night.
And we think of that evenly spread out through the end of 'twenty, 2 or a little bit more backend loaded as you guys work through the balance sheet dynamics.
Yeah. That's a fair question, because we've got to balance a number of different factors.
And tier 1 leverage were comfortable operating and the fives and <unk>.
This is the.
Right weight risk if you think about it we've got a <unk>.
Influx of deposits there.
And they are held at the safest place and the world the fed and the central banks.
And so we're not particularly exercise that bump and that too bumping at or even down a bit from the from.
From the lower end of that range. So that's fine as long as we have plans over time that we.
That we can.
And that we can execute and we do have those plans and that's what we do for a living.
And as I mentioned, we've got we've got actions and play some of those deposits came and a little heavier in May and June we've got a set for example of ongoing client discussions are mix of commitments and ongoing discussions for example around 10 billion and those that are literally happening.
As happened last week this week.
And so there are ways for us to chip away at that in terms of the buyback patterning, while it's always dependent on facts and circumstances and exactly whats going on at any point in time.
We don't have an interest and back loading buybacks necessarily like we'd rather do them relatively smoothly again.
All else being equal.
And we think we have plenty of capacity given our higher levels of capital ratios and our strength and the confidence we have on our <unk>.
Deposit management efforts to what to deliver those and a relatively consistent way and in a way I think that shareholders would appreciate.
Awesome, Thanks very much.
Your next question comes from the line of Brian Bedell with Deutsche Bank.
Hey, good morning folks.
Just wanted to come back to the balance sheet.
Hi.
And in terms of the size and how youre managing that I don't know if I missed it.
And for the $4.60 to $4.70 quarterly guide.
Sure.
And what's embedded in the size of the balance sheet given that it did spike up and the second quarter. If that if your expectation is for that to moderate and.
And then longer term over the next 6 quarters.
In conjunction with the $3 billion buyback you mentioned, obviously keeping capital.
And for balance sheet and.
Maybe if you can.
Give us some thoughts around whether your plan is within that buyback expectations here continue to grow the balance sheet on and on a year over year basis.
And how that contrasts with the comments about trying to reduce the excess deposits on the balance sheet.
Sure Brian It's Eric there are a couple of <unk>.
Factors and there.
That both get at total balance sheet, and then the risk weighted asset content and balance sheet I think distinguish those 2 let me just tackle your questions and order on the NII range of $460 to 400.
And 70 million per quarter for the next couple of quarters.
That that fully takes into accounts some of our deposit management efforts remember the incremental $10 billion deposits and earn a ton. These.
These days and so that's been that's been factored in to get to that range and the underlying reason that range has slowed up a little bit as the front and rates.
And have picked up which was gratifying.
In terms of balance sheet growth.
We need to contain the size of the.
The.
And the balance sheet in terms of size call it leverage assets, alright, thats, what we need to contain.
Under the surface there's always.
Some amount of healthy growth and risk weighted assets right because as we <unk>.
Support our clients and the FX business or in the second lending business for by lending to them, we have to expand those modestly now and our balance sheet. We're a capital light business, we've got a.
We have <unk> on our balance sheet.
And that are.
In the $120 billion range, you know what I don't know if there is a range of what those can grow but they're not growing at 10% a year. There. They may be growing 5 ish percent a year plus minus a couple of points.
And so it's a it's kind of that level and when you grow <unk> that amount youre, not really adding to the leverage balance sheet, the leverage balance sheet, which connects with tier 1 leverage is driven primarily with deposits and that's separable from the <unk> kind of growth typically.
Okay got it that's clear and then.
And then just maybe just back to the Abu Dhabi relationship and.
And as you said, Ron you expect that to start.
<unk>.
Moving pretty pretty quickly.
Should we think about any impact Q.
And for State Street and.
And and asset servicing fees.
Related to that or is it.
Is it less material.
Yeah, Brian and I would say that.
I mean, clearly it will our expectations it will drive AUC ticket.
It will be a modest amount at the beginning it will also help us to continue.
Continue to contain and manage our sub custody costs.
And maybe most importantly over the medium term given the relationships that are.
It will help further our penetration in the region. So I mean and Thats, probably the most important reason to be doing it.
Just a terrific partner.
Okay.
I think the challenge that we have.
And others have too is that there can be times, when you've got sub custodians and you'll like them, but you are competing with them in certain instances and in this case we have.
And we're now have a sub custodian that we're not competing with.
Right right and then that makes sense okay.
Thank you.
Your next question comes from the line of Steven <unk> with Wolfe Research.
Hi, good morning.
Good morning, so wanted to start off.
Eric maybe with a question on securities growth and.
More specifically I guess related to the LCR.
<unk> had strong deposit growth as you noted the LCR ratio is running a little bit tight and 104% versus 100% minimum and I was hoping you can just give us some sense philosophically how you are managing to LCR constraints and just given the poor QE lip.
Liquidity treatment of Kiwi related deposit growth and how does it impact your ability to deploy at higher yields and even just growth of securities book incrementally from here.
Sure Steve It's Eric the LCR has some anomalies and I'll remind you up and that calculation between the.
<unk>.
All in Corp, LCR and the bank and the best way I can describe it is what's most pertinent to us as a institutions a bank holding company is actually the bank LCR. The bank LCR is at 131% and so it's extremely flush and and.
Got plenty of room.
And what happens at the Corp is that the.
And the additional deposits get haircut, just because of the transfer ability which is.
Which is fine and.
And what happens and the calculation because of how the numerator is factored in for that and the denominator and I'm happy to.
Put you in touch with our IR team to share with you some of the scenarios.
Is that as we become more flush at the bank, which is a good thing.
You have this.
This this.
Odd result that the.
Corporate Holdco, where the LCR goes down.
What's ironic is that if we were to begin to reduce deposits.
What happens mathematically is that the bank LCR starts to flow down from the very elevated 131% and the corporate LCR actually floats up and I think it's best that probably have.
Someone and work through the algebra with you. It's just how the how the rules are configured.
There are fine, but we're actually quite flushed with LCR and.
Our.
And our operating quite quite comfortably.
And thanks for that color Eric.
And the follow up I had was just on expenses.
Great job a range.
And clearly into Q3, Q guide reinforces and similar trend and there is some growing concern amongst investors just given many of the other large banks are guiding higher on expenses talking about accelerating investments and I was.
Was hoping you can might be able to give us some context on what the full year expense might look like for this year and even talked thinking through what the growth algorithm might look like heading into next year, whether you might need to step up investments to keep pace with payers ultimately.
Sure.
Let me let me start.
<unk> has been a focus for several years and our ROE now, we've gone and expenses down ex notables and adjusted for currency.
Down, 2% and 1.5% last year and this year. What we've said is that on a nominal basis, we expect expenses on a full year basis to be to.
To be flattish plus or minus half a basis point range.
And.
And that's nominally and on a on an adjusted for currency basis and notables it would be down by about by about a point, obviously with a range around that.
And obviously the biggest thing that we wrestle through this year in particular is that there are revenue related costs that come through as we've mentioned sub custody costs are often AUC a base market data costs, our AUC and AUM based and so those are those are what we're working through and why we have a range.
And there and we stuck with our.
<unk> stock and are sticking with that range given given what we what we know today I think if I step back there is a hallmark of our approach to cost is that you've got a systematically.
Half productivity programs.
In place that actually save.
And not a little bit, let's save a good amount of costs right and I think we show you typically.
And when we do our January call being the year that we're looking to take 4.5 percentage points of the expense base off through a set of productivity programs.
And that on a base of 8 billion 4.5 points is.
And that's significant amounts of hundreds of millions of dollars of revenue, but we're a scaled business thats, what we should be doing and then at the same time, what we're doing is reinvesting a portion of that not all of that but a portion of that in the underlying business and sometimes we invest by expanding coverage and sales force as such.
Times, we reinvest by expanding and.
Product feature functionality, sometimes we invest as we onboard clients right we have to.
Have some marginal cost that we have had and we're usually happy to do that because it comes with revenues on the other side of it and so our programmatic approaches to.
Save sufficiently.
So that we can reinvest and we'll continue to do that now how those balance out we've given you a sense for how that balances out too.
To down expenses.
And.
And 19 and 2020, it was down and this year, we expect to be down as well again adjusted for notables and currency translation and how that plays out we're going to we'll keep working through it's a little early to talk about next year, but I think you can tell we're we're pretty focused on on this.
But obviously, we do need to factor in revenue related costs and as equity markets continued to tick upwards and all we have to factor that in and that's a little more of a feature of this year and maybe even.
Upcoming time periods and it has been and so that is something that we we have to work through but at least that's the broad approach.
And that's great color Eric Thanks, so much for taking my questions sure.
Your next question comes from the line of Gerard Cassidy with RBC.
Good morning, Aric, Martin and run.
Hi, Gerard.
And.
Eric.
I think you said and the call and I'm trying to get the transcript.
The cadence so I apologize I have to ask this question I think you've seen and the call net new business wins. This quarter contributed positively I think you'd said maybe earnings versus last quarter. It was neutral.
First of all could you clarify if it was earnings per second what was the changing dynamics between the 2 quarters and enabled this quarter to be a positive number versus last quarter. It was neutral.
Gerard it's Eric.
I think you've got you've got.
Good good.
<unk> summary, and let me just.
At the specifics as part of my prepared remarks on servicing fees right I was clear that part of the increase on a year on year basis and servicing fees came from.
Positive net new business, so more wins installed and the usual modest amount of.
Of attrition that we get and that is in contrast, if you remember correctly last quarter I said.
New business net new business was neutral and I said, we were not as pleased as we'd like to be we'd like it to be positive and it's important for it to be positive and part of what Youre seeing is I think that over the last couple of quarters, we've accelerated.
Our wins and win rate and you see a little bit of that and AUC as but it's bouncy right.
You've seen us.
<unk> put in place and install business quickly and some cases, so remember custody can get installed quickly when it's 1 and so we've had some focus on some of those kinds of wins and those have come through.
And the intention here is how do you continue tests.
To sell and expand share of wallet with clients not just with the top 60, as we've talked about but the next.
The next tundra and the next 200 and.
And so I think what we're starting to see some of the effects of the or some of the results of that more intense coverage process some of which we presented at 1 of the conferences back in June.
Is starting to take root and are more I'll say, a more consistent way that doesn't mean it'll happen every quarter, but were I think quite quite pleased with this quarter and we see that it's been building.
It's been it's been a building.
And the momentum has been building in this regard.
Very good and.
And then the follow up questions on the outdoor product and you are having obviously some success now and winning over new customers I guess within that area.
What percentage of your Hulu customers you just referenced Eric the top 60 for example.
And what percentage of your customers are LNG, you think would be interested and the alpha products and.
And second when you talk to your customers.
Taking on Alpha 1 and assuming the challenges you expand to convince and then it's really and their best interest to do it.
Hey, Gerard it's Rob why don't I take that.
And in theory, I suppose we'd say.
Other percentage of them are eligible.
So starting point really matters here.
The clients that have been.
We've now got experience under our belt.
Sure.
<unk>.
And through the end of the second quarter.
Whole lot more.
Current conversations underway.
Typically there is some kind of trigger point.
The aging technology.
Effective or excessively costly.
Operation stack.
And the triggers this.
The obstacles to it or several fold right.
Or big change programs and typically the institutions that are going forward with it.
It's not about.
And <unk> Deputy head of operations has decided to come higher us.
Almost always at least driven from the CIO and the COO meeting the Chief investment Officer, and the Chief operating officer and oftentimes, it's on the Ceo's agenda. So when there's that kind of focus on it.
And that's when these things tend to happen now just given.
What's going on and some of the trends and the asset management industry.
<unk> now, but some of the underlying trends in terms of aging technology.
Real challenges around data management and.
And how do you.
Effectively use that data you have these.
These issues are on the agenda of most Ceos.
No.
It's very few instances, where there is not a conversation going on and how it plays out will be different which is why we built the model the way it is meaning.
Interoperability.
And we will.
<unk>.
We've had different wins were in fact were inter operating with other front office systems to the extent and we need to.
Such as Aladdin.
And so.
And we've tried to build this recognizing that these are very large sophisticated clients long histories.
Lots of kind of software and their stocks and we want to make this work across a broad variety of clients.
Okay.
And just as a quick follow up on the share of wallet that you just referenced earlier Eric.
You guys found yet with the alpha customers that youre, having better success and expanding the share of wallet once you get them on boarded and up and really the non traditional customers.
Yeah, Gerard it's Eric that's exactly the result that we're seeing because.
We are finding is not only do we expand up the up and down the value chain, we add the front office, the middle office, and many cases and the back office, but as you do that it's much more natural to begin to.
Say, if youre going to add middle office and back office to begin to consolidate the custody.
For example.
And the relationship or to cash.
Connect with the some of the trading activity that we have because some of the trading activity can plug for example directly into into Charles River. So that's the that's the underlying benefit as they expanded share of wallet supplemented by these become even stickier relationships. These become true partnership.
And so as opposed to.
Our service range.
Great. Thank you.
Your next question comes from the line of Jim Mitchell with Seaport Research.
Hey, good morning.
Ron you noted that you want to lean into the institutional asset management business and this quarter was 1 of the best flow quarters and 5 years. So can you I guess 1 describe in more detail what youre doing on the sales and distribution side to drive the improved growth and I guess secondly, when you talk about adding products and capabilities.
And what areas would you look to add is that and organic effort or does that need to be acquisition, just some help on that thanks.
And of.
And what we've done is over the course of a couple of years taken a.
A very good sales and relationship management force and made it better.
We have the benefit and most of our instances because of the core passive products, where if we're in a client we tend to be if not the largest manager.
1 of the largest which by definition gives you a seat at their table.
And as they think about asset allocation and those kinds of things. So it's been very systematically.
<unk> out and upgrading our.
And our capability to her.
Have those conversations and provide those products into and.
2.
Have and increased share of their wallet.
ESG has been.
Providing some real tailwind here, we've got a long history and we've got it.
A strong reputation and it.
And we've been able to.
Both have those conversations and shape a lot of asset allocation there and.
In terms of products.
I mean, it's.
If you think about it it's.
And we tend to dominate 1 and of the barbell. So as you look out across the rest of the barbell.
Almost anything would be eligible our focus is on now.
Multi asset products and building some of those ourselves or creating them bespoke from from.
Our very large clients through.
Through product capabilities that we already have but the way we're thinking about it conceptually is that.
We have a distinctive strength.
In terms of our institutional sales and client management.
Capabilities and we're thinking about how to do that we think theres organic opportunities in terms of inorganic.
They're hard to engineer right. So.
If something comes along that makes sense for for our clients and per our shareholders. We'll certainly look at it there's been plenty of.
Organic that we have been able to do that you are now seeing and the results.
Alright, great Thats helpful. Thanks.
Your next question comes from the line of Mike Mayo with Wells Fargo Securities.
Hi.
And late 2018, you had around 40000 employees and now you have 39000 employees. So I was just wondering.
You're putting on more revenues without adding head count.
And what role has technology played into that and what are your expectations going forward and the Big picture question is whats the state of your tech backbone in terms of.
How much are you on the cloud public cloud private cloud and which do you expect to remain for almost a decade later actor State Street first implemented.
And it didn't go great last decade, it seems like it's going better now so kind of it and update on that and again tying that back to head count.
Yes.
Mike It's Ron here.
In terms of your your point to book leverage we're getting out of the.
Of the employee base and make a couple of points here.
Yes.
And that.
The composition of that also has changed too I mean, we are continuing to leverage and utilize lower cost locations. So you would find that the mix has changed over that period, but youre raising actually the more important point, which is which is technology and.
Service productivity.
And it's not just the service and it's not just US firm service productivity has been elusive.
For a long time, now and I think we and I suspect others are getting our arms around it.
A lot of it is automation a lot of it is taking and.
Automation and services.
It's not quite the same thing same thing as you envision an automobile assembly line with lots of moving mechanical arms. It tends to be you are taking.
Many many task constitute a job and automating those such that whats remaining and the job is higher value added and those things, where you need judgment, we're getting better and better and instituting that.
We also Mike Kurt and we've talked about this and other contracts, where we're spending a lot of time on measuring productivity again manufacturers. The good ones who've had the stone for a long time service companies, it's much newer.
We've got a significant percentage of our company now.
Covered by productivity metrics and sometimes.
The old Hawthorne effect right you just.
Now that there is a measure and youre, saying, hey, there is a difference between this group and that group and they are pretty similarly, situated and doing the 2 and the same thing what can we learn from that and that is starting to drive some of that productivity on the technology side.
I stand by the team that we have an outstanding team, that's making a lot of progress as you know and technique.
Some of it is about pure investment and new staff and new capabilities and that's part of the investment.
We're making a lot of it is around continuing to.
Our resilience.
This is <unk>.
Ongoing.
And issue for the industry, particularly in fiber.
And as the cost to deal with that goes up and up and up and <unk>.
<unk>.
Need to be at the lead and we want to be I believe there.
I think we're making very good progress.
Showing up and the numbers again, it's the result, not just the things that we did last quarter, but.
Things that we've done now for.
Many quarters and approaching years, and they're starting to pay off and you'll see more payoffs and the future.
And.
And.
Just I found that very interestingly the analogy gave with the auto Assembly lines. So when you automate a services business how much of that can you automate, leaving the value added parts at the end and again on the the head Count question and maybe you don't want to answer that 1 or maybe you don't know yet.
And you had those 2 follow ups. Please.
Yes, I mean you are at.
And the question and the first part of that next question, you've asked which is how far can we go and we don't know that yet, but we know there's a lot more we can do that we've done.
To think about the striking a at NAV.
Net asset value and there's a lot that goes into that and then there's a lot of reconciliation and checking that goes into that.
We are again as we've talked about and other forums.
Putting a lot of AI and Tibet right to make that NAV calculation not be this flurry.
And of the day that begins at 4 and hopefully is done by 515, but in fact is starting as soon as trading starts such that what youre doing at the end.
Is really that final checking where you do need human intervention.
So and.
Mike What was your question on people did I Miss a question just no I guess.
And I was trying to make the connection between technology and head count and may be enforced and that connection, but your head count and flat revenues look like Theyre going higher you talked about.
Backlogs installation intense coverage process do you expect head count to start going up again.
And those initiatives and the backlogs.
I think what you should expect to see from US is a breaking of the relationship that occurred in the past which is that.
Head count and compensation related costs went up kind of at the same level as revenue.
With this really is about is just getting more scale and scale effect.
Auto power system.
And.
In the past some of our challenge has been that we tend to deal with the most sophisticated clients highest demanding.
They pay us a lot of money. So there are demands are justified.
But we've gotten much better about getting scale out of those relationships and those operations and you should expect us to continue to do that.
Got it thank you.
Okay.
Your next question comes from the line of Robert <unk> with Autonomous research.
Good morning, guys.
Hi, Rob.
Just another question on CRD you guys did.
Highlighting some of the drivers of this quarter's results.
I'm wondering if you could comment on the trajectory of the software enabled and professional services pieces do you think the 10% growth that we saw this quarter is sustainable.
Rob It's Eric.
And that certainly is sustainable I think the what we'd actually like to do and you've seen in different quarters. If you go back. The last few earnings releases is that the combination of professional services and software enabled.
Revenue is actually growing.
Nicely and the double digit is not.
And.
And some cases closer to 15% and because.
And what's happening is 2 things 1 is.
You've got take up and the market for new installations, and I think we've.
Described in the past the number of SaaS clients. For example is up but you also have overtime conversion from on premise to.
SaaS because clients are realizing the value of a cloud offering a more standardized cloud offering and still has to connect with their the rest of their state.
Where they can then get upgrades and.
The new feature functionality that we rollout on a regular basis. So that's that.
And that component of the of the.
And that professional services and software enabled.
Set of revenues and Charles River, I think are gonna be and the mid <unk>.
And the double digit teens, typically they'll just bounce around a little bit with professional services, but that is a real.
That's the.
I think thats the.
The future of the franchises.
And those those areas.
Rob what I would add to that is.
Much of the investment that we've.
1 other key investments we've put into the RFP was in fact.
Enhancing not overhauling.
And the cloud offering.
And we've.
Migrated.
And that to the Microsoft Azure platform.
It is now being installed and clients.
Or a combination of more standardization, but as Eric noted more flexibility for clients that have <unk>.
<unk> needs and particularly.
You get outside the United States, there's very particular desires, where that data is located.
And <unk> is giving us that ability to basically be flexible on that in terms of location.
Which is.
It's basically a more robust offering then Charles River have when we bought it.
Got it and maybe Relatedly I did want to ask about profitability and CRD.
Do you think that you're starting to see signs of scale and that business and then what do you think about the longer term profitability or margin profile of the business.
Going forward.
Rob It's Eric.
Yes, we are getting to that point I think we bought Charles River.
3 years ago, as we said, we announced the deal and.
And then.
The first year or 2 we needed to reinvest and the platform that was part of our deal modeling was part of.
What we thought would lift.
Revenue topline revenue from it.
It was.
Single digit and to the low double digits on average, we've said and so we did need to reinvest last year or.
2019, 2020, and this year, but I think we're starting to get to the point, where it's Scott now the scale and the functionality.
It should have where it can.
Where we can really deliver.
Earnings growth over time and.
Take advantage of.
The.
The.
The momentum.
And the <unk>.
Take up that we've seen and this business.
Rob and Theres been too.
I would categorize the investments and Charles River and 2 broad categories..1 is what you would have expected us to do.
And that matter, probably any other buyer, which was okay. We're going to enhance the offering here for Charles River and its historic established core business the SEC.
<unk>.
The category of investment has been related to.
Whole alpha platform, and making Charles River and integral part of that enabling the kind of connectivity.
And that Eric was talking about earlier connectivity to other parts of state Street connectivity.
You think about Charles River as the front to the middle and the back.
And that's been there's been a lot of investment there and.
Also a lot of development that has come out of that and it felt like nothing has popped out some of those and quite a bit thats been completed and implemented and.
And we think we are.
Kind of at the.
The peak of that and that that should start to flatten and then decline.
Got it thank you guys.
And your next question comes from the line of Vivek <unk> with Jpmorgan.
Hi.
A question.
And both Ron and Eric.
Firstly.
Ron you mentioned that you have.
A wider.
And you talked about the products and the asset management side.
Waiters active stand and.
Equity extend and your mind given that that has been.
For the last 4 quarters. It Hasnt really moved despite the strong markets is that still something you want to be and do.
Do you exit.
Whats your thinking there.
I know it's small.
But given your comment about your body and wide window.
It's small.
And much of our.
Our active equity.
Tends to be and the value space right, which is you know vivek.
Not yet seen its enduring day and the Sun.
But we do believe that active will play a part and should play a part and portfolios.
We actually think that the.
And the move to active Etfs will help propel them.
It will.
<unk> provided different vehicle to construct portfolios with so we view this institutional relationship management channel is 1 again, given the nature of the people and the nature of the relationships.
And 1 that can accommodate a broad set of products, including including active equity.
And does that really need and acquisition too.
That sort of make a material impact on that though.
Again, we're focused.
The organic agenda is pretty full.
In terms of products at this point and that's where our focus will be.
And I just hate to speculate about.
Inorganic because.
That's all it would be would be speculation.
Again to the extent to which something came along that made sense for our clients and for our shareholders. We'd certainly take a close look at it.
Yes.
And that's a completely separate question if I may the <unk>.
The big win with <unk>.
Someone like Invesco.
Huge existing clients already.
Given that there are already a large client and what are the incremental.
Services, and therefore, the incremental fee revenue from that.
Trillion sounds big but how should we think about.
Given the dealer and existing client alpha.
Is that did you add middle office and front office and then can you give us some perspective and how meaningful that.
Yeah.
Kind of awareness.
It is a large client.
But we certainly are.
We're not the only servicer of them so.
I would think about the services there and a few buckets, firstly, some back office, which actually transitioned over.
Before we even announced the win additional back office.
Secondly, as front office and terms of Charles River, which will be the.
We will be the core operating platform for them.
And then thirdly Middle office issued notice so it's really across the board.
And again this is us partnering with them.
To help them achieve what they're trying to in terms of their technology and operation stock.
And because we do have.
Long standing relationship with them.
And if also partnered with us in terms of developing.
And helping us develop new features and functionality into the alpha platform that will be extendable to other clients and the future.
Okay, and I guess, the middle office would probably come.
Little bit longer time to get and installs as it normally does right right.
Okay. Thank you both.
Yes.
And there are no other questions at this time I will now turn the call back over to Ron for closing remarks.
Thank you operator, and thanks to all of you on the call for joining us.
Thank you. This concludes today's conference call you may now disconnect.
And.
And.
And.
[music].
And then.
[music].
Moving on.
And again.
And our long haul.
And.
And we'll be moving.
And then.
[music].
And then.
[music].
Non.
And then.
Net.
And then.
And.