Q3 2021 State Street Corp Earnings Call

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Good morning, and welcome to State Street Corporation's third quarter 2021 earnings Conference call and webcast. Today's discussion is being broadcasted live on state Street's website.

Mr. Dodd State Street Dot Com. 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 for rebroadcast or distribution in whole or in part without the expressed written authorization from State Street Corporation the author.

<unk> broadcast of this call will be housed on the state Street website, now I would like to introduce Eileen to zelle dealer.

Global head of Investor Relations at State Street.

Good morning, and thank you all for joining us on our call today, our CEO Ron <unk> will speak first then Eric <unk>, our CFO will take you through our third quarter 2021 earnings slide presentation.

This is available for download in the Investor Relations section of our website investors that state Street Dot Com afterwards, we'll be happy to take questions. During the Q&A. Please limit yourself to two questions and then re queue.

When we get started I'd like to remind you that today's presentation will include results presented on a basis that excludes or just one or more items from GAAP reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our slide presentation.

In addition, 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 in our Form 10-K, our forward looking statements speak only as of today and we disclaim any obligation to update them, even if our views change now let me turn it over to Ron.

Thank you Eileen and good morning, everyone earlier. This morning, we released our Q3 results, which reflect continued strong performance across our enterprise before I discuss our third quarter financial results I want to acknowledge our employees for their ongoing achievements and supporting our clients and generating the performance and momentum we are now seeing.

Across the franchise, thanks to their hard work and execution. We are now seeing measurable progress in our financial results, even as we invest in our business for the future.

We continue to successfully execute against our strategic objective of being an enterprise outsource solutions provider across the front middle and back office and a leading asset manager. This is just the beginning we are encouraged by the opportunities we see within our industry our sales wins the momentum in our pipeline and what this mean.

For our ability to drive future growth in 2022 and achieve our recently enhanced medium term financial targets.

We are encouraged by the trajectory of our organic profile as demonstrated by our year to date business wins for example on a year to date basis, we have delivered the strongest AUC a wins in the company's history, while AUC a won but not yet installed stood at $2 seven trillion at quarter end.

At Global Advisors, our ETF franchise cross one trillion of AUM. This year with year to date Spider flows on track for a record year and already surpassing the full year 2020 flows.

Global Advisors financial performance continues to strengthen with pre tax margin expanding to 36% in Q3.

I also want to take a moment to note. The intended acquisition of Brown brothers Harriman Investor services, which we announced in the third quarter. We are excited by the opportunities. This transaction presents it is a strong demonstration of our confidence in the industry, our investment servicing business and our overall strategy. The transaction is also a <unk>.

Naturally compelling as it will enhance state street's financial profile and importantly, it will create long term value for our shareholders.

From a strategic perspective, this combination will strengthen our competitive positioning and market leadership and deepen geographic coverage with state Street, becoming the number one provider of asset servicing globally by assets under custody.

The accompanying talent will build on state street's already strong expertise and better position us for growth the compelling nature of the deal has enabled us to raise our medium term pre tax margin targets.

Turning to slide three I'll review, our third quarter highlights.

Third quarter EPS was $1 96 up 35% year over year, we delivered about seven percentage points of positive operating leverage this quarter and generated a strong improvement in state Street's third quarter pretax margin, which increased by about five percentage points year over year to over 29%.

This year over year improvement was driven by solid fee revenue growth good organic results and higher NII supported by robust loan growth leading to a strong total revenue performance.

Meanwhile, our focus on expense discipline continues to drive earnings growth as expenses remained well contained.

Relative to the year ago period quarterly total fee revenue increased 9% as we delivered broad based improvement across all three revenue lines.

Servicing and management fees increased 7% and 10% year over year, respectively, and we delivered solid results within our markets businesses. Despite a continued moderation of FX market volatility.

Even with 9% year over year total fee revenue growth expenses were well controlled increasing just 1% over the same period.

Fences were flat year over year, excluding notable items as our productivity improvements continued to yield results.

AUC a increased to a record $43 three trillion at quarter end with new asset servicing wins, increasing to $1 seven trillion for the quarter, including a large alpha mandate with legal and general which was announced in July as a result, AUC a won but not yet installed increased to $2 <unk>.

Seven trillion at quarter end as I noted a moment ago.

Including the legal and general mandate, we reported three new Alpha client wins in the third quarter, making the total number of taking the total number of alpha clients to 18 at quarter end.

At Charles River annual recurring revenue increased 12% year over year to $239 million and I am pleased with its business performance and how it continues to propel and propel our alpha strategy.

At Global Advisors assets under management totaled three nine trillion at quarter end and management fees increased to a record $526 million in the third quarter benefiting from higher average equity market levels and continued inflows to our ETF franchise, where we continued to innovate.

For example in recent years, we have been expanding our actively managed ETF capabilities.

And through three quarters. This year, we have the most successful active ETF in the U S. In terms of asset growth with the Spider Blackstone senior loan ETF.

By quarter end. This fund had gathered $5 5 billion of inflows in 2021 and had AUM of $7 7 billion we.

We also made an addition to our actively managed fixed income ETF range in the third quarter.

Each of the Spider alumina sales opportunistic bond ETF.

Turning to our balance sheet and capital we completed a $1 9 billion common stock offering related to the proposed acquisition of PVH Investor services in the third quarter.

Also related to the transaction, we suspended common share repurchases in the third quarter and currently expect to reinstate common share repurchases during the second quarter of next year.

We increased our quarterly common stock dividend by 10% in the third quarter.

Capital return remains a key part of our medium term targets and we recognize its importance to our shareholders. We believe that the BPH investor services acquisition as a financially compelling use of our capital and then it will deliver earnings accretion and value creation for our shareholders over time.

And with that let me turn it over to Eric to take you through the quarter in more detail.

Thank you Ron and good morning, everyone. I'll begin my review of our third quarter results on slide four we reported GAAP EPS of $1 96 or $2, excluding the impact of notable items.

On the left panel of the slide you can see that we delivered strong revenue growth year over year across every line item controlled expenses.

We delivered significant pre tax margin expansion all of which drove strong earnings growth.

In fact expenses were down year on year, excluding notable items in the headwinds from currency translation, which you can see at the bottom of the slide.

This was another strong quarter, where we were able to demonstrate the progress we are making and delivering on both our strategic priorities and our medium term targets.

Turning to slide five you'll see our business volume growth period, and AUC, a increased 18% year on year to a record $43 three trillion.

The year on year increase was largely driven by higher market levels net new business growth and client flows.

At Global Advisors, AUM increased 23% year on year to $3 nine trillion.

Year on year increase was primarily driven by higher market levels, coupled with net inflows.

Quarter on quarter, both AUC and AUM are relatively flat given relatively stable domestic market levels.

Turning to slide six you can see another quarter of strong business momentum.

Third quarter servicing fees increased 7% year on year, the increase reflects higher average equity market levels, good client activity inflows and positive net new business.

These items were only partially offset by normal pricing headwinds and about a percentage point of impact from some divestiture activity.

On a sequential basis servicing fees were flat as favorable equity markets and client activity were offset by about a percentage point of currency translation from the U S dollar appreciation.

AUC a wins totaled roughly $1 seven trillion in the third quarter, which gets us to a record of over three trillion of new AUC wins year to date.

We continue to estimate that we need at least one five trillion and growth of UCA wins annually in order to offset typical client attrition normal pricing headwinds and given the strong wins, we have garnered year to date, we have already more than double that this year.

At quarter end.

<unk> won but not yet installed amounted to $2 seven trillion and I would also note that the unique alpha value proposition represents a large proportion which reflects our competitive strength as the only front to back office offering from a single provider.

I will remind you that installations typically incur in phases in over time and deals with very buy fee and product mix.

And as we've discussed previously we would expect current one but yet to be installed AUC a to be converted over the coming 12 months to 24 month time period with about half of the annualized revenue benefit through 2022 and about half in 2023.

We continue to be pleased with our pipeline and a robust wins this quarter further showcases the broad based geographic and multi segment momentum of our business and will help drive net new business revenue growth in 2022.

Turning to slide seven third quarter management fees reached a record $526 million up 10% year on year and were up 4% quarter on quarter, resulting in a record investment management pre tax margin of about 36%.

Both the year on year and quarter on quarter management fee results, primarily benefited from higher average equity market levels and strong ETF flows.

These year on year benefits were only partially offset by the impact of the previously reported in synchronic institutional asset asset.

Asset reallocation and money market fee waivers.

Notably, we previously estimated that gross money market fee waivers on our management fees could be approximately $20 million to $25 million per quarter.

As a result of the recent improvement in short end rates. We now expect they will be modestly lower at around $20 million in the fourth quarter, assuming current for forward rates.

Lastly, as you will recall, we have taken a number of actions to deliver growth in a long term institutional ETF franchises and we continue to have strong momentum and year to date results as you can see on the bottom right of the slide.

Turning to slide eight let me discuss the other important revenue fee revenue lines in more detail.

Within FX trading services. We are pleased that we continued to generate strong client volumes, which remained above pre pandemic levels in the third quarter relative.

Relative to the third quarter of 2020, FX revenue increased 3% year on year, reflecting higher direct sales and trading revenue and indirect volumes, partially offset by lower FX volatility.

FX revenue was down 2% quarter on quarter, largely driven by seasonally lower client volumes and spreads.

Moving to Securities Finance third quarter fees increased 26% year on year, mainly reflecting higher client securities loan balances and spreads as well as business wins in enhanced custody.

On a sequential basis fees were down 3% quarter on quarter, mainly as a result of lower agency balances.

Finally, third quarter software and processing fees increased 15% year on year, but were 8% lower quarter on quarter, largely driven by CRD, which I'll turn to next.

Moving to slide nine I'd like to highlight our CRD and Alpha performance.

We delivered strong standalone CRD results in the quarter with a year on year revenue growth of 22%.

We saw growth across all three categories of CRD revenues on premise professional services and software enabled that.

The more durable SaaS and professional services revenues continued to grow nicely and were up 18% year on year.

Record, new quarterly bookings of 28 million and our healthy revenue backlog of $105 million also demonstrate our continued business momentum that we're seeing in CRD supported by the alpha value proposition.

On the bottom right of the slide we show some of the third quarter highlights from our State Street Alpha mandates, we reported three new Alpha mandates during the third quarter as the value proposition continues to resonate well with clients, notably since inception through third quarter. We now have seven of 18 total alpha client mandates that are live.

As a testament to our ongoing commitment and investment to further building out our alpha value proposition. We've also acquired <unk>, a premier front and Middle office solutions and data management provider for private market managers.

In connection with the acquisition, we launched alpha for private markets, which will extend our end to end data platform offering for alternatives.

Turning to slide 10.

Third quarter, NII increased 2% year on year, mainly driven by higher loan balances growth in the investment portfolio in more deposits as well as the absence of the previously disclosed third quarter 2000, and true up partially offset by lower investment portfolio yields due to the low rate environment.

Relative to the second quarter NII came in 4% higher primarily as a result of higher loan balances and a larger investment portfolio as well as higher short term rates all of which was partially offset by ongoing compression of yields.

I would also note that we saw a larger than usual slowdown in premium amortization in the corner due to some tactical rotation on the MBS portfolio, which accounted for about a third of the sequential.

Sequential quarter improvement and something we wouldn't expect to repeat in the fourth quarter.

Yeah.

On the right of the slide we show our average balance sheet during the third quarter, notably total average deposits decreased by $9 billion in the third quarter or a decrease of roughly 4% quarter on quarter, reflecting the active management of non operational deposits.

We also put more of our surplus balance sheet cash to work, we added approximately 3 billion quarter on quarter to our investment portfolio.

We also increased our average loan balances quarter on quarter to $32 billion in response to good clients demand.

Turning to slide 11 third quarter expenses, excluding notable items were flat year over year as productivity savings for the quarter continue to more than offset targeted business investments typical expense headwinds and $10 million to $20 million of higher than expected revenue related quarterly costs.

Compared to the third quarter of last year on a line item basics, excluding notables compensation employee benefits was down 1% driven by higher salary deferrals and lower head count, partially offset by higher medical benefit costs as claims begin to normalize.

Information systems, and communications were up 3% due to continued investment in infrastructure and our technology estate, partially offset by our savings programs.

Transaction processing was up 8%, primarily driven by higher revenue related expenses associated with sub custody volumes and market data costs.

Occupancy was down 6%, reflecting benefits from our footprint optimization efforts.

And other expenses were down 5%, primarily driven by lower asset management sub advisory fees and the timing of some marketing costs.

Relative to the second quarter expenses, excluding notable items were down primarily driven by the currency translation of the strong dollar and lower head count.

Overall, we are pleased with our continued ability to demonstrate productivity and expense discipline, while driving high single digit fee revenue growth year over year.

When combined together, we delivered a solid pre tax margin of nearly 30% and generated a robust operating leverage of about seven percentage points year over year.

Moving to slide 12 on the right of the slide we show our capital highlights.

As Ron mentioned earlier to finance the proposed acquisition of Brown Brothers investment services business, we completed a $1 $9 billion of common offering this quarter.

Also in conjunction with the transaction and we did not repurchase any stock during the third quarter and intend to temporarily suspend repurchases before resuming them during the second quarter of 2022.

Lastly, we still increased our quarterly dividend by 10% and returned a total of $179 million to shareholders in the third quarter in the form of dividends paid.

To the left the slide we show the evolution of our CET, one tier one leverage ratios as you can see we continue to navigate the operating environment with strong capital levels with or without the recent equity raise relative to our requirements.

As of the third quarter, our standardized CET, one ratio improved by roughly 230 basis points quarter on quarter to 13, 5%. The improvement was primarily driven by the issuance of $1 9 billion of common stock related to the proposed acquisition of Brown brothers investment services and higher retained earnings. We also managed down our <unk>.

Yes.

Our tier one leverage ratio also improved quarter on quarter by a little over 100 basis points to six 3%, primarily driven by the issuance of the common stock a decrease in the balance sheet size as we actively reduced some excess deposits and higher retained earnings.

Post closing of the Brown brothers investment services acquisition, we expect both capital ratios to be at the lower end of our target ranges.

Turning to slide 13 in summary, I'm pleased with our quarterly performance, which demonstrates continued business momentum on our top line and productivity in engineering across our operating model.

Total fee revenue was up 9% year over year, continuing the momentum we saw last quarter, reflecting growth in all businesses with management fees, reaching a record level this quarter.

Our expenses remained effectively flat excluding the impact of notable items as a result of our productivity efforts notwithstanding higher revenue related costs mentioned earlier.

As a result, we delivered about seven percentage points of operating leverage year on year, and we're able to drive pre tax margin and ROE closer to our recently enhanced medium term targets even in this low rate environment.

Next I'd like to update our outlook.

Just one quarter left in the year I would like to provide our current thinking regarding the full year outlook.

At a macro level our rate outlook broadly aligned to the current forward rate curve.

We're also assuming global equity market levels will be flat to the third quarter average for the rest of the year as well as continued normalization of FX market volatility.

In terms of the full year outlook.

We expect overall fee revenue to be up 5% year over year with servicing fees expected to be up seven 5% to eight five year over year.

You will recall that at the beginning of the year. Our guide was for total fee revenue to be flat to up 2%. So this continues to be a meaningful increase over our earlier expectations. We increase this due to both higher equity markets and our net new business performance.

Regarding NII, we had a small rebound in the short end market rates and some movement in the longer end of the curve as well.

We now expect NII in the range of 475 to 490 million next quarter, which is a meaningful improvement from the range, we provided last quarter.

This assumes rates do not deteriorate and premium amortization continues to trend favorably, though as I mentioned earlier, we would not expect the same episodic slowdown in amortization that we saw in the third quarter to repeat in <unk>.

Turning to expenses, we remain confident in our ability to effectively manage core operating costs, while on boarding new clients and investing in the business.

Given the strong revenue performance this year and a healthy pipeline in front of US we now see the need to both invest in our staff and in our business as well as covering some revenue related costs.

We thus expect full year expenses ex notables to be up 1% to 1.25% year over year, which means a sequentially quarter increase into the fourth quarter.

This is the equivalent of a full year expenses being flat adjusted for the currency translation headwind and this would put us in a position to drive solid full year margin expansion and operating leverage in spite of the double digit year on year decline in NII.

On taxes, we now expect that full year 2021 tax rate will be towards the lower end of our range of 17% to 19%.

And with that let me hand, the call back to Ron.

Thanks, Eric to conclude our prepared remarks, we had a strong third quarter and continued to demonstrate measurable progress towards achieving our medium term financial targets, including our recently increased pre tax margin target.

As we look ahead, we need to both appropriately recognized for a strong year and proactively invest in our business as we see growth accelerate the.

These strategic investments will include the alpha platform and private markets expansion in particular as well as state Street digital to drive future growth as.

As we stand here today and make these business investments for the next stage of growth we have confidence that we will be able to do so while also delivering positive operating leverage and our and expanding our pre tax margin each year through our medium term horizon aided by the strong momentum we are seeing across our businesses.

With that operator, we can now open the call for questions.

As a reminder to ask a question simply press Star then the number one on your telephone keypad again that is star one to ask a question. Our first question is from Alex <unk> with Goldman Sachs. Please go ahead.

Hey, guys. Good morning, Thanks for taking the question. So maybe we can start with a question around asset management.

Not sure if you can answer, but I'll give it a shot.

So we obviously continue to see market speculation surrounding strategic alternatives to SSG, we've seen that in the past as well.

Ron you've been very vocal about sort of the secular changes in the asset management industry that are sort of supporting your growth strategy on the servicing fee side and a lot of that it just emphasizes scale. So I guess with that in mind do you think it's SGA has enough scale to succeed in the marketplace today and if they are sort of strategic alternatives that you are considering do you need.

We remain a majority shareholder of any asset management kind of entity or.

If minority or a JV structure would make more sense.

The capital rules, just too too onerous in the obstacles to go too high to ultimately get anything done here.

Well Alex Thanks.

Set of multiple there.

I'll begin this by saying that we we like the business and we particularly like our business.

It has continued its performance has continued to improve.

And it's now at least at average if not above average in terms of.

Of the market and continues to grow and what are structurally growing areas. If you think about the ETF ETF business, particularly fixed income Etfs et cetera. So we think the businesses.

It's an attractive business, it's a business that helps us strategically from a portfolio perspective.

For many years now it's been a bit of a laboratory for us to test out different things that gives us some insight into the rest of the marketplace. So.

Our overriding goal would be to continue to participate in the business assuming that.

We continue to believe that we can improve performance.

I'm not going to comment on speculation or other than to say that a speculation.

And we have something to talk about we'll certainly come to you.

Got it fair enough.

Eric maybe one follow up for you just on the servicing fee side, obviously really nice momentum in terms of wins, but.

But servicing fees, a flattish quarter over quarter, and even taken taking into account some of the kersey bandwidth. So it sounds like a lot of it is just timing with next kind of 12 to 24 months.

We will see the benefit of the of the revenue is on the yet to be installed business can you help us frame and sort of size the revenue pool attached to the $2 seven Chilean on yet to be installed and then within that maybe hit on the pricing dynamics as well I think in your comments that you continue to see kind of normal pricing headwinds and the <unk>.

I think it's been kind of in the 2% to 3% range long term is that sort of the headwind, we're still talking about or has that changed.

Alex Let me thank.

Thanks for the question, let me let me, let me answer that maybe in reverse order.

I think we continue to see.

The normalized <unk>.

<unk> <unk>.

Headwinds in the marketplace, we feel that well controlled we feel like they're understandable. There. There are there are logical and that headwind is back.

Back down to about 2%, which is the historical norm and a lot of that is how we go to market. How we engage with clients. How we now have added more feature functionality to our offering alpha is a big part of that of course and.

The duration of some of these these deals will I think help reinforce that.

Over over time.

We're very pleased I think as you could expect with the with the wins this quarter last quarter or the first quarter for that matter and they.

There is certainly in the range of the fee rates that we have for the company.

We don't I think we don't feel comfortable going into individual deals or individual quarters on.

On that but they are in that range that you see.

How you broadly see on average and that gives us confidence that as this business can install that's going to have a meaningful impact to revenues.

We've been we've been clear we need about a trailing and a half plus of AUC a wins we need.

You know that that at.

Current or are you know around the fee rates that we have.

What's the right amount of gross.

Revenue.

Bob.

Wins, as well, which then get implemented over time. So that's that's why we put that benchmark out there and what I would say is well.

Well I think we've had.

This year, a couple of lighter years in terms of sales.

We need to continue the momentum we've been building and part of the reason we referenced the pipeline as we feel comfortable with the pipeline and we see maybe not.

There are three two trillion of AUC, a wins, but at least a substantial wins.

Embedded in the pipeline for us to continue this momentum.

No.

Into next year.

Great I appreciate all that thanks.

Our next question is from Brennan Hawken with UBS. Please go ahead.

Mr. Hawken Your line is open your.

Your line is open.

Sorry was on mute.

For taking my question.

I'd like to start maybe with PVH.

Could you talk about what you would expect the impact of that acquisition could do to your asset sensitivity.

And how.

The inclusion or pro forma.

Our balance sheet will be sensitive to 100 basis point shift in rates and then also help contextualize investors.

Eric you had discussed on the M&A call that the cost savings.

<unk> assumption is conservative.

What is the historical range for the right way to think about expenses.

For these types of deals.

Sure Let me let me let me.

Start on the.

On the deposit side and then we'll we'll leg into the other part of the P&L and obviously, it's early with with Brown Brothers investment services. We're now.

We've now gotten our regulatory filings and we're obviously working through the closing process and.

With.

Our container target.

A year end close.

In terms of asset sensitivity.

I think it's a little early to model it.

Too finely but.

I think I would say is that the asset sensitivity of the book is probably in the range of what we have at state Street, just because its similar asset management oriented clients they have.

<unk> expectations of deposits and deposit pricing and I think you can get similar.

Betas and.

Ah well similar betas and.

And adjustments overall, I think what what's different Brennan and constructive here is because of the Brown brothers Bank sweep program.

Have more flexibility than usual to either bring in deposits at attractive rates and so that could in a way enhance our asset sensitivity though.

You have to be careful by the you know you'd have to at the model that in or it could lead us.

Protect the size of the balance sheet and the <unk>.

A leverage constraint leverage ratio constraints that we have which also led us adjust some amount of preferred securities that we need to run the business. So I'd say overall, it's probably in the same.

Ballpark, but with an ability through the rate cycle to either.

Add deposits and NII or two.

Manage leverage and I think that's a that's a constructive program and a new.

Functionality that they bring to us and one that will that will continue.

In terms of the expense guide.

I did say.

I was.

Hopeful it would be it would.

Would be a bit on the conservative side I think the expense guide was for.

A reduction of about.

25%, so kind of.

I think on the lower end of what we've achieved before.

I think.

But it's hard to compare to past deals too.

I guess to forcefully because every deal is different we need to bring this business on and I've said in the past we've not always finish what we started and made sure that all the integration happens and all the.

Functionality that we bring in from a from a from an acquisition gets gets gets.

Gets <unk>.

Fully integrated and created in our own.

Offering and I think thats why its been at the lower end of our.

Expense savings targets, but I think there is we will see I think its early I think we'll be well certainly give guidance as to.

Some of those.

Cost estimates in January and we'll certainly.

Keep you posted but we stand by the guidance and.

The CFO I'm hopeful we can we certainly want to meet those and you know I always like to exceed where I can but I think it's a little early to to lean too far.

Hey, Brendan it's right what I would what I would just.

Add to that is we've emphasized about this acquisition as a boat.

Capabilities.

And geographic reach in talent. So as we think about the synergies here, where we're thinking about them as this combined synergies if you will.

There is instances where theres just.

Some better capabilities.

That exist over at Brown brothers.

Great. Thanks for all that color.

And then for my second question Ron.

Actually Eric when you provided the color on the fourth quarter expense expectation you made reference to some needs to invest and whatnot I know, it's probably early.

It's just starting to work on the budget for 2022, but our cost inflation is very much on the minds of investors, we hear about it broadly.

One of your competitors at a recent conference.

Raised a point that there would it would probably be some upward expense pressure in 2022.

Should we begin to prepare for a bit of a lift.

Is it is it appropriate maybe to use the fourth quarter as the jumping off point and then adjust for adjust for seasonality and then think about that into next year is there or just in general guiding principles you could provide to help people level set on 22.

Yes.

Let me start on that okay because.

We are we are definitely seeing instances where.

There is some cost pressure, but it's.

It'd be.

Untrue to say that it's across the board certain types of employees.

For example, in the technology area as you'd expect because there we're not just competing with other cros three banks, we're competing with technology firms.

We are definitely seeing that.

But we also continue to.

To see productivity improvements in our in our business, where engineering them in so we do see an ability to offset some if not all of that.

We're just going to be careful about how we proceed forward, we don't want to Underinvest in key stuff.

But we also think that I mean.

As we see performance, we can pay per performance into it through.

Through the incentive line. So it's something we're watching out for and there are particular areas, where we are seeing the need to.

To raise the fixed costs have come up but not at an overwhelming but we're not seeing an overwhelming kind of thing yet.

Erica yes.

Brian I'd add to that you go through the line items of expenses.

Ron covered.

Salary comp incentives and obviously.

I have a little pressure there, but we also have a little more attrition I think everyone's seeing that as they were.

Turning to <unk>.

You know what.

We need to net that out as we go into next year, I think you'll see a little bit of creep on the tech side, obviously some of those.

Costs in transactional costs, but again.

We have our engineering programs to offset some of that in wallet means. There is there is more work to do you know there's always more work to do that's just how it plays out I think from a if you step back and you say what are the guiding principles that we use as we go into our budget process, which is just really started in full swing in November.

And then comes through in December is really about how do we continue to make.

Healthy our solid progress in expanding.

Margin each year, how do we do that with.

Positive operating leverage and you know you've heard me say before it all and we don't like to live on the edge and be too hopeful of.

And equity market tailwind or something of that sort and so I think you've got to think of it as a.

Our commitment to progressing towards our medium term targets and progressing at pace, where we can make a progress each year, you've seen us notwithstanding the interest rate headwinds. This year remain we're making progress this year towards towards those targets, we're proud of that and we need to feel like we need to continue that.

Thanks for all that color.

Your next question is from Betsy <unk> with Morgan Stanley.

Hi, good morning.

Hi, Betsy.

Okay. So two questions.

I think on the expense side one of the reasons why there's so many questions here is that.

There had been a period where state Street had.

A tougher time delivering positive operating leverage and then more recently you had very good success. So when I hear the point about hey, we're going to be reinvesting a bad for future growth I'm. Just wondering is this a message we should take that into the investment spend.

Was a bit under.

You underinvested over the past year, and a half and now we're going to ramp backup to quote unquote normal or is this more of a.

Temporary we've got some things specific opportunities that we need to invest and we can't tell you how many quarters. It is going to take but it's more of a specific opportunity in <unk>.

And that positive operating leverage we've been used to seeing recently.

Will persist once we get through this period I guess, that's part of the reason why there's so many questions on expenses and if we could frame it like that would there be any more color you could share with us with us. Thanks.

Hey, Betsy it's Ron so we've been.

We certainly have not been under investing in our business.

And whether it's inorganic organic I mean, obviously it was Charles River more recently.

Brown brothers.

Inorganic basis, but as we've tried to emphasize quarter over quarter every time, we've talked about.

Keeping expenses flat or even down but that's been done.

Fairly aggressive engineering effort to bring down via <unk> expenses, while also continuing to invest in the business, particularly young.

Particularly in the technology area.

Terms of future investments.

We just see the momentum building in areas.

We've already started to invest in there is opportunity to invest more and accelerate growth.

The three areas that we highlighted we're just continuing to invest in alpha.

And kind of bring more and more of that to market quicker second as private markets.

And then third is the hold.

Digital space, where you're seeing a lot of activity, there and thats a combination of both.

Supporting our clients in their digital kinds of.

Ventures, and also continuing to go to the next stage of Digitization of our own business. So that's what we're talking about there.

And again I would underscore what I said at the end of my prepared remarks that we will do so with a commitment to positive operating leverage and continued margin expansion over.

Over the short to medium term.

That's great color and in those three threads those are type of ILS two in terms of revenue generating growth potential over the next three to five year or so it seems like it makes a lot of sense to be investing for that.

Maybe a little bit more.

Quarterly oriented kind of question, but just on the loan growth that you saw in the quarter I just wanted to get a sense as to.

Key drivers of that growth and should we think that it was a.

Yes specific to this quarter or there is a demand there that will likely see that kind of growth continue as we as we look into next year. Thanks.

Betsy, it's Eric it's a little bit of both actually we saw higher then.

Than usual opportunities this quarter I think sequentially or.

Our loan balances were up.

Theyre talking.

Three $3 billion, that's quite a bit on our $30 billion base of loans.

<unk>.

A little bit of that was some discretionary lending we do and then some of it was literally higher demand from private equity capital call financing. Obviously is the alternatives markets continues to boom.

Some of our classic.

Fund finance clients were looking for some support.

And so forth. So I think it was.

The higher than usual quarterly print I think year on year, what we're seeing is some confidence that we can grow this loan book in the low double digits, which is which is nice but one thing. We are conscious of though is with loans comes on it'll be way and so we're always doing it.

Background is optimizing the.

Risk weighted asset and the returns mix of those loans to make sure of that.

Some cases, we add in other cases, we we self fund by optimizing other positions and that'll be part of how we think about it going forward, but we do think of <unk>.

Lending is an opportunity for us to to drive NII.

In the coming quarters and years.

Eric.

Sure.

The next question is from Glenn Schorr with Evercore ISI.

Hello.

Wonder if you could expand on the NII discussion and just talk about what you think are nonoperating excess deposits right now and how you think.

With model N behaving in a modestly rising.

World.

As we go into next year. Thanks.

Yes, Glenn it's a really.

Good and hard question, because theres not a not an easy answer to them.

I think we clearly have like others have had some amount of of excess deposits flow in.

What what I would say, though is.

If you go back call. It two years you know you can ask the question is that the typical deposits and as all of the increase access and I'd say, that's not true what we've had over the last two years is very significant growth in our AUC as in with AUC as right.

<unk> need to leave a certain amount of cash with us to handle the transaction volumes and so a good bit of the increase that we've seen over the last couple of years is.

Is on the core deposit side.

There is though some.

<unk> seen that is excess and we pulled off.

Thank you.

A reasonable amount this quarter, we don't necessarily want to.

Pushed down deposits too far because we do want to be there for our clients.

If you go from from with that context, I think the next part of your question, which is what happens in.

Either tighter monetary policy with a slower expansion of the feds balance sheet of rising rates does that reverse the course of deposits.

I think it will eventually but I think it'll be it'll be a while it'll be.

Two to three year process for that to happen and part of the reason I say that as the fed continues even even under a tapering to expand its balance sheet right. There just expanding it less is what the talk is all about it's not about actually.

Stopping the expansion of its balance sheet and so as the fed continues to expand its balance sheet and then signal rising rates I think we're probably going to be an environment of having healthy deposit levels, which effectively means there are core right, partly driven by the AUC.

Need and partly driven by just the.

Surplus of cash in the system.

And rising rates, which I think would be positive would.

It would be positive to certainly our our balance sheet in NII and to the to other banks as well.

I appreciate that I wonder if you could just expand a little bit more on your thoughts you mentioned part of the Marcellus is one of key growth areas one of the pioneers.

On the customer he saw about what is in our potash.

And.

What what can and can't you do right now.

Exploring the world a couple of months.

Thanks.

Yes, and private markets as a broad area, which is.

Why I think we see some opportunities if you recall there is theres hedge fund activity in private markets. There is.

Classic private equity there are.

Theres more fixed income kind of alone oriented.

Private markets there is real estate and so it's in each of those areas, where theres not one investment we need to make but a series as we pick our spots and pick our spots novel not only across each of those products but.

Make some choices.

Geographically as well.

What Merck had a springs is a set of front end functionality to the.

You know that we can.

That we can use to support our our private equity and other private market clients so functionality around.

Reporting to Lps reporting to.

Two.

To their own partnership and Thats. The front end that I think we we value and with that comes a set of data.

Feeds and.

And communication.

Thats quite valuable and if you think about that that is directly plugged into the historical custodial operation that we that we provide and why we're so excited about it.

Glenn what I would add to this that that market is still largely a in.

In sourced market.

So this isn't about slugging it out with with competitors in a race to the bottom on fees.

To be able to demonstrate a.

Better offering them what these institutions are doing for themselves.

The stakes are going up for them in terms of data reporting a particularly.

In ESG reporting.

Alright.

Not just that investors are demanding it but in some cases, particularly outside the U S and Europe.

Youre seeing reporting requirements being imposed not just on public companies put on private companies and.

Investors want to know what's in their portfolio, including their private portfolio. So we think this is all going to be and Ricardo helps us do that and this will all be.

Further impetus to drive this to two.

A more outsourced model.

Thank you for all that I appreciate it.

Your next question is from Ken Houston with Jefferies.

Thanks, Good morning.

Hey, Eric just wanted a couple of cleanups here.

So you said that the the premium am was improved but you've called it episodic but.

I just wanted to understand like what was that premium am number in in the third quarter. So we can understand I think you said it would continue to improve so just wanted to understand what the delta was this quarter.

Yes, I think the best way to describe it Ken is remember every quarter, we get some.

The headwind from the compression in underlying yields in the portfolio and what offsets that is less and less premium amortization, which comes through as a negative, but it's a smaller negative each quarter.

And.

This past quarter, I said about a third of the $20 million.

<unk> was from I'll describe it as as an excess reduction in premium amortization.

That's the piece, we don't expect to repeat we do pay it all as I said continuing to expect some some margin headwinds in the in the underlying ports.

Portfolio yields we do expect some.

Ongoing reduction in premium amortization, not just at that same level.

And then we've also been pleased with some of what we've been able to do on the balance sheet.

Asset size around lending and.

The investment portfolio and that's why we.

We took our range up but we were a little conscious that the fourth quarter print.

Uh huh.

We gave a range purposely we don't think the third quarter print's necessarily a perfect indicator of that but.

All that said I think we're pleased with the direction that NII has taken over the last couple of quarters.

And we think that sets us up for.

For the for the future as well.

So you have a number to give us versus the $1 57 in the second quarter.

I think youll have to help me I think in the second quarter, we had NII of $4 67 in the third quarter of 487.

And I think the range I gave you was.

No.

475 to $4 94.

For the.

For fourth quarter, that's total NII I think what I'm trying to messages there are pieces below the surface and we could we could get into a great amount of detail, but that's that's kind of where the net falls out.

Okay. So on money market fee waivers can you tell us what the money market fee waivers and asset management were in the third quarter.

Sure.

Third quarter or the money market fee waivers were about $19 million.

Back in the second quarter, they were close to $25 million.

And that's why we thought at current levels of front end rates, which have stabilized.

We said that fourth quarter is likely to be around the $19 million to $20 million that we just saw.

And what about the other fee waivers that were $21 million in the second quarter do you have what that was in the third.

I think we're focused there.

The biggest driver of money market fee waivers and our systems for.

For <unk> for for a global advisors business. That's the one we've spent the most time tracking I think is material I think the and dominate so I think that state area to focus on.

Okay. Thanks, a lot Eric sure.

Your next question is from Brian Bedell with Deutsche Bank.

Great. Thanks, good morning folks.

One is just on the asset servicing side, Eric if you can maybe just sort of.

Maybe give us a view on that step up of asset servicing fee growth at legacy State Street, not including Brown brothers.

In 'twenty, two and 'twenty three given that you given that the.

The new wins have been so strong and youre running at more than double the pace required to offset the pricing headwinds. So I mean I guess.

Short question here is or should we expect a step up in organic growth.

Asset servicing in 'twenty, two and again in 2023, given that pipeline and not factoring in any kind of.

Ignoring the market side of it.

Brian It's Eric I think it's a little early to get out.

And start to forecast 22, and 23 I think what I was trying to signal is we're very pleased with our sales performance this year, where we've been able to book.

Bulk and that clearly is going to be part of the components of delivering growth then.

In 'twenty two 'twenty three I would say.

And I've said this before we need to earn our keep every quarter by continuing to drive.

Sales in wins and you saw that in the first quarter, we had we had $343 million of.

Of AUC wins were very pleased with that we're pleased again with the second quarter with a third quarter, we need to keep at it because if you step back remember.

A portion of every year's wins gets.

It gets implemented in that particular year, it's something like a third about two thirds of our year's wins typically as is.

It gets reported in the following calendar year and then.

You still have some it's probably like a sex.

And the year after that so we were in a business where what we how we then start to implement and then we need to keep up that progress and that's what drives drives growth and so I'd say, we're on a good trajectory. We're pleased with this year's.

Our success is and.

We'd like to continue to.

To be successful, we expect to be given our pipeline, but it's still early to forecast actual.

Growth for next year and the year after.

Okay. That's fair enough and then Ron just back on <unk>, Obviously, you made a good case for the.

The growth in that business.

Longer term, but as you just think of strategically state Street as a whole obviously you've been clear in a way leader in the core asset servicing business in Europe.

You continue to enhance that lead was with CRD and BPH.

In other.

Investments for organically growing it so as you think about state street longer term.

Maybe would you prefer to be.

More of a pure play on that leadership position.

Would you prefer to have the balance of the asset management business.

Within that and I guess also as it really critical that you'd need SGA for preferential capital treatment.

Hum.

Going through the feds stress stress test and CCAR.

Brian.

I mean, if you think about our our portfolio of businesses, we're far and away the narrowest of.

Both the U S totaled <unk> <unk> population.

So we're pretty focused to begin with.

And if you think about those two broad businesses, because I would put markets underneath our investment servicing business, because it's really there to support that business. So.

So.

If you think about those two those two businesses they really are.

The fall under that single purpose of helping institutional investors achieve better outcomes.

We start out from a position of being very focused and then <unk>.

Ask ourselves all the time.

First.

Are we satisfied with our performance.

Second are we the right owner for these businesses.

At this point as we've looked at it.

We.

And believe that.

Given the performance given the.

With somewhat symbiotic relationship between two businesses that having this participation on that business is actually enhancing and as you note.

Certainly.

That's helpful from a capital perspective relative to our.

Two our investment servicing and related activities.

It's a capital light business. So when you add it all together.

Like the business, but we recognize that.

You as shareholders can picture of diversification of its not up to us to diversify for you we have to.

To make sure that.

But as owners of these businesses that were good owners and we can continue to grow the business and we are looking at this all the time.

Yes.

That's great color. Thank you.

Your next question is from Jim Mitchell with Seaport research.

Hey, good morning.

Maybe just on on on the security servicing side.

Inside of one one off large outflows like the Blackrock bids can you can you speak to your efforts to reduce client attrition and kind of get that $1 five trillion dollars bogey of of annual gross outflows down to really start to enhance the net growth from that side of the equation.

Jim It's Eric Let me let me let me start there is a there is a.

<unk> long history here, and serving our clients serving them well and being incredibly focused on what they need.

And that.

Thats what both.

Create sales and sales opportunities because we said.

Over time, something like two thirds three quarters of our sales come from our existing clients and the other side of that coin is staying close to our clients understanding their needs being there.

When they add funds or when they consider other options is also big part of what we do now sometimes our clients are involved in <unk>.

M&A and we need to.

Rebid, what we've got and so we have very active programs when that happens.

That's.

That's part of the industry.

We've got a set of.

Client.

NPS net promoter score work that we do that.

Expanded over the last two years to now take on a very large portion.

Of our of our clients. So that provides real time feedback to us from the C suite on down to the operational.

Portions of our.

Of our clients.

And then sorry.

Coverage program I think you saw us back in June describe how would you leverage with.

Our global client division, our premium or preferred and each one of them is geared towards making sure that we're staying close and <unk>.

Supporting our clients.

Making sure there is.

Satisfied and.

As as can be so those are some of the elements that I'd say it's.

It's deep in our culture.

And something we work on that said you've got to keep if we want to grow and deliver core growth like we've done in the last few quarters.

We've been able to drive core growth.

Which we're very pleased with we got to keep.

Expanding and selling both to existing and new clients and you've seen us do that successfully and then on the.

Other side, we I think we feel quite good about our retention rates and that'll be it.

That's always an area of intense.

Effort and I'd say this year has been successful as well.

Okay. That's helpful and maybe just a second question on enhanced custody. If I look at the balance if I'm reading the balance sheet correctly. It seems like you've had very significant growth there.

Is there any constraints on growing that business from a balance sheet prospect capital perspective, how do we think about the what's driving the growth and the outlook for that over the next year or two.

Sure Jim its Eric again, I think for all of our balance sheet businesses, we always need to be careful about how much they consume in risk weighted assets.

Versus the the earnings and the opportunities that they couldnt provide us.

We do that certainly on a standalone basis, because you've got to look at every asset on the balance sheet, whether it's lending asset for <unk>.

Our loan book for example, our Securities Finance business, our enhanced custody business. Our FX business and then you also have to think about it within the context of the client relationship because there's always a give and take in for clients that may not borrow very much were they to do more.

Securities Finance for enhanced custody.

That can be a.

Reasonable.

Mix and a way to serve them, but to serve them with with decent returns. So.

I'd say there is there is certainly room in these businesses, but I think what we are doing is going into the end of the year as we close the Brown brothers acquisition, we are being a bit disciplined about our our risk weighted asset position right because we want to close that that that deal and we want to.

Land within our.

Our capital ratios and so I think while you've seen some very heavy growth in the last couple of quarters just in the next.

One to two quarters I think you'll see you'll continue to see some discipline, you've seen a little bit of that on the quarter on quarter balance sheet and some of the areas like.

SEC Securities Finance and you could imagine we will do that going into.

At the beginning of next year.

But what I would say is I think the franchise as we continue to grow the fee portion of the revenue base.

Manage our expenses, we can continue to put more capital to work over time, but sometimes there will be some ebbs and flows and I think I've given you a little bit of an indication where we see some of those.

Okay, great. Thanks.

Your next question is from Stephen Ju back with Wolfe Research.

Hi, good morning.

Eric I wanted to start off.

Just discussing some comments you made actually a bit ago about conference you talked about the servicing fee growth algorithm and you framed it based on expectations around.

New store and same store sales growth pricing pressures, what have you and I was hoping you could maybe just update us on how youre thinking has evolved with regards to that algorithm.

It strengthened just given the improved outcomes that we're seeing in terms of new business wins at least relative to what you've seen historically.

Yes, Steve I think the algorithm that youre, referring to that we've that I've described and we described it as a company is that servicing fee growth comes from a mix of.

Equity market tailwind.

Client activity inflows.

Net new business, we can either be positive as it has been last couple of quarters neutral.

Or or negative and then pricing headwinds right, it's that that four part.

Structure.

I think the way I'd update that is to say that there that the structure is still there and I think been fortified.

The different areas move around a bit I think equity market tailwind as we've seen a very strong equity market tailwind. This year I don't think we're going to see that every year, but we'd like to see flat to up equity market. So you can imagine that part of the tailwind.

<unk> was very positive this year, which we're pleased with and the way we monetize that is we didn't take our expenses with equity market uptick.

The second one is client flows and activities I think a couple of years back this was a positive buyer.

By a couple of points I think.

A year or two ago as we saw outflows from packaged products in both especially in the U S.

As mutual funds, who are on the wane and we.

We saw less inflows in Europe, I think we felt less confident in client activity and flows of the tailwind I think that's actually rebounded nicely. This this year.

We expect that to continue given the current market dynamics.

Net new business as you reference I think we've got a strong year here in terms of wins that will now start to get implemented next year and the year. After so.

It takes time, but we're pleased with the backlog.

And then pricing I think as I said I think on the first question. This morning has been well controlled and we just work on that intensely every day. So I think thats structures intact that every year will bring a little different mix and different elements of the.

That framework.

Okay. Thanks for that color, Eric and just for my follow up.

I know you provided some helpful color on the BPH rate sensitivity.

Additional flex from having the off balance sheet sweep option I was just curious how the improving rate backdrop, just taking the forward curve informs your willingness to onboard more than the $10 billion of deposits, which you disclosed at the time of the deal and just speak to the relative attractiveness of Onboarding, a larger percentage of deposits versus maybe other forms of.

Capital return like buybacks and dividend increase.

Sure and let me, let me open up the aperture a little bit remember the core of <unk>.

Our capital constraints around CET, one right our common equity tier one ratio, which is really a risk weighted asset base measure not a leverage ratio measure. So on the leverage ratio, we just need to be kind of within within bounds.

And so the decision on deposits in NII.

Within reason is really around what rate levels, we're sitting at.

I think the way to think about deposits is wind.

Prevailing short rates call. It fed funds is at the.

The current levels.

Zero.

Youre not incentives to have deposits on the balance sheet.

That tends that breakeven tends to flip it around.

Two or three rate hikes, so around 75 basis points of fed funds you start to be in a more neutral position and at a 100 basis points of fed funds you start to be the right way around where you'd prefer the deposits on the balance sheet and so it's somewhere in that area.

Call. It two three rate hikes from now where we begin to.

Seriously thinking about.

The benefit of adding more deposits instead of <unk>.

Being being.

Instead of holding them off and so I think the question that we will the decision criteria that will get to is where our prevailing rates in the first quarter in the second quarter in the third quarter next year.

And at that point, we will make some some conscious decisions and trade off additional NII, which wed like to bring in because it helps with our margin and our.

EPS and we will just have to just be careful about.

The balance sheet size, but you've seen us manage the balance sheet side you saw it this quarter and in fact, it's not like we are.

We know where to judiciously manage the balance sheet I think we will continue to do that while bringing on deposits and serving our clients as best as best we can.

That's great color Eric Thanks, so much for taking my questions sure.

The next question is from Gerard Cassidy with RBC.

Good morning, everyone. Good morning, Eric.

Hi, Gerard.

Eric can you share with us.

When you guys look at your asset under custody wins.

Can you break it out geographically.

Also on the wins coming from competitors or are they coming from just companies that were doing it internally and now have chosen to go with somebody like yourself and how does how do the numbers in this quarter look compared to the prior couple of years as their shifts going on in either of those two dynamics.

Sure, maybe I'll begin and Eric will add in color.

If you look at this quarter.

<unk>.

The standout obviously from an AUC was legal and general.

So mostly UK, but some.

There is an American element that also.

In that case it was for the most part a new client to US we did not have we had a nominal existing relationship to us.

And it's.

Alpha driven mandates so lots of activities will be coming our way over time.

If you look at the prior quarter.

Again, the standout there would've been invesco.

Which was more of a U S based global clients, where we had an existing relationship.

On the servicing side, we were consolidating much of that.

And <unk>.

Expanding into the middle.

And front office.

So I would say that what we've seen over the past couple of years in terms of the alpha related kinds of wins, it's been nicely mixed.

Geographically.

Importantly, it's Ben.

Theres been more new client wins than we would've expected from the beginning.

So it's enabled us to drive new client growth.

Whats encumbered upon US then is to make sure that obviously, if it's a new client they're they've got it.

The traditional servicing business with somebody else. So what we are.

Doing strategically is we'll have a discussion on alpha when the AUM from them, saying that we'd want to move the servicing business over.

<unk>.

In terms of the core wins.

The.

I would say that theres been a little bit of a cycle here on Eric correct me, if I'm getting this wrong.

But after you go back a couple three years ago.

Right.

<unk> was relatively light relative to the U S and we've seen actually over the past couple of years a lot of activity in EMEA.

<unk>.

And it's not so much that it's been less U S. It's just been more activity in.

In EMEA so.

But.

A lot to do with.

Changing out and rebuilding our sales force.

And things like that that had been done in the U S Im quite been done until.

More recently in EMEA so.

It's what we like is its nicely mixed and more recently, we're starting to see some activity.

In Asia Pacific and were really excited about.

Brown brothers because of.

Truly leading position that they have in Japan that will be able to.

But we'll be able to leverage to spur even more growth there.

Thank you very good so.

So a follow up question.

And then I apologize if you guys have addressed this already.

In the <unk>.

Revenue growth in servicing fees and management fees, 7% for servicing and a year over year basis, 10% for management.

Mentioned that a client flows and new business growth higher market levels contributed to this growth how much of that growth was attributed to the higher market levels.

Gerard it's Eric it at.

It varies by bye bye business on servicing fees, a large proportion of the up 7% was driven by the.

The equity markets tailwind.

A smaller proportion from client flows and net new business and then in the other direction you have the usual.

Smaller amount of pricing headwinds and we also called out a little bit of divestiture activity. So it's kind of it's kind of two thirds, one third but.

What what I think I'm, particularly pleased with is we're able to hold expenses flat notwithstanding that and that's not been our history here.

As we've managed on the management fee side it was.

Just the way that that business tends to be priced the market tailwind tend to come in and.

Very.

Important part of the tailwind.

But we also had I think very nice.

Net new business performance on the revenue side you see it in flows we also counted in revenues.

But you saw there that's taking up our margin.

In the asset management business and so while we're creating the environment for either an equity market tailwind or a flow tailwind in asset management. It's the.

We're also managing the other side of the P&L and that's been that's been quite renew them or to force. This this quarter and and pleasing.

Very good thank you.

Im looking forward to seeing you at the Bank analysts Association of Boston Conference about three weeks. So we will see you then thank you.

Here shortly.

Your next question is from Rob.

With autonomous research.

Okay.

Good morning, guys, just one more on the expense side, you highlighted some productivity savings this quarter and thats been a trend recently, how much more is there left to do on the productivity side and how much do you think that can continue to serve as an offset any increases in other expenses going forward.

Rob.

Yeah.

Service productivity is hard work.

We have been at it now for a couple of years and despite the progress that we see we actually see more opportunities.

Not as easy as just like in manufacturing just substitute a people driven assembly line with a bunch of robots.

It's really activity by activity.

Substituting.

Substituting other kinds of automation trying to eliminate reconciliations.

And we're making progress against certain we see the opportunity to do more so we see this.

<unk>.

It requires work ongoing work and ongoing engineering, but we see opportunities over the next several years to continue to do more and more of those.

And Robert It's Eric I'd, just add you know as we as we adjusted our outlook a little bit part of that was just a year end incentives we need to reward our really strong performance, but we also talked about.

Starting to leg into investments and we like to invest behind the revenue not ahead of the revenue per behind the revenue and that's what we're doing one of those investments to be honest is is engineering work right development work to actually automate processes simplify processes and so forth and so.

Part of what we're doing even into the fourth quarter is beginning some of that work so that.

Several quarters from now a year from now two years from now there's actually an engineering benefit.

And so that's where it comes together as well, but as Ron says it takes it takes real hard work and it gets done in phases.

Got it thank you for that sure.

Your next question is from Vivek <unk> with Jpmorgan.

Hi, Ron Eric a couple of questions for you folks.

BH acquisition.

I remember you, saying on the last call something about earn outs can you talk a little bit about are these is this additional payment over and above the purchase price.

Or is there something else.

Partners, who would have presumably.

Part of that.

Purchase price in cash that Youre getting.

Can you.

Give us some color on that.

And what's the driver of that.

What is it tied to.

Over what time period.

Yes perfect.

So there is not a contingent and extra contingent payment here so.

Let's put that aside but what we have put in place and this was part of our.

Sure.

As we talked about expected accretion here.

Have put in place an incentive plan that is.

Quite broad based.

Basically.

Space.

With the factors being client.

On.

Onboarding and retention.

As well as staff retention.

<unk>.

Everybody.

All of senior management fairly deep into BPH management.

Participates in that and there are targets out there in terms of client retention, there's targets out there in terms of.

Of desired staff retention so.

<unk> was really meant to align.

PVH people around what we're aligned about which is growing our client base and keeping our best talent and the fact, it's Eric Youll see those costs and the acquisition and restructuring line. So we're purposely bounding it and including it in our financials, but they're modest there what you would expect.

Us or any other acquired to do a deal and given the combination there is a real benefit in.

And the execution here.

Okay, great. Another one on PVH and Eric maybe this is more for you.

The BPH sweep program that you mentioned.

Previously too.

How much of those deposits.

How much of that sweep is at risk with banks, who.

Who are who would not want to renew it because of capital constraints. So how much of that would you need to take on.

If you could and what's the ultimate after that.

If in fact, we as part of our diligence.

Looked at every part of this <unk>.

Acquisition.

How the revenues come together.

And there were there was a lot of share of wallet opportunity expenses, how it comes together.

And certainly the sweep program.

The sweep program is modest when it comes to the bank Counterparties, it's not enormous for any one.

Bank provider I think the.

The top 10 bank.

Bank providers are important but if you can do you think about what swept away I think we said about.

$60 $70 billion is swept away today across 10 large banks youre not talking about a real capacity constraint.

And we did we have done and we've actually engaged with each of those bank Counterparties, most of whom we know extremely well and who we do business with right. We often do business with those counterparties on the sub custody side.

Or and in terms of other arrangements and so there's a there's kind of a.

There's a there's a bidirectional set of relationships that we have so we don't see a lot of risk.

At this point and more and see more of an opportunity to actually sleep, a little more sleep, a little less but I would say is the core of the sweeps in U S dollar and I don't need to be patriotic to say that the U S. Dollar is an extremely valuable.

Deposit and cash currency and so that's so theres certainly valuable to to the U S and global banks and so I think we've got a good.

Good program set up and we see it continuing.

With some upside optionality for us.

Okay. Thank you.

Sure.

Your next question is from Mike Mayo with Wells Fargo.

Hi.

If you can provide more color on your freight business investing for the next phase of growth that sounds like something more significant than simply.

Tweaking budgets going into year end or anything like that so when you talk about this next phase of growth I know you talked about alpha private markets the digital space, but.

If you can maybe just give more color on the overall tax strategy in the tech budget.

How much are you looking to increase the tech budget from where it is now how much of that is to change the bank and which areas of tech are you investing such as the cloud or or other areas.

Well, Mike as I said, it's Ron as I said earlier.

We've been investing all along through this.

Most recent period these last several years.

And as Eric just noted we've.

We've invested behind our revenue growth for Vacates in our investment have not been necessarily opportunities thats been what can we do to fund this growth off of our.

Are you spending and second how is the growth coming in.

In terms of what we're investing in it really isn't changing much other than from a balanced perspective, I would say that much of the investment that you've seen over the past several years.

If you think about the whole Brazil.

Brazilians area the whole I mean this is <unk>.

Imposed on all of US resilience for the fiber area would probably fall under the B you will run the bank.

Alpha.

Certainly been a change the bank kind of thing and I think there. So we would anticipate a little bit of a mix shift from run to change.

In terms of total amounts, but really it's not going to be.

Peanut butter, a thing where everybody gets a little something here for their project. It really is about those things, where we see it positioning us for meaningful growth meaningful additional growth. So.

Explain why but the private market phase III digital kind of primarily.

What I would add to that.

Continuing to selectively invest in now.

Global advisors.

The investments we've made there in the past, particularly for example in the active ETF space.

The investments, we've made in and European Etfs and of low cost Etfs, all of which are growing and we're gathering disproportionate share on those spaces.

That's how we think about it.

Shouldnt expect us to be.

Throwing a lot of money at things that we don't know anything about or that are new to us.

It's about things that we've already established.

Give us growth and with a little more investment we expect to be able to look to accelerate our growth.

Okay, so spread around the peanut butter too much.

But.

When you look at it by function like I know you have this predates you rod, but when you talk about the cloud or the back office, we talked about Digitization digitizing your operation.

How are you looking at the cloud today in terms of public private how much of the workload has shifted where are you in that thought process and how much does that play as part of your transformation.

I mean, Mike.

We've been very active in the cloud and we've I think talked about this in other contexts with you I'll use. An example, what we're doing in Charles River and Alpha.

Which is an entirely.

Rates.

Right from the beginning when we said we were going to be open architecture interoperable, but by definition meant that it had to be cloud based so we have.

Quite aggressively gone to the cloud we've talked about our partnership which was one of the first in this whole security services area with.

With Microsoft in areas, where our products so.

That is very.

Very much a part of it we think about it as being how can we.

I mean, certainly there's a cost element to it.

How do we advance the business strategically and grow revenues.

Alright, thank you.

Your final question is from Rajeev <unk> with Morningstar.

Good morning, just one quick question from me, there's some headlines that hedge fund flows are pretty strong. So can you comment on your alternative fund administration business and what kind of growth Youre seeing there.

Okay.

Yes, why don't I begin.

Eric will pick up.

Steve I mean, Youre right hedge fund flows have been strong in.

Going back to Mike's effort, but it would be another example of where we've invested fairly significantly in new technology there.

And.

This case using an outside provider.

And.

We're enjoying the benefits of those flows and I think that you will see.

We expect to see more and more flows into alternatives alternatives of all types.

There is a further push too.

See this if you will go into smaller smaller accounts.

So coke democratization of it.

And we want to be positioned for that.

And Rajeev, it's Eric I'd, just add the private markets. The hedge funds are all attractive asset classes for us and so.

Year on year, we saw 7% growth this year across the servicing fee franchise.

In the private markets Youre seeing two to three percentage point higher growth than.

The average for the company and that's one of the reasons why over the last year.

A year or two and certainly going into the fourth quarter next year.

We're investing more in private markets, because we see those those opportunities and that adds to the growth trajectory of the company.

Got it thanks.

Sure.

Yes.

And we have no further questions at this time I will turn the call back over to our presenters.

Well, thanks to all on the call for joining us and we look forward to speaking with you further thanks very much.

Thank you again for joining US today. This does conclude today's presentation you may now disconnect.

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