Q3 2023 State Street Corp Earnings Call

Good morning, and welcome to State Street Corporation's third quarter 2023 earnings conference call and webcast.

Today's discussion is being broadcasted live on state Street's website at investors Dot State Street Dotcom.

This conference call is also being recorded for replay.

Streets 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 only authorized broadcast of this call will be housed on the state Street website.

Now I would like to introduce Eileen Fizzle Bieler global head of investors Relations at State Street. Please go ahead.

Good morning, and thank you all for joining us.

[music].

Good morning, and thank you all for joining us on our call today are CEO , Ron <unk> will speak first then Eric <unk>, our CFO will take you through our third quarter 2023 earnings slide presentation, which is available for download in the Investor Relations section of our web site investors that state's great Dot com afterwards, we'll be happy to take question.

During the Q&A. Please limit yourself to two 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 adjusts 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.

Also available on the IR section of our website. In addition, today's presentation will contain forward looking statements. Actual results may vary 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 today, we released our third quarter financial results.

As we issue. These results the world has witnessed a surprise and unconscionable terrorist attack on innocent Israeli citizens and the resulting enormous human toll in Israel in Gaza. These.

These terrible events are shocked the world and created further global geopolitical uncertainty.

State Street's stands with the people of Israel, and we are United with all those impacted.

Now turning to the third quarter Global financial market performance was mixed as a positive start for equity markets in July turned decisively negative as the quarter progressed.

Just a backdrop of softening economic data market sentiment was negatively impacted by continued global central bank rate hikes, and investor concerns of a higher for longer interest rate environment, and an economic hard landing.

As a result equities fell while global bond yields continued climbing around the world reaching levels not seen for many years with the U S 10 year yield reaching its highest level since 2007.

Despite these factors the <unk>.

Third quarter continued to be characterized by relatively low currency market by market volatility.

Turning to slide three of our Investor presentation, I will review, our third quarter highlights before Eric <unk> takes you through the quarter in more detail.

Beginning with our financial performance.

Third quarter earnings per share was $1 25, or $1 93, excluding a loss on sale from an investment portfolio repositioning, which was a notable item and three Q.

EPS growth year over year, excluding notable items was driven by our significant common share repurchases during the period, coupled with a 3% increase in total fee revenue.

This fee revenue growth reflects higher servicing and management fees better front office software and data fees and an increase in other fee revenue taken together the benefit of share repurchases and the improvement in fee revenue more than offset lower NII market headwinds within trading businesses as well as the impac.

<unk> of year over year expense growth that said, we are pleased with our ongoing transformation and productivity initiatives, which help us to contain that expense growth, while allowing us to continue to invest in our businesses.

Turning to our business momentum within investment services total AUC a increased to 40 trillion at quarter end and we recorded a 149 billion of new asset servicing wins during the third quarter, largely driven by wins in official institutions and private markets.

The estimated annual annual new servicing fee revenue to be recognized in future periods associated with three <unk> asset servicing wins amounted to $91 million, which is the highest level of quarterly new servicing fees in over two years, demonstrating our ability to achieve our ambition of driving stronger.

Sales performance.

Encouragingly, our <unk> momentum continued in <unk>.

We deepen relationships with existing mandates and recorded two new alpha mandate wins, including our first alpha for private markets mandate for one of the world's most influential investors.

During the third quarter, we outlined a number of strategic focused areas for our investment services franchise as we aim to drive opportunities across key regions and product areas and realize the full potential of our state Street alpha value proposition.

Importantly, we are taking actions aimed at gaining market share and reinvigorating revenue growth. We are executing against our plan to improve core back office custody sales performance as it is our largest revenue pool installed quickly has significant scale and drive high margin.

Ancillary revenues.

As an illustration of our custody sales momentum and the power of Alpha in the third quarter State Street, and Vontobel, a premier global asset manager headquartered in Switzerland entered into an agreement to expand our existing front and middle office relationship by providing back office services subject to the necessary approvals.

Phase III had no relationship with vontobel until discussions began in 2020 around alpha resulting in the adoption of our front middle and now back office services.

Key client wins, such as vontobel demonstrate how alpha can establish broaden and deepen client relationships further positioning state street as our clients' essential partner.

It illustrates the value of the alpha proposition and confirms our strategic rationale of how alpha can grow and tied together the full breadth and depth of state street's capabilities and a true one state street's solution for our clients from front to back.

Accelerating the Alfa sales cycle and implementation timeline, particularly back office services remains important strategic priorities to drive even more fee revenue growth.

Turning to our front office software and data businesses CRE.

CRD continues to perform well and has a strong pipeline by the end of the third quarter annual recurring revenue for our front office software and data business increased by 12% year over year to $299 million.

At Global Advisors assets under management reached $3 seven trillion at quarter end supported by a record $41 billion of net cash inflows and three Q.

Importantly, our cash business gained market share in an expanding market driven by strong investment performance, coupled with the higher yield environment and aggregate global advisors gathered 10 billion of total net inflows and three Q record quarterly flow performance and cash was partially offset by outflows in the institutional.

<unk>, coupled with the impact of risk off market sentiment and our ETF business in <unk>.

While our ETF franchise saw modest net outflows in aggregate and <unk>, our U S. Low cost Spider ETF franchise continued to be a bright spot generating 7 billion of net inflows gaining further market share to.

To drive continued growth and <unk> reduced the price on 10 low cost Spider portfolio Etfs.

Demonstrating our commitment to delivering institutional quality investment solutions at competitive price points.

Lastly on business momentum I am proud to highlight that state Street's foreign exchange business has once again been recognized as the industry leader.

After being ranked number one FX provider to asset managers by Euromoney magazine in 2022. This year Euromoney magazine as 2023 FX Awards named State Street as the winter across four categories.

Including best FX Bank for real money clients Best FX Bank for research.

Venue for real money clients and best FX Bank sales.

Turning to our financial condition state Street's balance sheet liquidity and capital positions remain strong our CET one ratio was a strong 11% at quarter end well above our regulatory minimum.

This strength has enabled us to deliver against our goal of capital returned to our shareholders and three Q.

We returned $1 2 billion of capital buying back $1 billion of our common shares and declaring over $200 million of common stock dividends.

This means that cumulatively over the last four quarters to the end of September .

We have returned approximately $5 6 billion of capital to our shareholders through a combination of share repurchases and common stock dividends.

As we look ahead in the fourth quarter. It remains our intention to continue common share repurchases under our existing authorization of up to $4 5 billion for 2023 subject to market conditions and other factors.

To conclude amidst the challenges of the market environment in <unk>, we remain dedicated to driving stronger business momentum and improving fee growth to that end in the third quarter, we outlined our sharpened execution plan for the investment services business underpinned by a number of actions aimed at accelerating sales in <unk>.

<unk> growth, while simultaneously improving the discipline and accountability for this execution.

Our laser focus on expense discipline also remains high we have a well established track record of reengineering, our processes and transforming our operations to improve our efficiency and realized productivity growth in the third quarter, we reduced expenses quarter over quarter and announced another step in our.

Multi year productivity efforts aimed at improving our operating model, while enabling even greater investment in our business.

As part of our ongoing transformation and productivity initiatives, we are streamlining streamlining our operations in India and have now assumed full ownership of one of our joint ventures in the country.

This consolidation will continue the transformation of state Street's global operations and enable us to achieve productivity savings as part of our plans to deliver positive fee operating leverage in 2024.

Now, let me hand, the call over to Eric who will 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 EPS of $1 25, which was down year on year due to the impact of the $294 million loss on sale in connection with the repositioning of our investment portfolio, which will benefit NII in future periods.

<unk> was up year on year at $1 93, excluding the rig positioning which you can see on the right hand side of the page.

Turning to the core business.

As you can see on the left panel of the slide total fee revenue grew by 3% year on year driven by growth in our front middle and back office investment services business as well as solid management fee performance at global advisors.

This performance enabled us to offset some of the industry wide headwinds, we saw in our global markets business as well as lower NII, given the mixed macroeconomic backdrop in the quarter.

Lastly, we remain focused on managing costs in the current operating environment limiting expense growth to just 3% this quarter and achieving productivity savings as part of our plans to deliver a positive fee operating leverage in 2024.

Turning now to slide five.

We see we saw period end <unk> increased by 12% on a year on year basis, and 1% sequentially.

Year on year, the increase in <unk>, driven by higher period end equity market levels, and net new business quarter on quarter <unk> increased primarily due to client flows and net new business.

While net new business was positive long term flows in the asset management industry have been muted as you can see on the bottom right of the slide.

This risk off sentiment leads to the current headwind across the servicing industry.

At Global Advisors period end, AUM increased 13% year on year and was down 3% sequentially.

Relative to the period a year ago. The increase was primarily driven by higher quarter end market levels and inflows of $10 billion.

Notably in the quarter, our cash franchise continued to perform strongly generating a record 41 billion of net inflows as our competitive performance contributed to market share gains.

Quarter on quarter.

AUM increased mainly due to lower quarter end market levels.

Turning to slide six.

On the left side of the page Youll see third quarter servicing fees up 1% year on year.

Primarily from higher average equity markets net new business and the impact of currency translation, partially offset by lower client activity and adjustments normal pricing headwinds and a previously disclosed client transition.

Sequentially total servicing fees were down 2%, primarily as a result of a lower client activity and adjustments in previously and the previously disclosed client transition, partially offset by higher average equity markets.

As I've mentioned over the past year, we continue to see lower levels of client activity and flows all of which impact transactional volumes, leading to a two to three percentage point headwind on servicing fees year to date.

Part of this is the cyclical nature of the servicing business. The full year effect has ranged from minus 2% minus 2% to plus one percentage point impact over the last five years.

Within servicing fees back office services were generally consistent total servicing fee.

Unknown Executive: Good morning and welcome to State Street Corporations 3rd quarter, 2023 earnings conference call and webcast. Today's discussion is being broadcasted live on State Street's website at investors.statestreet.com. This conference call is also being recorded for replay.

TS Middle Office services, which is part of the Alpha proposition had another quarter of good growth on a year over year basis Middle office fees were up 3% and up 1% sequentially largely driven by net new business.

On the bottom panel of this page, we highlight the business flow and Tim we saw in the quarter, we won $149 billion of new AUC.

We on boarded roughly 250 billion of <unk> in the quarter, primarily in the asset management client segment.

Unknown Executive: State Street's conference call is copyrighted and all rights are reserved. This call may not be recorded for re-broadcast or distribution in whole or in part without expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street website.

And importantly, as Ron mentioned, we achieved new annual servicing fee revenue wins of $91 million this quarter, which will be recognized in future periods. The servicing wins underscore the progress, we're making towards stronger sales performance.

While we've historically only described wins in AUC terms, we recently expanded our disclosure to indicate that a healthy level of annual servicing sales is in that $300 million range. This year, you can measure us against this benchmark.

Ilene Bieler: Now I would like to introduce Ilene Fizzle, dealer, global head of investors relation at State Street. Please go ahead.

Unknown Executive: Good morning and thank you all for joining us.

We now have about $2 three trillion of assets to be installed in about $255 million of the servicing fee revenue to be installed as well.

Ronald OHanley: On our call today, our CEO, Ron O'Hanley, will speak first.

Eric Aboaf: Then Eric Aboaf, our CFO, will take you through our 3rd quarter, 2023 earnings slide presentation, which is available for download in the investor relations section of our website, investors.statestreet.com.

Turning to slide seven third quarter management fees were $479 million up 1% year on year, primarily reflecting higher average equity market levels, partially offset by a previously described shift of certain management fees and NII.

Unknown Executive: Afterwards, we'll be happy to take questions. During the Q&A, please limit yourself to two questions and then re-q.

Quarter on quarter management fees were up 4% as a result of higher equity market levels and record quarterly cash net inflows.

Unknown Executive: Before we get started, I would like to remind you that today's presentation will include results presented on a basis that excludes or adjusts one or more items from GAP. Reconciliation of these non-GAP measures to the most directly comparable GAP or regulatory measure are available in the appendix to our slide presentation, also available in the IR section of our website.

As you can see on the bottom right of the slide our investment management franchise remains well positioned with very strong and broad based business momentum across each of its businesses.

And Etfs, we had neutral overall flows but saw positive net inflows and consistent market share gains in the spider portfolio low cost suite.

Unknown Executive: In addition, today's presentation will contain forward-looking statements. Actual results may vary, 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 10K. Our forward-looking statements speak only as of today and we display any obligation to update them even if our views change.

As you know, we strategically dropped the fees on about a third of our low cost suite of products and expect more growth in the coming quarters from this action.

In our institutional business, notwithstanding net outflows of $30 billion in the quarter, which were primarily driven by client in sourcing.

Both our defined contribution and index fixed income products continue to drive strategic momentum.

Ronald OHanley: Now, let me turn it over to Ron. Thank you, Eileen, and good morning, everyone. Earlier today, we released our third quarter financial results.

Lastly across our cash franchise, we saw record quarterly cash net inflows of 41 billion as we captured some of the cyclical movement of cash and the financial system.

Ronald OHanley: As we issue these results, the world has witnessed a surprise and unconscionable terrorist attack on innocent Israeli citizens and the resulting enormous human toll in Israel and Gaza. These terrible events have shocked the world and created further global geopolitical uncertainty. State Street stands with the people of Israel and we are united with all those impacted. Now, turning to the third quarter, global financial market performance was mixed as a positive start for equity markets in July, turned decisively negative as the quarter progressed.

I'll, just remind you that cash flows can be volatile quarter to quarter.

Turning now to slide eight.

Third quarter FX trading services revenue was down 2% year on year.

Up 3% sequentially.

Relative to the period a year ago. The decrease is mainly due to lower direct FX spreads and lower FX volatility, partially offset by higher volumes.

Quarter on quarter, the growth primarily reflects higher volumes.

Industry volatility is down 25% to 40% across developed markets and emerging markets relative to the period, a year ago and down 5% to 10% sequentially, which is presenting fewer trading opportunities and lower spreads.

Ronald OHanley: Against the backdrop of softening economic data, market sentiment was negatively impacted by continued global central bank rate hikes and investor concerns of a higher for longer interest rate environment and an economic hard landing. As a result, equity fell while global bond yields continued climbing around the world, reaching levels not seen for many years with the US 10-year yield reaching its highest level since 2007. Despite these factors, Williams. The third quarter continued to be characterized by relatively low currency market volatility.

Securities Finance revenues were down 6% year on year due to lower specials activity and lower agency balances.

Sequentially revenues were down 12%, primarily as a result of seasonally lower activity in the recent industry drop off of U S equity shorting activity and specials.

Third quarter software and processing fees were up 2% year on year, but down 15% sequentially, largely driven by CRD, which I'll turn to shortly.

Ronald OHanley: Turning to slide three of our investor presentation, our review our third quarter highlights before Eric takes you through the quarter and more detail. Beginning with our financial performance, third quarter earnings per share was 125 or 193, excluding a loss on sale from an investment portfolio repositioning, which was a notable item in three Q. EPS growth year over year, excluding notable items was driven by our significant common share repurchases during the period, coupled with a 3% increase in total fee revenue.

Other fee revenue increased $49 million year on year, primarily due to the tax credit investment accounting change and the absence of negative market related adjustments.

Okay.

Moving to slide nine you will see on the left panel that front office software and data revenue increased 2% year on year, primarily as a result of higher growth in our more durable software enabled and professional services revenue as we continue to convert an implant more clients to the SaaS environment, which now accounts for about 60% of our clients.

Ronald OHanley: This fee revenue growth reflects higher servicing and management fees, better front office software and data fees, and an increase in other fee revenue, taken together, the benefit of share repurchases and the improvement in fee revenue more than offset lower NII, market headwinds with in trading businesses, as well as the impact of year over year expense growth. That said, we are pleased with our ongoing transformation and productivity initiatives, which help us to contain that expense growth, while allowing us to continue to invest in our businesses.

Partially offset by fewer on premise renewals.

Sequentially front office software and data revenue was down 20%, primarily driven by lower on premise renewals, partially offset by higher software enabled revenues are.

Our sales pipeline continues to grow and remains strong for our Charles River development front office solutions products.

Turning to some of the other alpha business metrics in the right panel. We're pleased we had two more mandate wins in the quarter for Alpha most notably we also had our first alpha for private markets when.

Ronald OHanley: Turning to our business momentum with an investment services, total AUCA increased to 40 trillion, a quarter end, and we recorded 149 billion of new asset servicing wins during the third quarter, largely driven by wins in official institutions and private markets. The estimated annual new servicing fee revenue to be recognized in future periods associated with 3Q asset servicing wins amounted to 91 million, which is the highest level of quarterly new servicing fees in over two years, demonstrating our ability to achieve our ambition of driving stronger sales performance.

We also meaningfully advance crd's institutional fixed income capabilities.

Yes.

Turning to slide 10, third quarter, NII decreased 5% year on year, and 10% sequentially to $624 million.

Year on year decrease is largely due to the continued mix shift from noninterest bearing deposits interest bearing and lower average deposit balances, partially offset by higher interest rates.

Sequentially the decline in NII performance was primarily driven by lower average deposit balances in the deposit mix shift partially offset by the benefit of higher interest rates, including international Central Bank hikes.

And our investment portfolio repositioning.

Ronald OHanley: Encouragingly, Alfa's momentum continued in 3Q. We deepen relationships with existing mandates and recorded two new alpha mandate wins, including our first alpha for private markets mandate for one of the world's most influential investors. During the third quarter, we outlined a number of strategic focus areas for our investment services franchise, as we aim to drive opportunities across key regions and product areas, and realize the full potential of our state street alpha value proposition.

The NII results were somewhat better than expected due to non it due to noninterest bearing deposit levels coming down slightly less than expected and the portfolio repositioning partially offset by decline repricing some of which will be delay and will impact fourth quarter and staff.

On the right of this slide we show our average balance sheet during the third quarter with average deposits declining 4% quarter on quarter.

Cumulative U S dollar client deposit betas were 73% since the start of this recent cycle, while cumulative foreign currency deposit betas for the same period continued to be much lower than the 25% to 50% range.

Ronald OHanley: Importantly, we are taking actions aimed at gaining market share and reinvigorating revenue growth. We are executing against our plan to improve core back office custody sales performance, as it is our largest revenue pool, installed quickly, as significant scale, and drives high margin and slurry revenues. As an illustration of our custody sales momentum in the power of alpha, in the third quarter, state street in Vontobl, a premier global asset manager, headquartered in Switzerland, entered into an agreement to expand our existing front and middle office relationship by providing back office services, subject to the necessary approvals.

Finally, as I mentioned earlier last month, we executed an NII accretive in capital accretive investment portfolio repositioning exercise to take advantage of both higher yields and spreads, which all else equal should drive NII towards the higher end of the previously disclosed range of $550 to $600 million.

Quarter next year.

Turning to slide 11.

Third quarter expenses, excluding notable items increased 4% year on year.

Ronald OHanley: State street had no relationship with Vontobl until discussions began in 2020 around alpha, resulting in the adoption of our front middle and now back office services. Williams. Key client wins, such as Vontoval, demonstrate how alpha can establish, broaden, and deep in client relationships. Further positioning, State Street is our client's essential partner. It illustrates the value of the alpha proposition and confirms our strategic rationale of how alpha can grow and tie together the full breadth and depth of State Street's capabilities in a true one-state street solution for our clients, from front to back. Accelerating the alpha sale, cycle, and implementation timeline, particularly back-office services, remains important strategic priority to drive even more fee revenue growth.

Sequentially third quarter expenses were down 1% as we actively manage the expenses and continuing our productivity and optimization savings efforts all while carefully investing in the strategic elements of the company, including Alpha private markets and technology and operations automation.

On a line by line basis year on year compensation and employee benefits increased 4%, primarily driven by salary increases associated with wage inflation higher head count and the impact of currency translation.

Sequentially. However, we brought head count down and we also reduced incentive compensation this quarter in line with our year to date performance.

Information systems, and communications expenses increased 3%, mainly due to higher technology and infrastructure investments, partially offset by the benefits from ongoing optimization efforts in sourcing and vendor savings initiatives.

Ronald OHanley: Turning to our front-office software and data businesses, CRD continues to perform well and has a strong pipeline. By the end of the third quarter, inventory-curring revenue for our front-office software and data business increased by 12% year-over-year to $299,000,000. At global advisors, asset thunder management reached $3.7 trillion at quarter-end, supported by a record $41 billion of net cash inflows in 3Q. Importantly, our cash business gained market share in an expanding market. Driven by strong investment performance, coupled with the higher yield environment.

Transaction processing increased 6%, mainly reflecting higher sub custody vendor costs.

Occupancy increased 4% as we relocate our headquarters building and other expenses were up 4%, mainly reflecting higher marketing spend and professional fees.

Yes.

Moving to slide 12.

On the left side of the slide.

We show the evolution of our CET, one and tier one leverage ratios fall by our capital trends on the right side of the slide.

As you can see we continue to navigate the operating environment with very strong capital levels, which remain above both our internal targets on a regulatory minimum.

Ronald OHanley: In aggregate, global advisors gathered 10 billion of total net inflows in 3Q. Record quarterly flow performance in cash was partially offset by outflows in the institutional business, coupled with the impact of risk-off market sentiment in our ETF business in 3Q. While our ETF franchise saw modest net outflows in aggregate in 3Q, our U.S, low-cost spider ETF franchise continued to be a bright spot, generating 7 billion of net inflows, gaining further market share. To drive continued growth in 3Q, we reduced the price on 10 low-cost spider portfolio ETFs, demonstrating our commitment to delivering institutional quality investment solutions at competitive price points.

As of quarter end, our standardized CET, one ratio of 11% was down 80 basis points quarter on quarter.

Driven by the continuation of our share repurchases and modestly higher <unk>, partially offset by retained earnings.

Our LCR for stage III Corporation was a healthy 109% and 120% for the State Street Bank and trust.

In the quarter, we were quite pleased to return roughly $1 2 billion to shareholders consistent consisting of just over 1 billion of common share repurchases and over $200 million in common stock dividends.

Over the last year, ending September 30th we repurchase approximately 12% of shares outstanding.

Finally, a few brief closing thoughts before turning to outlook, our third quarter performance was solid with fee revenue growth of 3% year on year.

Ronald OHanley: Lastly, on business momentum, I am proud to highlight that state streets foreign exchange businesses once again been recognized as the industry leader. After being ranked number one FX provider to asset managers by EuroMoney Magazine in 2022, this year EuroMoney Magazine is 2023 FX Awards, named State Street as the winner across four categories, including Best FX Bank for Real Money Clients, Best FX Bank for Research, Best FX Banyu for Real Money Clients, and Best FX Bank Sales.

We executed on our plan to improve sales capacity and reported $91 million in new servicing fee wins in the quarter as we look towards our goal of $250 million to $400 million in servicing fee wins in 2024.

And as you have seen us do for the last four years, we again demonstrated expense discipline, while continuing to invest in the business.

Next I'd like to provide our current thinking regarding the fourth quarter at a macro level. Our interest rate outlook is broadly in line with the current forwards.

Ronald OHanley: Turning to our financial condition, State Street's balance sheet, liquidity, and capital positions remain strong. Our CET-1 ratio was a strong 11% at quarter-end, well above our regulatory minimum. This Frank has enabled us to deliver against our goal of capital return to our shareholders. In 3Q, we return 1.2 billion of capital, buying back 1 billion of our common shares, and declaring over 200 million of common stock dividends. This means that, cumulatively, over the last four quarters to the end of September, we have returned approximately 5.6 billion of capital to our shareholders, through a combination of share repurchases and common Partners. As we look ahead, in the fourth quarter, it means our intention to continue common share repurchases, under our existing authorization of up to $4.5 billion for 2023, subject to market conditions and other factors.

We currently assume global equity markets will remain flat from now to quarter end, which implies the daily average is down about 3% quarter on quarter Bond markets are also expect to be down about 3% on average quarter on quarter.

Regarding fee revenue in four Q on a year over year basis.

We expect overall fee revenue to be flat to up 1% year over year with servicing fees approximately flat and management fees to also be flattish.

As we expect the year on year business drivers similar to what we saw this quarter.

We do expect fourth quarter sales momentum to be similar to the strong sales performance, we saw in third quarter.

We also expect that our markets businesses will be down modestly year over year, given lower volatility, we expect software and processing fees to be up.

Ronald OHanley: To conclude, amidst the challenges of the market environment in 3Q, we remain dedicated to driving stronger business momentum and improving fee growth. To that end, in the third quarter, we outlined our sharp and execution plan for the investment services business underpin by a number of actions aimed at accelerating sales and revenue growth, while simultaneously improving the discipline and accountability for this execution. Our laser focus on expense discipline also remains high. We have a well established track record of re-engineering our processes and transforming our operations to improve our efficiency and realize productivity growth.

10% to 12% largely due to the timing of on Prem renewals and the expected new SaaS installations.

And we expect the other revenue line to come in at around $30 million to $40 million in the fourth quarter.

Yes.

Regarding NII, we now expect <unk> NII.

We now expect <unk> NII to be towards the middle of the $550 to $600 million range. We've previously mentioned. This includes continued expected rotation of about three to 4 billion out of noninterest bearing deposits and the impact of deposit pricing, which we've previously noted but with more stability in the total deposit averages.

Turning to expenses, we remain focused on controlling cost in this environment and expect to maintain relatively flat expenses and for Q quarter over quarter.

Ronald OHanley: In the third quarter, we reduced expenses quarter over quarter, and announced another step in our multi-year productivity efforts aimed at improving our operating model, while enabling even greater investment in our business. As part of our ongoing transformation and productivity initiatives, we are streamlining our operations in India and have now assumed full ownership of one of our joint ventures in the country. This consolidation will continue the transformation of state streets global operations and enable us to achieve productivity savings as part of our plans to deliver positive fee operating leverage in 2024.

As always is and this is on an ex notables basis and in this regard we are keeping an eye on the likely FDIC assessment.

And we expect our adjusted effective tax rate for <unk> will be around 22%.

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

Thanks, Eric Operator, we can now open the call for questions.

Thank you, ladies and gentlemen, we will now conduct the question and answer session.

If you have a question. Please press star one on your Touchtone phone.

Eric Aboaf: Now, let me hand the call over to Eric who will take you through the quarter and more detail. Thank you, Ron, and good morning, everyone. I'll begin my review of our third quarter results on slide 4.

You will hear us retail entrepreneur acknowledging your request.

If you would like to cancel your request please press star two.

Eric Aboaf: We reported EPS of $1.25, which was down year on year due to the impacts of the 294 million loss on sale and connections to repositioning of our investment portfolios, which will benefit NII in a future period. EPS was up year on year at $1.93, excluding the rig positioning, which you can see on the right hand side of the page. Turning to the core business, as you can see on the left panel this slide, total fee revenue grew by 3% year on year, during by growth in our front, middle and back office investment services business, as well as solid management fee performance at global advisors.

Please ensure you lift the handset if you are using speaker phone before pressing any one moment for your first question.

Your first question comes from Mr. Alex.

Boston from Goldman Sachs.

Goldman Sachs Mori.

Good morning.

Hey, good morning, Thanks, Thanks, everybody.

Hey, Ron and Eric I was hoping maybe we can touch on your comments earlier around positive fee operating leverage into 2024.

Which is definitely very encouraging to hear after a couple of years of very good cost management already so as you think about the revenue uncertainty between the markets and customer flows I guess what is the range of outcomes. You are assuming for fees as you look out into 'twenty four and if revenues proved to be more challenging than the base case is there enough room to still deliver that positive.

Eric Aboaf: This performance enabled us to offset some of the industry wide headwinds we saw in our global markets business, as well as lower in I.I, given the mix macroeconomic backdrop in the quarter. Lastly, remain focused on managing costs in the current operating environment, limiting expense growth to just 3% this quarter, and achieving productivity savings as part of our plans to deliver a positive fee operating leverage in 2024. Turning now to slide 5, we saw period end AUCA increase by 12% on a year on your basis, and 1% sequentially.

The operating leverage thanks.

Yes, Alex it's rod.

We are facing that comment largely on two things. One is we feel like we've got quite good visibility around what we're doing from a cost perspective, so we feel like we.

We've got a series of initiatives underway that will continue into 2024 on managing our costs, while also continuing the.

Eric Aboaf: Year on year, the increase in AUCA was originally driven by higher period end equity market levels in net new business. In the quarter on quarter, AUCA increased primarily due to client flows in net new business. While net new business was positive, long term flows in the asset management industry have been muted, as you can see on the bottom right of the slide. This risk loss sentiment leads to the current headwind across the servicing industry.

The investment program that we've got in place there.

Investment program includes.

Some investments that will drive revenues in 2024 and beyond.

But also the second thing it's based on as some of the actions we've taken around strengthening R. R.

Eric Aboaf: At Global Advisors, Period and AUM increased 13% year-on-year and was down 3% sequentially. Related to the period a year ago, the increase was primarily driven by higher quarter end market levels and inflows of $10 billion. Notably in the quarter, our cash franchise continued to perform strongly generating a record $41 billion of net inflows as our competitive performance contributed to market share gains. Quarter on quarter, AUM increased mainly due to lower quarter and market levels.

Our sales and.

And sales effectiveness.

Just pointing to the results we had in Q3.

Sure.

Note that Eric just made to you in terms of the visibility we have on 24. So those two things are confidence in.

Expenses and what we believe is a.

Nicely developing pipeline and us.

Set of sales capabilities and processes.

Eric Aboaf: Turning this slide six, on the left side of the page you'll see third quarter servicing fees of 1% year-on-year. Primarily from higher average equity markets, net new business and the impact of currency translation partially offset by lower client activity and adjustments, normal pricing headwinds and a previously disclosed client transition. Equentially total servicing fees were down 2% primarily as a result of the lower client activity and adjustments and previously and the previously disclosed client transition partially offset by higher average equity markets.

I mean, obviously markets could turn everything upside down, but based on a reasonable market forecast.

And not necessarily.

One that's going to be necessarily a tailwind.

<unk>.

We do believe we can achieve positive fee operating leverage.

That's great and I appreciate the new disclosure on the backlog and the revenue backlog definitely helpful.

So maybe within that can you help us maybe understand the cadence of how quickly some of that $2 55 of backlog will sort of get converted into servicing fee revenues is that expected largely over the course of 'twenty four or some of that is going to spill 25, and then ultimately do you think thats can be enough to offset some of the Blackrock related outflows in revenues that you still expect.

Eric Aboaf: As I've mentioned over the past year, we continue to see lower levels of client activity and flows, all of which impact transactional volumes leading to a 2-3% point headwind on servicing fees year-to-date. Part of this is the cyclical nature of the servicing business. The full year effect has ranged from minus 2%, minus 2%, to plus 1% point impact over the last five years. Within servicing fees, back office services were generally consistent total servicing fees.

Thanks.

Alex It's Eric Let me let me.

Answer that from a couple of different directions.

Give you some texture because as we think about.

Go forward fee revenues right part of what matters is installing the backlog part of what matters is new sales rate sort of maintaining the third quarter momentum into fourth quarter and into next year, because some of those sales actually come through.

Eric Aboaf: Middle office services, which is part of the alpha proposition, had another quarter of good growth. On a year-over-year basis, middle office fees were up 3%, and up 1% sequentially, largely driven by net new business. On the bottom panel this page, we highlight the business momentum we saw in the quarter. We won 149 billion of new AUCA. We unborted roughly 250 billion of AUCA in the quarter, primarily in the asset management client segment.

In the.

Subsequent few quarters and then as we talked about back in September making sure that we're <unk>.

Effective on our retention activity. So every one of those matters.

In terms of the backlog, we said, there's about 255 million.

Million of revenues in the backlog on the on servicing fees and.

Eric Aboaf: And importantly, as Ron mentioned, we achieved new annual servicing fee revenue wins of 91 million this quarter, which will be recognized in future periods. These servicing wins underscore the progress we're making towards stronger sales performance. While we've historically only described wins in AUCA terms, we recently expanded our disclosure to indicate that a healthy level of annual servicing sales is in a 300 million range this year. You can measure us against this benchmark.

North of two trillion on an <unk> basis the implementations.

A little bit.

Different in each of the regards in terms of revenues.

Think about 5% to 10% of that will come through specifically in the fourth quarter. So thats included in our guide, we expect 50% to 60% of that 255 to come through next year.

Eric Aboaf: We now have about 2.3 trillion of assets to be installed, and about 255 million of servicing fee revenue to be installed as well. Turning to slide 7, third quarter management fees were 479 million, up 1% year-on-year, primarily reflecting higher average equity market levels, partially offset by a previously described shift of certain management fees into NI. Quarter on quarter management fees were up 4% as a result of higher equity market levels and record quarterly cash net inflows.

And then the balance in 2025, so it's kind of a good mix.

Align with what wed like the AUC <unk> implementations, a little more it's a little quicker just sometimes that happens it's quicker sometimes slower that's a little closer to 30%.

Fourth quarter and.

Around 60% next year, but those will those will move around.

As as they play out, but we've got good visibility now and what we've been particularly pleased with.

On our third quarter sales in particular was that a lot of that was around back office services and back office services. As you know are one of the fastest to two.

Eric Aboaf: As you can see on the bottom right of the slide are investment management franchise remains well positioned with very strong and broad-based business momentum across each of its businesses. Service. In E.K.S., we had neutral overall flows, but thought positive net inflows and consistent market share gains in the spider portfolio low cost suite. As you know, we strategically dropped the fees on about a third of our low cost suite of products and expect more growth in the coming quarters from this action.

Two to onboard and implement and thats going to provide some momentum into the.

First half of 2024.

That's great. Thank you very much.

Thank you and your next question comes from Mr. Ken <unk> from Jefferies.

Eric Aboaf: In our institutional business, notwithstanding net outflows of 30 billion in the quarter, which were primarily driven by client-insourcing, both our defined contribution and index fixing income products continued to drive strategic momentum. Lastly, across our cash franchise, we saw record quarterly cash net inflows of 41 billion as we captured some of the cyclical movement of cash in the financial system. I'll just remind you that cash flows can be volatile quarter to quarter.

Your line is hey, guys good morning.

Hey, Eric just one follow up.

Quarter NII, you are expecting to be in that middle of that kind of by 575 Zone. And then you are talking to the upper end for next year I just wanted to ask you to walk us through.

That direction of travel like what are the factors that start to turn chip, perhaps a slight positive as you exit the year into next year with regard to either is either left side repricing or just deposits getting to the right zone, just kind of walk us through the moving parts. Thanks.

Eric Aboaf: Turning now to slide A, third quarter FX trading services revenue was down 2% year on year, while up 3% sequentially. Relative to the period a year ago, the decrease was mainly due to lower direct FX spreads and lower FX volatility partially offset by higher volumes. Quarter on quarter the growth primarily reflects higher volumes. Industry volatility is down 25 to 40% across developed markets and emerging markets relative to the period a year ago and down 5 to 10% sequentially, which is presenting fewer trading opportunities and lower spreads.

Yes, Ken it's Eric as you as you surmise there are number of factors that that matter, especially at this point in the cycle.

As we.

As we transition from.

Declining NII to some level of stabilization and we we see.

A good rationale for some uptick from from fourth quarter into the first quarter of next year. So let me. Let me just go through them right. There is a continued amount of rotation of niv noninterest bearing deposits, we still expect some in the fourth quarter, but we expect that that starts to flatten out the beginning of next year, we will see exactly how much one.

Eric Aboaf: Securities finance revenues were down 6% year on year due to lower specials activity and lower agency balances. Sequentially revenues were down 12% primarily as a result of seasonally lower activity and the recent industry drop off of US equity shorting activity and specials. Third quarter software and processing fees were up 2% year on year, but down 15% sequentially largely due to invite CRD which I'll turn to shortly. Other fee revenue increased 49 million year on year, primarily due to the tax credit investment accounting change and the absence of negative market related adjustments.

It's hard to call and it moves around.

Got quite a bit of visibility into our repricing, especially in for our largest and most sophisticated fine site describe that last year and then work through a good bit of that we have we executed on some more of it in third quarter, we expect and we have very good visibility.

Clutter and so the kind of the repricing effects and the catch up is kind of.

Eric Aboaf: Moving to slide 9, you'll see on the left panel that front office software and data revenue increased 2% year on year, primarily as a result of higher growth and are more durable software enabled in professional services revenue. As we continue to convert and implement more clients to the SaaS environment, which now accounts for about 60% of our clients partially offset by fewer on premise renewals. Sequentially front office software and data revenue was down 20% primarily driven by lower on premise renewals partially offset by higher software enabled revenues.

Hey.

Bubble that works its way through.

On the tailwind side, we then have the investment portfolio rolling through.

And.

The investment portfolio matures for a $5 billion bonds quarter, you've got the.

The new bonds come on roughly at two sometimes 300 basis points higher than the ones that are maturing and so that's what's giving us a pop.

Positive.

Trajectory and so it's really those three factors.

Eric Aboaf: Our sales pipeline continues to grow and remain strong for our child river development from an office solutions products. Turning to some of the other alpha business metrics on the right panel, we were pleased we had two more mandate wins in the quarter for alpha. Most notably, we also had our first alpha for private markets win. We also meaningfully advanced CRD's institutional fixed income capabilities.

Plus a little bit of.

Lending growth in some of our other actions that we can control that we think starts to shape <unk>.

Stabilization of.

NII.

As we get from fourth quarter to the first quarter, but it'll.

It'll it'll depend there there'll be some movements as you know we update all of you is.

As frequently as we are in public and we will continue to do that but those are the trajectories that our expectations at this point.

Eric Aboaf: Turning to slide 10, third quarter NII decreased 5% year on year and 10% sequentially to 6% and 24 million. The year on year decreases largely due to the continued makeshift from non-interest bearing deposits to interest bearing and lower average deposit balances, partially offset by higher interest rates. Coincidentally, the decline in NII performance was primarily driven by lower average deposit balances and the deposit makeshift, partially offset by the benefit of higher interest rates, including international central bank hikes, and our investment portfolio repositioning.

Understood. Thanks, and my second one is just.

<unk> costs were I think a little better than you would than you had thought and Youre flat to <unk> also probably a little better than the market thought in a slower implied year over year rate of growth. Just wondering have you done anything incremental to slow the organic growth rate of expenses and is that something we should think about as we go forward as well.

Yes, Ken its Ron I mean, there is there is a number of initiatives underway.

I think always talked to you about.

Eric Aboaf: The NII results were somewhat better than expected due to non-interest bearing deposit levels coming down slightly less than expected, and the portfolio repositioning. Partially offset by client repricing some of which will be delayed and will impact fourth quarter instead. On the right of the slide, we show our average balance sheet during the third quarter, with average deposits declining 4% quarter and quarter. Cumulative US dollar climbed deposit betas were 73% since the start of this recent cycle, while cumulative foreign currency deposit betas for the same period continued to be much lower in the 25 to 50% range.

Really got an ongoing productivity.

Set of actions underway that as comprehensively looking.

Throughout the organization some of the things that are underway now.

We mentioned.

What's going on in India.

And this India JV, bringing that inside administrative it goes back to our early days in India before we had our own center of excellence there.

It's going to enable us to eliminate redundancy.

And eliminate a lot of oversight activities, so we'll be able to take down costs there.

Takedown repetitive costs, we've got a comprehensive look at operating models throughout the.

Eric Aboaf: Finally, as I mentioned earlier, last month we executed an NII accretive and capital accretive investment portfolio repositioning exercise to take advantage of both higher yields and spreads, which, all else equal, should drive NII towards the higher end of the previously disclosed range of 550 to 600 million per quarter next year.

Business, which.

As we will start to yield results into next years, we are looking at some.

Where work gets done.

Throughout the world.

Are there places, where we can move and combined things create more end to end. So it's a series of things.

Eric Aboaf: Turning to slide 11, third quarter expenses, excluding notable items, increased 4% year on year. Sequentially, third quarter expenses were down 1% as we actually managed expenses and continued our productivity and optimization savings efforts, all while carefully investing in the strategic element of the company, including alpha, private markets, and technology and operations automation. On a line-by-line basis year on year, compensation and employee benefits increased 4% primarily during by salary increases associated with wage inflation, higher headcount, and the impact of currency translation.

Some of them a lot of the easy works already been done. So some of these things have been the work has been underway for a while and we will start to realize the benefits of it but we see visibility such that we can make the statements that we are that notwithstanding that we continue to make significant investments in the business that we feel we can.

We can keep our costs in reasonable Chuck and Ken I would just add that the other thing that we have.

They're down on effectively that we talked about over the last quarter or so as our hiring freeze I mean, what we've found as we've got outstanding individuals and <unk>.

Eric Aboaf: Sequentially, however, we brought headcount down and we also reduced incentive compensation this quarter in line with our year-to-date performance. Information systems and communications expenses increased 3% mainly due to higher technology and infrastructure investments, partially offset by the benefits from ongoing optimization efforts, in-sourcing, and vendor savings initiatives. Transvesting processing increased 6% mainly reflecting higher sub-custody vendor costs. Occupancy increased 4% as we relocate our headquarters building, and other expenses were up 4% mainly reflecting higher marketing spend and professional fees.

People on our team and part of what we need to do as we reinvest in different features of the business or different areas, we actually need to reallocate.

Some of that talent to those areas and I would say at the same time, we need to find efficiencies in others and so thats been.

While while it.

It is it is hard work has been an effective way to actively manage our our our team and our human resources. It still means we invest in all.

Although we need to do for new products functionality regulatory requirements, and so forth, but the reallocation.

Eric Aboaf: Moving to slide 12, on the left side of the slide, we show the evolution of our CET1 and Tier 1 leverage ratios, followed by our capital trends on the right side of the slide. As you can see, we continue to navigate the operating environment with very strong capital levels, which remain above both our internal targets and the regulatory minimum. As of quarter-end, our standard ICET1 ratio of 11% was down 80 basis points quarter and quarter, largely driven by the continuation of our share of purchases, and modestly higher RWA, partially offset by retained earnings.

That's born from the.

From this sort of freeze is actually a very effective tool for us at this stage in the cycle.

Yes.

What I would add to this.

I think what we're talking about now is a continuation of what we started going back to 2019.

That was rudely interrupted by Covid and everything that occurred coming out of Covid.

The disruption in the great resignation.

The.

Issues that arose out of that with with service quality, and where we needed to overinvest to make up for some of the.

Eric Aboaf: Our LCR for State Street Corporation was a healthy 109% and 120% for the State Street Bank in trust. In the quarter, we were quite pleased to return roughly 1.2 billion to shareholders, consisting of just over a billion of common share repurchases and over 200 million in common stock dividends. Over the last year, ending September 30th, we repurchased approximately 12% of shares upstanding.

The.

Turnover that we were.

<unk>.

Led to the kind of cost increase that you saw that's all been normalized service quality has stabilized and so.

I would say that we're back on the path that we started back in 2019 and overcome what we saw in the kind of 'twenty one 'twenty two period.

Thank you.

Eric Aboaf: Finally, a few brief closing thoughts before turning to outlook. Our third quarter performance was solid. With fee revenue growth of 3% year on year, we executed our plan to improve sales capacity and reported 91 million in new servicing fee wins in the quarter, as we look towards our goals 250 to 400 million in servicing fee wins in 2024. And as you have seen us do for the last four years, we again demonstrated expense discipline while continuing to invest in the business.

Thank you and your next question comes from Brennan Hawken from UBS.

Please go ahead.

Good morning, Ron and Eric and Thanks for taking my questions.

One question on your expectations for <unk> Eric.

Encouraging to hear that.

Yet you still are expecting noninterest bearing.

Fine.

Stable point here in the beginning of next year, but.

Eric Aboaf: Next, I'd like to provide our current thinking regarding the fourth quarter. At a macro level, our interest rate outlook is broadly in line with a current forwards. We currently assume global equity markets will remain flat from now to quarter end, which implies the daily averages down about 3% quarter on quarter. Bond markets are also expected to be down about 3% on average quarter on quarter. Regarding fee revenue in 4Q on a year over year basis, we expect overall fee revenue to be flat to up 1% year over year, with servicing fees approximately flat and management fees to also be flatish, as we expect the year on year business drivers similar to what we saw this quarter.

When you think about your fourth quarter expectations are you thinking that the typical seasonality that we see in deposits will come through and is that embedded within the middle of that range of $5 50 to 600 for NII.

Brian It's Eric.

Yes, broadly, but with the abstracts at the seasonality that we've seen has moved around a bit sometimes a little stronger or sometimes it's a little.

Weaker than than typical so we do see.

A bit of a of an.

Uptake at a normalization in total deposits and so we've guided to is.

Stabilization, maybe we will see an uptick we'll see.

Eric Aboaf: We do expect fourth quarter sales momentum to be similar to the strong sales performance we saw in third quarter. We also expect that our market businesses will be down honestly year over year given lower volatility. We expect software and processing fees to be up 10 to 12% largely due to the timing of on-prem renewals and the expected new SaaS installations. And we expect the other revenue line to come in at around 30 to 40 million in fourth quarter.

But.

This is based on.

Really quite deep analysis of our client deposit base remember, we manage it on a U S. Dollar we manage each of the foreign currencies.

We have.

Just an niv for example, I think we have 30000 accounts the average account size of $1 million.

We've seen that.

Trends in the largest most sophisticated cline and largest accounts come down.

Eric Aboaf: Regarding an II, we now expect 3Q and II. We now expect fourth Q and II to be towards the middle of the 550 to 600 million range we previously mentioned. This includes continued expected rotation of about 3 to 4 billion out of non-interesting deposits and the impact of deposit pricing which we previously noted. But with more stability in the total deposit averages, turning to expenses, we remain focused on controlling cost in this environment and expect to maintain relatively flat expenses in 4Q quarter over quarter. As always, this is on an ex notable basis and in this regard we are keeping an eye on the likely FDIC assessment. And we expect our adjusted effective tax rate for 4Q will be around 22%.

Quite a bit the smaller ones tend to have.

A flatter.

Line and evolution so.

The guide is based on that plus plus a little bit of the seasonality and we'll just we'll just update as we go but I think we start to see some amount of.

Of inflection here, but we want to be careful right. There's still some amount of rotation playing out there is some amount of balances and pricing coming through a good bit of which we have a visibility into but they'll take a little time to just work through it in the next few months and quarters.

Okay, Okay, great. Thanks.

And then.

Maybe following up a little bit on Ken's question.

Ronald OHanley: And with that, let me hand the call back to Ron. Thanks, Eric.

Sure at this point Youre going through the budgeting process for 2024.

Any preliminary expectations for what you could be looking at for expense growth operating expense growth here in the next year.

Unknown Executive: Operator, we can now open the call for questions. Thank you, ladies and gentlemen. We will now conduct the question and answer session. If you have a question, please press star one on your touch tone, and Phone. You will hear a three-tone product acknowledging your request. If you would like to cancel your request, please press R2. Please ensure you lift the handset if you are using speakerphone before pressing any keys. One moment for your first question. Your good morning. Hey, good morning, thanks everybody.

Brendan it's it's early to do that.

<unk>.

I think that what gives us.

Confidence in actually the feel of necessity on fee operating leverage as we need to run the business.

That is healthy for our shareholders and our various stakeholders at the same time, we need to find a way through that we've certainly gone through a strategic planning exercise we do that.

Through the Summer July August and September and we have.

We've got a path forward, we believe both on the top line and on an expenses, it's a little soon to get into that.

Alexander Blostein: Hey Ron and Eric, I was hoping maybe we can touch on your comments earlier around positive the operating leverage into 2024, which is definitely very encouraging to hear after a couple of years of very good cost management already. So, as you think about the revenue uncertainty between the markets and customer flows, I guess what is the range of outcomes you are assuming for fees as you look at on the 24, and if revenues prove to be more challenging than the base case, is there enough room to still deliver that positive the operating leverage?

But.

We're working through that and part of what we're doing now is actually making sure that we have detailed plans business by business function by function. We have we run alternative scenarios.

We even developed contingency plans.

And we also we are careful about metering out our spend next year, where we do add two to.

To spend we're going to do that with stage gate. So theres a lot going on right now will come back with a kind of a full.

Alexander Blostein: Thanks. Yeah, Alex, it's Ron. I mean, we're basing that comment largely on two things. One is, we feel like we've got quite good visibility around what we're doing from a cost perspective. So, we feel like we've got a series of initiatives underway that will continue into 2024 on managing our costs while also continuing the investment program that we've gotten place. That investment program includes some investments that will drive revenues in 2024 and beyond.

Set of guide guidelines and guidance in January but I.

Alexander Blostein: But also, the second thing it's based on is some of the actions we've taken around strengthening our sales and sales effectiveness and just pointing to the results we had in Q3. The note that Eric just made to you in terms of the visibility we have on 24. So, those two things are confidence in expenses and what we believe is a nicely developing pipeline and a set of sales capabilities in processes. Obviously, markets could turn everything upside down, but based on a reasonable market forecast and not necessarily one that's going to be necessarily a tailwind, we do believe we can achieve positive feedback operating leverage. That's great. And I appreciate the new disclosure on the backlog and the revenue backlog. Definitely helpful.

I think for.

We're confident that we've got a path forward here that'll be healthy.

And fee operating leverage.

Good way for us to think about it in for I think for you guys as well.

Yes, thanks, very much Eric appreciate that color.

Okay.

Thank you.

The next question comes from Glenn Schorr from Evercore. Please go ahead.

Hello, Thank you.

So we've discussed over time and today that the lower client flows from the market the whole active to passive trend and that have disadvantages kind of all of us.

Can you talk about what Youre seeing and also private markets both from a servicing standpoint, and you sprinkled in a little comment about outflows were private markets bring this to life a little bit is could this be a growth industry for the next stands full of years.

Curious on site.

Thanks.

It's Ron.

Sure.

The.

Obviously.

You know what kind of growth that the private markets have seen.

Private equity.

More recently private credit infrastructure, and we see none of that abating private equity may be taking a bit of a pause but.

All of the fundamentals.

0.2.

Industries, increasing and in fact.

Many of the large if you look at some of the.

Large multi asset asset managers, a lot of their growth is actually coming from from privates.

Alexander Blostein: So, so maybe within that, can you help us maybe understand the cadence of how quickly some of that 255 of backlog will sort of get converted into service in few revenues? Is that expected largely over the course of 24? Some of that is going to still up to 25. And then ultimately, do you think that can be enough to offset some of the black arc related outflows and revenues that you're still expecting?

Much of that business today remains in sourced.

And theirs.

There's very few standards in the business a lot of it gets.

Serviced and very expensive locations.

<unk> is not a very good experience for the ultimate LP investors. So it's a very fast growth area for us.

Alexander Blostein: Thanks. Alex, it's Eric. Let me answer that from a couple of different directions to give you some texture because as we think about, you know, go forward fee revenues, right? Part of what matters is installing the backlog. Part of what matters is new sales, right? Sort of maintaining the third quarter momentum, the fourth quarter and into next year because some of those sales actually come through in the, you know, in the subsequent few quarters.

And it becomes more important for the.

For the sponsors for the actual firms to actually get their arms around this because the average ticket size is going down.

At 10 15 years ago.

The LP investors typical LP Investor Reserve.

It was an institution it was.

It was.

Pension funds sovereign wealth funds.

The average investor is some affluent person.

Alexander Blostein: And then as we talked about back in September, making sure that we're very effective on our retention activities. So, every one of those matters. In terms of the backlog, we said there's about 255 million of revenues in the backlog on the, on servicing fees and north of 2 trillion on an AUCA basis. The implementations a little bit different in each the regards. In terms of revenues, we think about 5, 10% of that will come through specifically in the fourth quarter.

And some kind of pooled fund and so getting this all right is actually quite important and the demand is very high for us we're investing a lot in it.

A lot of technology in it and increasingly these firms become multi asset.

Not just focused on.

In one area the idea of an alpha front to back kind of thing and all that's associated with it with data.

It becomes very important both as <unk>.

Providers, but also as investors.

Alexander Blostein: So, that's included in our guide. We expect 50 to 60% of the 255 to come through next year. And then the balance in 2025. So, it's kind of a good mix and aligned with what we'd like. The AUCA implementations a little more, it's a little quicker. Just sometimes that happens. It's quicker, sometimes slower. That's a little closer, a 30% in fourth quarter and around 60% next year. But those will move around as they play out.

So the opportunity here is not just the big privates providers, but also the big private investors with sovereign wealth funds and asset owners here. So yes, we see it as a.

A very significant opportunity for us and Glen just add a little bit of the kind of quantitative.

Elements of this private markets.

Broadly defined around the world from a servicing fee standpoint are growing in the 9% to 10% a year.

We described our performance, which is which has been quite strong in that area.

Alexander Blostein: But we've got good visibility now. And what we've been particularly pleased with on our third quarter sales in particular was that a lot of that was around back office services. And back office services, you know, are one of the fastest to onboard and implement. And that's going to provide some momentum into the, you know, first half of 2024. Thank you very much, Will.

Kenneth Usdin: Thank you, and your next question comes from Sir Ken Usdin from Jeff Rees.

And based on our client base and our pipeline our expectation is that we should be growing in the 15% range next year part of that is because we serve so many large global asset managers too.

Have a wide range both in traditional products and in privates right. So there they are coming to us and partly because increasingly we're serving the.

<unk>.

The classic alternative and private.

Organizations, right, who increasingly want to focus on what their core.

Kenneth Usdin: Hey guys, good morning. I just want to follow up at the fourth quarter, NII, you're expecting to be in that middle of that, you know, kind of by 575 zone, and then you're talking to the upper end for next year. I just wanted to ask you to walk us through, you know, that direction of travel, like what are the factors that start to turn to perhaps a slight positive as you exit the year into next year with regard to either, is either, you know, left side repricing or just deposits getting to the right zone, just kind of walk us through the moving parts.

Core investment processes as opposed to processing and so we see more and more outsourcing and <unk>.

Opportunities for us.

That segment as well.

Maybe just one follow up to all the detail you were early on the on line of the offshore outsourcing your early unhedged on outsourcing and it helps you on your growth rate over time.

Do you have a sense that youre early here do you think you have a head start and competitive edge.

Kenneth Usdin: Thanks. Yeah, Ken, it's Eric. As you, as you surmise, there are a number of factors that matter, especially at this point in the cycle, as we transition from declining NII to some levels of stabilization, and we see a good rationale for some uptick from from fourth quarter into the first quarter of next year. So let me just go through them, right? There's the continued amount of rotation of NIV, not interested in deposits.

On this private front, we just don't see the same competitive landscape.

Landscape. So curious on your thoughts thanks.

Okay.

It's a little bit hard to tell Glenn I think that we are certainly amongst the traditional asset servicers, we think that we're early.

You've got some of the.

Very focused fund administrators that too.

Kenneth Usdin: You still expect some in fourth quarter, but we expect that that starts to flat now at the beginning of next year. You know, we'll see exactly how much when it's hard to call and it moves around. We've got quite a bit of visibility into our repricing, especially in for our largest and most sophisticated lines I described that last year, and then we're, you know, through a good bit of that, we have, we execute on some more of it in third quarter, we expect, and we have very good visibility into fourth quarter.

Some narrow kinds of activities in there and certainly in terms of offering a full front to back solution that includes data as.

As far as we can tell we're the only ones out there.

So yes, we think in general we're early.

Okay. Thank you for all that.

Thank you.

Next question comes from Ryan Kenny from Morgan Stanley . Your line is already open.

Kenneth Usdin: And so the kind of the repricing effects and the catch-up, you know, is kind of a bubble that works its way through. On the tailwind side, we then have the investment portfolio rolling through. And, you know, the investment portfolio matures, you know, $45 billion bonds quarter. You've got the new bonds come on roughly at, you know, two, sometimes 300 basis points higher than the ones that are maturing. And so that's what's giving us a positive trajectory.

Hi, Thanks for taking my question.

The industry has been seeing servicing fee rate pressure for a while new update us on what Youre currently seeing in terms of fee rate repricing or the newer wins coming in at a lower fee rate than your existing contracts are at a higher fee rate.

Kenneth Usdin: And so it's really those three factors plus a little bit of, you know, lending growth and some of our other actions that we can control that we think starts to shape, you know, a stabilization of NII as we get from fourth quarter to the first quarter. But, you know, it'll depend. There'll be some movements. And as, you know, we update all of you as frequently as we are in public, and we'll continue to do that. But those are the trajectories and our expectations at this point.

Brian It's Eric.

The overall cadence of.

Re pricings have been stable for us I think for the industry. The last couple of years.

You know back in 2019 and went through a phase.

Of higher pricings, but they've been.

Relatively consistent in that kind of 2% or so headwind.

Level, which.

Which is not.

Sure.

Not that different from what it was over the last 510 years. So that's been relatively stable while.

What we have seen is very good fee rates on new business and.

And part of that is the discussion we just had in privates, where just because of the nature of the activity the servicing it tends to be a manually intensive process. The fee rates are multiples of the average fee rate for our business.

Ronald OHanley: Understood. Thanks. And my second one is just, you know, the costs were, I think, a little better than you had thought. And your flat to 4Q also probably a little better than the market thought. And a slower implied year-to-year rate of growth. Just wondering, have you done anything incremental to slow the organic growth rate of expenses? And is that something we should think about as we go forward as well? Yeah, Kenneth's run.

And in fact the.

The last couple of quarters, we've seen.

Fee rates on new business comfortably above the average that we've seen you can just go a little bit of comparison and we'd be cautious about doing it for every quarter, but take the last.

Yes.

A few quarters of AUC a win in the last few quarters of.

Ronald OHanley: I mean, there's a number of initiatives underway as we, I think always talking about, we've really got an ongoing productivity that of actions underway that is comprehensively looking throughout the organization. Some of the things that are underway now, we mentioned what's going on in India. And this India JV bringing that inside, I mean, this JV goes back to our early days in India before we had our own center of excellence there.

Fees.

Wins, and you kind of you get to that view.

And we've mentioned that in ways.

And our quarterly reports this year in particular, so I think in some ways.

What we've been able to find is that with alpha we bring more to our clients across the AUC a base right. So we have fees on the front office side, which we disclosed separately, but both the middle and the back office.

We have.

Ronald OHanley: It's going to enable us to eliminate redundancy and eliminate a lot of oversight activities. So we'll be able to take down costs there, take down repetitive costs. We've got a comprehensive look at operating models throughout the business, which is, we'll start to yield results into next years. We're looking at some, where work gets done throughout the world and where there are places where we can move and combine things, create more end to end.

Complex clients and so that's been.

It's been.

White fruitful for us and then the alternatives and private is a very.

As a much higher fee rate area just by virtue.

Virtue of that industry.

That together is what gives us some of the.

Revenue.

Kind of momentum.

We've seen into the third quarter of this year and we expect in the fourth quarter as well.

Thanks, that's helpful and if we look at the quarter it looks like the servicing fee rate over average ACI did come down a bit was there anything driving that is that just a function of lower volatility and timing or is there anything else in that number that we should think about.

Ronald OHanley: And so it's a series of things. Some of them, you know, a lot of the easy works already been done. So some of these things have been the works been underway for a while, and we'll start to realize the benefits of it. But we see visibility such that we can make the statements that we are that notwithstanding that we continue to make significant investments in the business that we feel we can keep our costs in reasonable check.

No. If you just look at the aggregates remember you've got this kind of effect, where when equity markets are up right you kind of have this natural.

Outstanding in the fee rate just because of how the fee schedules are structured right.

Ronald OHanley: And can I just add that the other things that we have bear down on effectively that we talked about over the last quarter or so is our hiring freeze. I mean, what we've found is we've got outstanding individuals and people on our team. And part of what we need to do as we reinvest in different features of the business for different areas, we actually need to reallocate some of that talent to those areas.

And theyre not theyre not.

Quite like they are in the asset management business, So no thats fair and Thats been fairly.

That was expected and in line with.

The ranges that we've been seeing.

Alright, great. Thank you.

Thank you.

Your next question comes from Brian Bedell of Deutsche Bank.

Please go ahead.

Ronald OHanley: And actually at the same time, we need to find efficiencies in others. And so that's been, while it is hard work, it's been an effective way to actively manage our team and our human resources. It still means we invest in all that we need to do for new products, functionality, regulatory requirements, and so forth. But the reallocation that's born from this sort of freeze is actually a very effective tool for us at this stage in the cycle.

Thanks, Thanks, very much for taking my question.

Just actually just follow on on that last one Eric and just doing the math just and if you can confirm if I'm correct on this the 91 million over.

$149 billion is the appropriate way to look at that and that would be six basis points as opposed to.

The $2 55.

Servicing revenue to be installed over the $2 three trillion, representing more than just like a basis point or so.

I guess first of all is that are we am I looking at that correctly and is it all characterized as servicing fee revenue and I guess is.

Ronald OHanley: Yeah, Ken, what I would add to this, I think what we're talking about now is a continuation of what we started going back to 2019. That was rudely interrupted by COVID and everything that occurred coming out of COVID, you know, the disruption, the great resignation. The issues that arose out of that with service quality and where we needed to over invest to make up for some of the turnover that we were seeing that led to the kind of cost increase that you saw.

What's driving that.

Is that.

Differential.

Sort of a sustainable type of new revenue run.

Ronald OHanley: That's all been normalized service quality is stabilized. And so I would say that we're back on the path that we started back in 2019 and overcome what we saw in the kind of 21-22 period. Thank you.

Run rate for I guess private market sector business.

Brian It's Eric I'm really glad you asked that question because with new disclosure come sometimes.

Very simple answers and sometimes.

More more textured ones. So what <unk> done is is an analysis. When if you look at our fee wins divided by our new AUC wins, which on average over time.

I'll stress that.

Will approximate the rates that.

Of.

The wins the challenge is in any one quarter remember some of what we win is on existing <unk> business. So so Ron mentioned one of the global asset managers, we added back office to that.

Brennan Hawken: And your next question comes from Brennan Hawken from UBS. Please go ahead. Morning, Ron and Eric, and thanks for taking my questions. One question on your expectations for 4Q, Eric. Encouraging to hear that you still are expecting non-intersparing to find a stable point here in the beginning and next year. But when you think about your 4Q expectations, are you thinking that the typical seasonality that we see in deposits will come through?

To that relationship those AUC as were already in our base why because we had already been doing both front and middle office processing for them. So in a way those.

Fees.

Wins in the quarter cannot be compared to any of the new AUC, a that's a kind of apples and oranges on.

On the other hand, sometimes the opposite happens right, where we're we might be adding in AUC.

NFC that.

That's quite.

Hi, one that's quite low because we're just adding a small service.

And we've had some of those over the last couple of quarter. So I'll just be I'd, just be cautious about the quarter by quarter math I'd encourage you over time, we can we can.

Brennan Hawken: And is that embedded within the middle of that range of 550-600 for NIA? Brennan, it's Eric. Yes, broadly, but with the asterisks of the seasonality that we've seen, you know, has moved around a bit, sometimes a little stronger, or sometimes it's a little weaker than typical. So, you know, we do see a bit of an uptick and a normalization in total deposits. And so, you know, we've guided to stabilization. Maybe we'll see an uptick.

We can look at that through through through time, but I think what we would encourage you to do is take a look at.

Revenue the wins on a revenue basis against the.

The base of servicing fees right $91 million in a quarter against the $5 billion of servicing fees as a very healthy amount of.

<unk>.

Of revenue and our ability to maintain that momentum gives you an indication of the kind of sales effectiveness and the growth dynamic that we can create net of the.

Brennan Hawken: We'll see. But, you know, this is based on really quite deep analysis of our client deposit base. Remember, we manage it on a US dollar. We manage each of the foreign currencies. We have, you know, just an NIB, for example. I think we have, you know, 30,000 accounts, right? The average account size is a million dollars. We've seen the trends in the largest, most sophisticated client and largest accounts come down, you know, quite a bit.

Retention rates that we need to.

Two.

To manage too so I'd encourage you to spend the most time there you can do a local.

Wins versus the AUC a base that gives you another indication.

But I'd encourage you to do it in in that direction, because youll get a better indication I think of our of our momentum. Okay. That's super helpful. And then the follow up would be on the deposit beta the differentials between the U S.

Brennan Hawken: The smaller ones tend to have, you know, a flatter line and evolution. So, the guide is based on that plus a little bit of the seasonality. And, you know, we'll just update as we go. But I think we start to see some amount of inflection here, but we want to be careful, right? There's still some amount of rotation playing out. There's some amount of balances and pricing coming through. So, a good bit of which we have a visibility into, but they'll take a little time to just, you know, work through it in the next few months and quarters. Okay. Okay, great. Thanks.

And non U S and we've heard this from the other custodians as well in terms of non U S deposit betas being significantly lower than U S and just maybe some thoughts on as we move into this into 2024 and potentially Europe may be even higher for longer versus the U S potentially.

Should we see more aggressive or I'd say more incremental deposit.

Peter.

Moving through the non U S markets to sort of almost catch up to us.

Not so much.

Brennan Hawken: And then, maybe following up a little bit on Ken's question, I'm sure at this point you're going through the budgeting process for 2024. You know, do you have any preliminary expectations for what you could be looking at for expense growth, operating expense growth here in the next year? Brendan, it's it's early to do that. You know, we, I think that what gives us, you know, confidence and actually, you know, the feel of necessity on the operating leverage is we need to run the business in a way that is healthy for our shareholders.

Our current indication and we're well through the cycle in the U S at least.

So we'll see it feels like Theres, a little more to go on the on the international side and it started later so it's harder to read.

We do see that there are some structural differences in the markets.

Round deposit betas between the U S currency.

And the non dollars even for the same clients in some cases and part of that is just the you have got this noninterest bearing versus interest bearing constructed in the U S and internationally you tend to have just the interest.

Brennan Hawken: Then our various stakeholders at the same time, and we need to find a way through that. We've certainly gone through a strategic planning exercise. We do that, you know, through the summer, July, August and September. And we have, you know, we've got a path forward. We believe both on the top line and on expenses. It's a little soon to get into that. But, you know, we're working through that. And part of what we're doing now is actually making sure that we have detailed plans, you know, business by business, function by function.

Bearing deposit construct so.

It's a little more.

It's a lot more straightforward so as I've described.

We have cumulative deposit betas in the U S and the.

70% to 75% range and we expect that will float up a little more as we as we kind of.

As the cycle.

Let's say finishes could go up another 510 percentage points, but it's starting to level off.

Brennan Hawken: We have, we run alternative scenarios. We even develop contingency plans. And we also, you know, we are careful about me during our spend next year where we do add to spend. And we're going to do that, you know, with stage gates. So there's a lot going on right now. We'll come back with a, you know, kind of a full set of guidelines and guidance in January. But I think, you know, we're confident that we'll, we'll, we've got a path forward here that'll be healthy. And, you know, the operating leverage is a very good way for us to think about it and for, I think for you guys as well.

In Europe .

We're in the 25% to 50% range of cumulative beta is it could go up another 10 points may be 15 points, we'll see but it's not going to reach the same levels that you have in the U S space still.

Based on the indications we have and.

The way, we both lead price and we see others.

Competitively priced in the market so fairly fairly different between the U S and the international currencies in some way.

That plays too.

That's good for US we know how to manage in both U S and non U S. Currencies. We've continued to have some tailwind in NII in the international currencies, we obviously need to make sure that that we share some of that with clients, but given the international <unk>.

Unknown Executive: Bill. Yeah, thanks very much Eric. Appreciate that color. Thank you.

Glenn Schorr: The next question comes from Glenn Schorr, from Evercore. Please go ahead. Hello, thank you. So, so we've discussed over time in today that the lower client flows from market, the whole active surpassive trend, and that's how this advantage is kind of all of us.

Composition of our balance sheet.

That's one of the areas that continues to be supportive of our.

In a positive way of our NII trajectory.

Thanks, very much that's great color. Thanks.

Okay.

Glenn Schorr: Can we talk about what you're seeing in all private markets, both from a servicing standpoint, and you sprinkled in a little comment about out those private markets, like, bring this to life a little bit, could this be a growth industry for the next handful of years? Just curious on that. Thanks. Yeah, Glenn, it's Ron. Obviously, you know the kind of growth that the private markets have seen, private equity, and more recently private credit infrastructure, and we see none of that abating.

Thank you. Your next question comes from Ebrahim Tuna Waller.

From Bank of America. Please proceed.

Hey, I guess good afternoon.

Just a couple of quick follow ups, one on capital I think could yield.

Adding competing for up to $4 5 billion in buybacks for the year, just give us a sense of the CET one up 11%.

Glenn Schorr: Private equity may be taking a bit of a pause, but all of the fundamentals point to those industries increasing, and in fact, many of the large, if you look at some of the large multi asset managers, a lot of their growth is actually coming from from private. Much of that business today remains in-sourced, and there's very few standards in the business. A lot of it gets serviced in very expensive locations, and is not a very good experience for the ultimate LP investors.

Close to your target how are you thinking about capital management going into next year would you rather, albeit with some amount of excess capital as you look forward to some of the macro uncertainties.

Yes, continuing buybacks and being out any excess.

Let me let me, let me start on that Ebrahim.

It's Eric <unk>.

Capital is one of the most important elements of the balance sheet and we spent a lot of time thinking about what are the levels of capital how to manage and it is based on facts and circumstances right. The economic environment, the uncertainty our confidence in earnings and earnings momentum.

What we can see in the strength of our balance sheet dry we're incredibly liquid and we have a very.

Very up market lending book, which is quite.

Glenn Schorr: So it's a very fast growth area for us, and it becomes more important for the sponsors for the actual firms to actually get their arms around this because the average ticket size is going down 10, 15 years ago, the LP investors, the LP investor was an institution. It was a pension fund, a sovereign wealth gun. On today, the average investor is some affluent person that's in some kind of a pooled fund.

Quite high quality. So many many things come together I think what we've laid out on the on the page on capital.

And the materials is that.

Our minimum requirement.

Is 8% we tend to run with a very healthy buffer above that we've got a target range in the 10% to 11% and we've been way above that range, partly because of a.

A little bit of history over the last.

Two years, and we've been bringing that down but.

At both at pace and in also in <unk>.

And in a thoughtful way.

Glenn Schorr: So getting this all right is actually quite important, and the demand is very high for us. We're investing a lot in it, a lot of technology in it. And increasingly, as these firms become multi asset, not just focused on in one area, the idea of an alpha front to back kind of thing, and all that's associated with it with data, becomes very important both as providers, but also as investors. So the opportunity here is not just the big private providers, but also the big private investors, the sovereign wealth funds and asset owners here.

I think what Youll see us do.

And again I say this is.

Given what we know today, because we're going to be careful.

Market's disrupt than year.

You slow a little bit if you've got a lot of confidence in market fees and there is confidence then.

Might you might go in the other direction, but the middle of that range is a good place for us to aim towards.

Partly because.

Want to keep a little bit of extra that's still two five percentage points above the.

<unk>.

The requirements.

On the other hand, there are some.

Some.

Some uncertainties in the world and it doesn't feel like we should run down to the lower end of that range right now right that feels that could be.

Glenn Schorr: So yes, we see it as a very significant opportunity for us. And Glenn, just add a little bit of the quantitative elements of this, private markets, broadly defined around the world, from a servicing fee standpoint or growing in the 9, 10% a year. We described our performance, which has been quite strong in that area. And based on our client base and our pipeline, our expectation is that we should be growing in the 15% range next year.

It wouldn't be appropriate so theres, a theres a theres a range for a reason I guess is what I'd say.

We've been returning capital at pace in the last few quarters of $1 billion or more.

Certainly like to continue to return capital at pace.

You can kind of do the math of 11% go down to the middle of that range you got to remember there is.

Pull to par that matters from the fast portfolio that provides.

A tailwind and capital accretion there is earnings and then there's the <unk> management, you saw <unk> tick up a little bit this quarter.

Glenn Schorr: Part of that is because we serve so many large global asset managers who have a wide range, both in traditional products and in privates, so they're coming to us. And partly because increasingly, we're serving the classic alternative and private organizations, who increasingly want to focus on what their core investment process is as opposed to processing. And so we see more and more outsourcing and opportunities for us from that segment as well.

Our goal is obviously to continue to optimize our WMA and.

Turn that into an advantage as well so we see.

Quite a healthy buyback going into the fourth quarter or at least got authorization plenty of authorization too.

To deliver on that we know it's important to our shareholders.

And.

Have I think a good path forward.

That's helpful. Thanks for walking through that.

Just a follow up quick question around NII or I guess as you're thinking about Alco management.

As things reprice on the asset side within the Securities book.

Glenn Schorr: May be just one problem up to all that good detail. You were early on the, a lot of the offshore outsourcing. You were early on hedge fund outsourcing, and it helps you on your growth rate over time. Do you have a sense that you're early here? Do you think you have a head start and competitive edge on this private front? We just don't see the same competitive landscape so clearly in your thoughts.

Kind of holding duration relative to where the back book is.

Well at any point.

What process they are all adding duration and I'm just wondering how youre thinking about the.

Cycled environment, who might be for the next few years and how that informs the duration youre willing to take on.

Ebrahim the answer is all the above so every one of those factors matter.

If we get more steepness to the yield curve right that would encourage us to add some duration.

Glenn Schorr: Thanks. It's a little bit hard to tell, Glenn. I think that we, it's certainly amongst the traditional asset servicers we think that we're early. You know, you've got some of the, the very focused fund administrators that do, you know, some narrow kinds of activities in there. And certainly in terms of offering a full front to back solution that includes data, as far as we can tell. We're the only ones out there. So yes, we think in general early. Okay. Thank you for all that. Thank you.

At the right time, we want to remain a little more duration to protect against that.

Falling rates right.

Ideally be be ahead of that.

On the other hand.

Rates could could move upwards further and so you want to be careful I think we are.

We're careful in how we configure the portfolio you saw us do some of the repositioning.

We unwound for a $5 billion of bonds, we reinvested towards the middle of the curve, but also at the front end right we have.

So it's not just an average duration position that we are focused on but where are the points across the curve.

Ryan Kenny: Your next question comes from Ryan Kenny from Morgan Stanley. Your line is already open. Hi, thanks for taking my question. So the industry has been seeing servicing firae pressure for a while. New update on what you're currently seeing in terms of firae repricing and are the newer winds coming in at a lower firae than your existing contracts or higher firae. Ryan, it's Eric. The overall cadence of firae pricing has been stable for us.

And then there's a whole.

Window of work that we do around the U S curve the euro curve and then the other foreign currencies and then there's also a mix of.

Ryan Kenny: And I think for the industry the last couple of years, as you know, back in 2019 went through a phase of higher repricings, but they've been relatively consistent in that kind of two percent or so headwind level, which, which is not. Not that different from what it was over the last five, ten years. So that's been relatively stable. What we have seen is very good fee rates on new business. And part of that is the discussion we just had in private where just because of the nature of the activity, the servicing, it tends to be a manual intensive process.

Duration claim duration, we put on through treasuries and some.

Some of the the convexity products like the agency MBS. So there is a wide range, but it's an active discussion I'd say at Alco and one that we.

We think we'll both be.

We think of it both on an economic basis, but also on our risk management and protective basis.

That will have I think quarter to quarter.

Got it thank you.

Okay.

Thank you. Your next question comes from Steven <unk>.

From Wolfe research.

Your line is already hey, good afternoon. Thank.

Thank you so much good afternoon.

Eric I wanted to ask a follow up on the new revenue disclosure in the past you spoke about the level of gross asset flows that would be needed to offset natural attrition in the business and in a similar vein I was hoping you could frame the level of gross revenue wins that are required to offset natural attrition recognizing per I think it was Brian <unk>.

Ryan Kenny: The fee rates are multiples of the average fee rate for our business. And in fact, the last couple of quarters, we've seen fee rates on new business comfortably above the average that we've seen. You can just do a little bit of comparison. And we'd be cautious about doing it for every quarter, but take the last few quarters of AUCA winds, the last few quarters of fees, winds, and you get to that view.

Earlier question that fee rates will certainly vary depending on new wins, but any way you could frame it in that context would be really helpful.

Yeah, Here's what I described in the past you've talked about AUC a win we had talked about.

About a trillion five of AUC wins, a year, that's kind of a kind of volumetric benchmark.

And as some of the discussion we've had typically we've been winning on average higher than the current fee rate and so you can kind of work through that.

Ryan Kenny: And we've mentioned that in our Corley reports this year in particular. So I think in some ways, you know, we've been able to find is that, you know, with alpha, we bring more to a client across the AUCA base. So we have fees on the front office side, which we disclose separately, but both the middle and the back office, we have, you know, complex clients. And so, you know, that's been quite fruitful for us.

On the fee revenue side and this is really around servicing fees.

Our goal for this year 2023.

Is to deliver about $300 million of servicing fee wins, and you can compare that to the $5 trillion of.

Sorry, a $5 billion of servicing fees for the year and that kind of gives you a sense for I'll call it growth gross revenue wins.

Ryan Kenny: And then the alternatives and privates is a much higher fee rate area just by virtue of that industry. And that together is what gives us some of the revenue, kind of momentum, you know, that we've seen into the third quarter of this year and we expect in the fourth quarter.

As Ron described we've got a series of initiatives some of which are already.

<unk>.

Playing through around adding to sales capacity sales effectiveness.

Product feature functionality and so forth.

And part of the disclosure that we provided just just last month.

Ryan Kenny: Paul, thanks, that's helpful. And if we look at the quarter, it looks like the servicing fee rate over average, ACI did come down a bit. Was there anything driving that? Is that just a function of lower volatility and timing, where is there anything else from that number that we should think about? No, if you just look at the aggregate, remember you've got this kind of effect where when equity markets are up, right, you kind of have this natural thinning in the fee rate just because of how the fee schedules are structured, right? And they're not quite like they are in the asset management business. So that's fairly, that was expected and in line with the ranges that we've been seeing. All right, great, thank you. Thank you.

Was that.

While $300 million of servicing fee fee wins is appropriate for this year, we'd like to get closer to $350 million to $400 million next year.

And again, you can kind of compare that to the $5 billion of servicing fees and that kind of gives you a sense of gross fee revenues.

I think the follow on.

Work you'd want to do is just think about the other drivers of servicing fee revenue growth on a net basis right. There is.

Typically some amount of attrition, we said, we'd like to have retention at 97%. So.

You can think about 3% servicing fee attrition, that's about $150 million a year as a way to compare the gross wins versus the gross losses and then there is some amount of fee headwinds, which is about 2% a year that we've described so what we're trying to do is create clarity for all.

Brian Battle: Your next question comes from Brian Battle of Deutsche Bank. Please go ahead. Great, thanks. Thanks very much for taking my question. I just actually just follow on on that last one, Eric, and just doing the math. If you can confirm if I'm correct on this, the 91 million over the 149 billion is the appropriate way to look at that. And that is the size of servicing revenue to be installed over the 2.3 trillion representing more than just like a basis pointer.

You on the elements of that growth.

Kind of the growth algebra.

I will say it in a.

And Ah.

And an analytic manner.

So that you can see where we're really focused in every one of those levers matter we have.

Hence efforts on each one of those but but it's that mix of activity and the sales the servicing fee sales in particular.

That will help US then deliver our core organic growth from year to year to year.

Brian Battle: So I guess first of all, am I looking at that correctly and is it all characterized as servicing fee revenue? And I guess what's driving that? Is that differential, sort of a sustainable type of new revenue when run rate for private market state of business?

And a good way for I think us internally to be clear about what we need to accomplish and externally with you all as to.

What.

What the what the bar is for.

For good organic growth and success.

No. Thanks for that Colorado, and if I could just squeezing one more clarifying question.

Eric Aboaf: Brian, it's Eric. I'm really glad you asked that question because with new disclosure, it comes sometimes very simple answers and sometimes more textured ones. So what you've done is an analysis, if you look at our fee wins divided by our new AUCA wins, which on average over time, I'll stress that, will approximate the rates of the wins. The challenge is in any one quarter, remember, some of what we win is on existing AUCA business.

Right.

There is a lots of unpacking the response to Ebrahim around capital management.

It does appear given the <unk> buyback level, assuming you execute on the four and a half in its entirety.

I'll be at the lower end of that 10% to 11% range of CET one.

Recognizing there'll be a pull to par benefit, but should we be anchoring to the 80% to 100% payout that you guys have managed to in the past just recognizing that there's not as much excess if youre going to run at those levels.

I think for the rest of this year.

Yes.

The.

Eric Aboaf: So Ron mentioned one of the global asset managers, we added back office to that, to that relationship. Those AUCA's were already in our base, why? Because we had already been doing both front and middle office processing for them. So in a way, those fees, wins in the quarter cannot be compared to any of the new AUCA. That's the kind of apples and oranges. On the other hand, sometimes the opposite happens where we might be adding an AUCA and a fee that's quite high, one that's quite low because we're just adding a small service.

The analytics I'd encourage you to do is to think about where we ended third quarter.

The middle of the range and Thats not necessarily a point range.

Range through the middle of the range for fourth quarter Theres pull to par there's out of the way management that gives us quite a healthy amount of buyback and I think the continuation of something thats quite.

Accretive to shareholders.

That is that is substantial in terms of capital return.

Once we get to the middle of the range then.

We're more likely to be the.

That over 80% level of earnings.

Eric Aboaf: And we've had some of those over the last couple quarters. So I'll just be cautious about the quarter by quarter math. I'd encourage you over time. We can look at that through time. But I think what we'd encourage you to do is take a look at the. Revenue, the winds on a revenue basis against, you know, the base of servicing fees, right, 91 million in a quarter against the five billion of servicing fees, is a very healthy amount of revenue.

But I think in that.

That'll be probably how we think about next year.

But but that's next year I think there is.

I think we have good.

Good visibility into a good and healthy amount of capital return and comfortably over.

What we've what we've committed to I'll call it in the medium term.

Really helpful. Eric Thanks for taking my questions.

Thank you. Your next question comes from Mike Brown of <unk>. Your line is already open.

Eric Aboaf: And, you know, our ability to maintain that momentum gives you an indication of the kind of sales, the factiveness and the growth dynamic that we can create, net of the, you know, the retention rates that we need to do to manage to. So I'd encourage you to spend the most time there, you can do a little bit, you know, AUCA wins versus the AUCA base that gives you another indication. But I'd encourage you to do it in that direction because you'll get a better indication, I think, of our of our momentum.

Okay, great. Thank you for squeezing me in.

So multi multi part question here on the asset management business.

So first I was just great to see the money fund flows come in this quarter and you mentioned that you believe there was some market share gains. There can you just touch on what what contributed to those gains and maybe some thoughts on the coming quarters, and then look at the equity side and consistent with the industry. There was there was pressure there on the flows.

Eric Aboaf: Okay, that's super helpful.

What's your thoughts on maybe when investor sentiment could improve and flex there.

Eric Aboaf: And then the follow-up would be on the deposit data, the differentials between the US and the, and non-US, and we've heard this from the other custodians as well in terms of non-US deposit data is being, you know, significantly lower than US and just maybe some thoughts on as we move into this, you know, into 2024 and, you know, potentially Europe, maybe even, you know, higher for longer versus the US potentially. And should we see, you know, more, you know, aggressive or at a more incremental deposit data, you know, moving through the non-US markets to sort of almost catch up to US or not so much.

And then just last part here when you take a step back and you look at SGA. Today is there anything strategically that could be interesting to you from a M&A perspective to help bolster the the asset mix or accelerate some of the future growth potential in the business. Thank you.

Right.

Yes, Mike it's Ron So there's a lot there in your question I think on the.

On the cash business I mean this is a.

Core competencies that we've had for a long time.

And it's also we've built up the capability both on the investment side and really on the distribution channel side. So we've got.

Eric Aboaf: You know, our current indication and we're, you know, well through the cycle in the US, at least we think so. We'll see. I feel like there's a little more to go on the on the international side and it started later so it's hard to read. We do see that there are some structural differences in the markets around the deposit data between the US currency and the non-dollar, even for, you know, the same clients in some cases.

Distribution and if you will kind of hooks in the water in many different pools.

And thats, including by the way lots of connectivity into the.

The core custody business. So as you've seen for example rotation from deposits we've captured some of that in the.

In the.

And the money.

The money market business, but the.

A lot of it most of it's been external most of its been around investment performance and kind of being where the money is flowing.

Eric Aboaf: And part of that is just the, you've got this not interest-bearing versus interest-bearing construct in the US and an international, you can have just an interest-bearing deposit construct. So, you know, it's a little more straightforward. So as I've described, you know, we have cumulative deposit data in the US in the 70 to 75 percent range. You know, we expect that'll float up a little more as we, as we kind of, as the cycle, you know, let's say finishes could go up another five, you know, 10 percentage points, but it's starting to level off.

The other areas that are also growing.

D C is growing and it's been growing for a while.

Our share has continued to grow there in the DC investment only.

And that's been very much product and product innovation driven.

Oh.

<unk> was one of the first to figure out how to put an annuity product into a target date fund.

Did it actually before.

We've got the regular the broad regulatory go ahead to do that and that's actually now a source of real growth. So we see that as a as a growth area.

Eric Aboaf: In Europe, you know, we're in the 25 to 50 percent range of cumulative data and it could go up another 10 points, maybe 15 points we'll see, but it's not going to reach the same levels that you have in the US based on the indications we have. And, you know, the way we both we price and we see others competitively price in the market. So fairly, fairly different between the US and the international currencies.

The defined benefit just goes away and people realize that longevity protection is something that people need I think that combination of target date funds with.

Some kind of insurance longevity product will be important and we've got real distinctive expertise in that.

Terms of the growth areas.

Eric Aboaf: And in some ways, you know, that plays to, that's good for us. We know how to manage in both US and non-US currencies. We've continued to have some tailwinds in NII and the international currencies. We obviously need to make sure that we share some of that with clients. But given the international composition of our balance sheet, you know, that's one of the areas that continues to be supportive of our, in a positive way of our NII trajectory.

There is.

Really for the most part on institutional shop.

We've built out the product capabilities in the retail in the intermediary space.

<unk> Hong who.

Joining us as CEO .

Late last year. She has got a lot of expertise there too. So some of it will be just <unk>.

Moving and expanding share in the retail intermediary space.

And then there is a real move into the.

Blending the line between public and private markets.

Unknown Executive: Ray. Thanks very much, it's great color. Thanks.

Tom.

And the belief that those lines really don't make sense in that blended products, where you have sufficient liquidity, but enable those that don't need the liquidity to take advantage of the illiquidity premium.

Ibrahim Poonawala: Thank you. Your next question comes from Ibrahim Poonawala, from Bank of America. Please proceed. Hey, I guess good afternoon. Just a couple of quick follow-ups. One on capital, I think, how do you regarding completing your four points up to 4.5 billion in buybacks for the year? Give us a sense with the C-E-K1 at 11% close to your target. How are you thinking about capital management going into next year? Would you rather operate with some amount of excess capital as you look forward to some of the macro uncertainties relative to just continuing buybacks and paying out any excess?

So some of this will be in product design, whether that's organic or inorganic I mean, we think there's opportunities in both.

The team's got.

Lots of <unk>.

Product.

Product development going on so we are fully committed to that business, we see lots of growth.

In that business in and excited about the prospects there.

Okay, great. Thank you I'll leave it there.

Okay.

Eric Aboaf: Let me start on that, Ibrahim. It's Eric. Capital is one of the most important elements of the balance sheet. We spend a lot of time thinking about what are the levels of capital, how to manage. It is based on facts and circumstances, the economic environment, the uncertainty, our confidence in earnings and earnings momentum. What we can see in the strength of our balance sheet, we're incredibly liquid and we have a very up market lending book which is quite high quality.

Thank you.

The next question comes from Mike Mayo of Wells Fargo Securities. Your line is already open.

Hi.

Is that a long journey for you guys to get the front to back solutions in Alpha and I'm, just trying to figure out how much traction that has and where we're seeing that in the financial results.

No one here and I hear your excitement and you have alternatives now part of that program and Youre guiding for positive 2024 fee operating leverage.

And you have all these new mandates on the other hand, I look at the fee growth this quarter it wasn't that great alright, and so.

Eric Aboaf: So many things come together. I think what we've laid out on the page on capital in the materials is that our minimum requirement is 8%. We tend to run with a very healthy buffer above that. We've got a target range in the 10 to 11%. We've been way above that range partly because of a little bit of history over the last two years and we've bring that down, but in both at pace and also in a thoughtful way.

Are we seeing evidence of the front to back momentum in the resource is it something that you expect to see or is it simply such a long.

Sales cycle that we should be thinking 234 years out.

And Mike Let me just start maybe.

Addressed the journey here because.

This was not something that you bought off the shelf.

Through something that.

Nobody had ever done before so there was.

Eric Aboaf: I think what you'll see us do, and I say this is given what we know today because we're going to be careful if markets disrupt. Then you slow a little bit. If you've got a lot of confidence in market fees and there's confidence, then you might go in the other direction. But the middle of that range is a good place for us to aim towards partly because you want to keep a little bit of extra that's still two and a half percent and points above the requirements.

An awful lot of development that we need to do and I think we signaled that at the beginning I mean, Charles River was an important acquisition.

To be clear that was the front end itself needed some investment.

Investment, particularly in the fixed income area.

So much.

Much of what we've been doing over the last several years.

So selling and developing.

Many of the early.

Some of the early large ones were explicit development partners.

Yes.

We've targeted them they targeted us and came in as development partners.

Eric Aboaf: On the other hand, there are some uncertainties in the world and it doesn't feel like we should run down to the low run of that range right now. That feels it wouldn't be appropriate. So there's a range for a reason. I guess is what I'd say. We've been returning capital at pace in the last few quarters, a billion dollars or more. We'd certainly like to continue to return capital at pace. You can kind of do the math of 11%.

With the idea of that.

They would help us to build this out they've been.

Purposely take them longer because they are the ones that are actually helping to shape what the overall.

Things will look like this has been a very very big year, Eric alluded to it.

In terms of some of the features and functionality, particularly around fixed income.

And getting up to not just par but to a market.

<unk>, leading position in terms of fixed income capability.

Eric Aboaf: Go down to the middle of the range. You got to remember there's pulled apart that matters from the AFES portfolio that provides a tailwind and capital creation. There's earnings. Then there's the quarter. Our goal is obviously to continue to optimize RWA and turn that into an advantage as well. So we see quite a healthy buyback going into the quarter. We've got authorization, plenty of authorization to deliver on that. It's important to our shareholders and have I think a good, good path for.

So.

In terms of just getting the program up and running we're actually quite pleased with where we are I don't think we would have thought back in.

2018, 2019, when we.

When we launched this that we'd have the number of clients that we do now.

The other thing that we can we're convinced but.

We had to prove it to ourselves was that this could be a tool to actually generate new clients that it wasn't just a way to solidify existing relationships, but it was a way to actually.

Grow share and ship share.

And that's what we're starting to see now.

Ibrahim Poonawala: Thank you. That's helpful, thanks for walking through that, Eric.

Eric Aboaf: And this is a follow-up quick question around NII or guys, I guess, as you're thinking about alcohol management, is there as things reprise on the asset side within the securities book, are we kind of holding duration relative to where the back book is? Will at any point the thought process evolved to adding duration? I'm just wondering how you're thinking about this cycle, the environment we might be for the next few years?

Total was one theres others in the pipeline.

So.

It's a journey that we believe we will.

C rare.

Revenue growth at an accelerated rate.

And maybe I'll leave it there.

And Mike it's Eric on the financials.

Very fair question and I, just remind you the context for the current year.

Eric Aboaf: And how that informs the duration you're willing to take on? The answer is all the above, so every one of those factors matter, if we get more steepness to the yield curve, that would encourage us to add some duration. At the right time, we may need a little more duration to protect against falling rates. That's what you want to ideally be ahead of that. On the other hand, rates could move upwards further and so you want to be careful.

Because there are some other large movements on servicing fees. So if you think about it we recorded a 1% growth in overall servicing fees.

But there were tailwind.

Headwinds away from the kind of organic.

Do business creation that.

That that's important that we need to demonstrate.

Year after year the market tailwind for year on year for this quarter was about four percentage points of servicing fees. So you would say hey.

Eric Aboaf: I think we're careful in how we've configured the portfolio. You saw us do some of the repositioning. We unwound for $5 billion of bonds, we reinvested towards the middle of the curve, but also at the front end. We have, so it's not just an average duration position that we are focused on, but we're the point across the curve. And then there's a whole window of work that we do around the US curve, the Euro curve, and then the other foreign currencies.

Where is that part of that was about three percentage points of headwind came from lower client volumes and activity and a little bit of what we described as we've seen less trading activity out there which is which.

Eric Aboaf: And then there's also a mix of duration, clean duration we put on through treasuries, and some of the convexity products, like the agency and B.S. So there's a wide range, but it's an active discussion, I'd say, at Altgo, and one that we think will both be, we think of it both on an economic basis, but also on a risk management and protective basis that we'll have, I think quarter to quarter.

Unknown Executive: Thank you.

It comes and goes tends to be cyclical.

And then the other thing we did see this year in this quarter is that previously disclosed client exit.

Worth.

Almost two percentage points as well so there are I think some.

Larger more headwinds and <unk> in particular flowing through the financials net new business right. If we just wanted to take a look at that.

Was a positive two percentage points year on year, this quarter, and that's where we'd like to see the value of alpha the value of traditional servicing fee sales the value of privates servicing fee sales and part of the reasons why we are adding to our disclosures to make that more apparent to.

To everyone over time.

And then just one follow up with Eric and then Ron just.

Of that.

Large client what inning are you in as far as Thats concerned and then Ron <unk>.

Steven Chubak: Your next question comes from Steven Truebock from Wolf Research. Your line is already open. Hey, good afternoon. Thank you so much. Good afternoon. Eric, I want to ask a follow up on the new revenue disclosure. In the past, you spoke about the level of gross asset flows that would be needed to offset natural nutrition in the business. In a similar vein, I was hoping you could frame the level of gross revenue wins that are required to offset natural nutrition, recognizing per, I think it was Brian's earlier question, that V-Rage will certainly vary depending on new wins, but anyway, you could frame it in that context would be really helpful.

As it relates to accelerating revenue growth from.

The long journey of Alpha.

Timing are we thinking quarter here.

Several years.

Yeah on the.

On the previously disclosed.

Klein or.

About.

The 30% through that very roughly.

The bulk of that will come through next year and then there is another.

There is just because of how year on year.

Comparisons work Youll get a tail into 2025.

Steven Chubak: Yeah, here's what I described. You know, in the past, we talked about AUCA wins, we had talked about about a trillion five of AUCA wins a year. That's kind of a kind of volumetric benchmark, and in some of the discussion we've had, you know, typically we've been winning on average higher than the current fee rate, and so you can kind of work through that. On the fee revenue side, and this is really around servicing fees, you know, our goal for this year, 2023, is to deliver about $300 million of servicing fee wins, and you can compare that to the five trillion of, I'm sorry, $5 billion of servicing fees for the year, and that kind of gives you a sense for, I'll call it gross revenue wins.

Yes.

Mike just can you clarify your question.

Want to make sure I'm on it yes.

My initial question was Steve.

Aren't growing that much and Eric identify some headwinds to that but you talked about the financial benefits from alpha the increased activity to result in accelerating revenue growth that I was just wondering a timeframe around that statement that revenue growth should accelerate due to the benefits of alpha.

Hi.

Yes, so I mean as we've.

Signaled I think at the beginning.

Probably.

I think it was.

My answer to Alex.

The.

We're telling you that we believe we're going to achieve positive fee operating leverage.

There is.

Steven Chubak: As Ron described, we've got a series of initiatives which are already playing through around adding to sales capacity, sales effectiveness, product feature functionality, and so forth, and part of the disclosure that we provided just last month was that while $300 million of servicing fee wins is appropriate for this year. We'd like to get closer to $350 to $400 million next year, and again, you can kind of compare that to the five billion of servicing fees, and that kind of gives you a sense of gross fee revenue.

If revenues, there and Theres a constant there on the revenue side.

We've got a program in place that includes alpha.

Going to enable us to do that.

Some of that is driven by office some of Thats driven by <unk>.

Actions that we're taking some of which have been implemented others.

It will be implemented.

This quarter and into next in terms of strengthening.

Sales and revenue related capabilities. So.

What you should be hearing from us is confidence around our revenue growth generating capability.

Some of it related.

But related to the core business.

Steven Chubak: News. I think the follow-on work you'd want to do is just think about the other drivers of servicing fee revenue growth on a net basis, right? There is typically some amount of attrition. We said we'd like to have retention at 97%, so you know we can think about 3% servicing fee attrition, that's about $150 million a year is a way to compare you know the gross wins versus the gross losses. And then there's some amount of fee headwinds, which is about 2% a year that we've described.

What you should also.

We normally don't go into.

A client example, what we did there, but it's such a.

A pure example of the strength of Vontobel example of such a pure.

Illustration.

The strength of <unk> because.

It's an institution, we had no relationship with.

We began the relationship with our front and Middle office and then.

We brought along the back office, which itself as you know, Mike as well as anybody.

Steven Chubak: So what we're trying to do is you know create clarity for all of you on the elements of that growth, kind of the growth algebra. I'll say it in an analytic manner so that you can see where we're really focused and every one of those levers matter. We have 10 efforts on each one of those, but it's that mix of activity and the sales, the servicing fee sales in particular that will help us then deliver a core organic growth you know from year to year to year.

Generates other kinds of ancillary revenues so.

This is.

That's an illustration of how alpha is enabling us we believe to pick up share that we wouldn't otherwise be able to pick up and to do it in a way that is distinct from our competitors.

Alright, thank you.

Yes.

Thank you. Your next question comes from Gerard Cassidy of RBC.

Your line is already open.

Thank you Eric.

Eric.

Can you share with us.

Steven Chubak: And a good way for I think us internally to be clear about what we need to accomplish and externally with you all as to what the what the what the bar is for you know for a good organic growth and success. No thanks for that color, Eric. And if I could squeeze in one more clarifying question, there was a lot to unpack in the response to Ebrahim around capital management. It does appear given the 4Q buyback level assuming you execute on the 4.5 and its entirety, that you'll be at the lower end of that 10 to 11% range of CET1.

I'm not asking you to go into details on your budget for the upcoming year, but could you frame out for us though.

The outside factors that influence the budgeting process on expenses, such as wage inflation or other types of inflation.

Do you feel that there is less pressure going into 2024 versus this time last year. When you were doing your 23 budget.

Gerard it's Eric yes, the headwinds have lessened, they're still there, but they've lessened if you think about it when we were doing the budget for 2023. It was the fall of 2022.

Steven Chubak: Recognizing there'll be a pull-to-par benefit, but should we be anchoring to the 80 to 100% payout that you guys have managed to in the past, just recognizing that there's not as much excess if you're going to run at those levels. I think for the rest of this year you know the analytics I'd encourage you to do is to think about you know where we ended third quarter kind of the middle of the range and that's not necessarily a point but to the range to the middle of the range.

We actually.

At that point.

<unk> done two formal merit increases that year, some of which we're going to then.

Play through on a carryover basis for 'twenty three so that was partly a headwind and then we had a.

Larger than probably typical merit increased by a little bit in the spring of this year in 2003, so that's a.

We're not in that environment more we certainly want to reward our employees with annual merit increases, but much more in line with what we've done over the last five or 10 years.

Steven Chubak: For fourth quarter there's pulled a par, there's RWA management. That gives us quite a healthy amount of buyback and I think the continuation of something that's quite accretive to shareholders that is substantial in terms of capital return. I think once we get to the middle of the range then you know we're more likely to be at the you know that over 80% level of earnings but I think and that that'll be probably how we think about next year but that's next year I think there's I think we have good visibility into a you know good and healthy amount of capital return and you know comfortably over you know what we've you know what we've committed to I'll call it in the medium term. Really helpful Eric thanks for taking my question.

Unknown Executive: Questions. Thank you.

As opposed to something that was.

Much higher so that's on the wage side benefits, we're actually continuing to see some amount of.

Inflationary activity medical claims dental et cetera, as you would expect I think thats pretty broad base. So.

But thats probably similar to prior years.

And then I think the interesting area, where we are.

Doing a lot of work on as all of the non.

Non personnel spend right.

Various partners and vendors.

Software licenses.

<unk> computing costs right every one of those is an area for us to think about.

What's appropriate and so we have we've been having those discussions.

This summer and this fall and we'll continue to have them into the center around around next year.

Mike Brown: Your next question comes from Mike Brown of KBW. Your line is already open. Okay, great. Thank you for squeezing me in. So multi-part question here on the asset management business. So first, it was just great to see the money fund flows come in this quarter. And you mentioned that you believe there was some market share gains there. Can you just touch on what contributed to those gains and maybe some thoughts on the coming quarters. And then I look at the equity side and consistent with the industry, there was there was pressure there on the flows. What's your thoughts on maybe when investors sentiment could improve and reflect there.

Are we seeing inflationary increases the way we were a year ago there.

A little bit less sell but I think we're still seeing higher than we'd like.

Inflationary increases there and so important questions are how do we offset them how do we use technology. If it is a little more expensive to drive increasing process engineering and automation.

Do we how do we partner with.

<unk>.

Suppliers in some cases and get the benefits of our scale. So there is a number of initiatives that we're working through but that's that's one that that takes some work in a way that's part of what we do during the budget process.

Ronald OHanley: And then just last part here, when you take a step back and you look at the S.S.G.A, today, is there anything strategically that could be interesting to you from M&A perspective to help bolster the asset mix or accelerate some of the future growth potential in the business. Thank you. Mike, it's Ron. So there's a lot there in your question. I think on the on the cash business. I mean, this is a core competency that we've had for a long time.

Very good and then as a follow up.

Lee.

Our industry the World has gone through an incredible turmoil in the last three or four years with the pandemic and such.

And now we're in this interest rate environment that we have not seen since prior to the financial crisis.

If we assume that the fit is higher for longer and let's say, it's 4% to 5% for an extended period of time versus the zero to 25 bps that you all have to operate in the industry operated.

Ronald OHanley: And it's also we've built up the capability both on the investment side and really on the distribution and channel side. So we've got distribution and if you will kind of hooks in the water in many different pools. And that's including, by the way, lots of connectivity into the core custody business. So as you've seen, for example, rotation from deposits, we've captured some of that in the in the in the money market business.

Post financial crisis going into where we are today.

How is that or is it changing.

Some of the strategies you may pursue now that the rate environment has not.

Possibly not going back to the 50 basis points that we were accustomed to does that change the way you approach the business or approach your customers that you couldnt do because rates were at this level three or four years ago.

Ronald OHanley: But a lot of it, most of it's been external, most of it's been around investment performance and kind of being where the money is flowing. The other areas that are also growing DC is growing and it's been growing for a while. Share has continued to grow there in the DC investment only. And that's been very much product and product innovation driven. SSGA was one of the first to figure out how to put an annuity product into a target date fund.

Gerard it's Eric I think it has several.

Impacts on us.

Which actually.

In aggregate tend to be positive for how we manage and engage.

On our business very tactically higher rates and especially some steepness in the yield curve, we talked about earlier gives us some ability to add duration and feel like thats valuable so theres some tactical affair.

Ronald OHanley: Did it actually before? It got the regular the broad regulatory go ahead to do that. And that's actually now a source of real growth. So we see that as a growth area as you know as the defined benefit just goes away and people realize that longevity protection is something that people need. I think that combination of a target date fund with some kind of an insurance longevity product will be important. And we've got real distinctive expertise in that.

<unk>, there I think more broadly with higher rates the value of cash in our ecosystem. We described.

A trillion dollars of cash in our ecosystem across.

Posits money.

Money market and cash sweeps and our asset management business, our repo activity our platform sleep activities is a trillion dollars to us cash is valuable for our clients to keep especially in risk on versus or especially in risk off versus risk on environment.

Sure.

And they want to be rewarded for it but it also means theres a whole cash wallet out there that for us as a way to engage with clients right.

Ronald OHanley: In terms of the growth areas I mean there's we are really for the most part an institutional shop. We've built out the product capabilities in the retail and the intermediary space. Yee-shin-hung who joined us as CEO late last year. She's got a lot of expertise there too. So some of it will be just moving and expanding share in the retail intermediary space. And then there's a real move into the blending the line between public and private markets.

Banks have got not only the banking offering of deposits, but the capital markets offering of repo the money management offering of.

Of money markets.

Sure.

Cash management to us, it's a way to deepen our relationships with clients. So I think over time Youll see us add to our product offering something that is quite broad today, but we'll think about how else do we integrate cash into say the alpha proposition.

As a way to consider it how do we think about it in terms of our platforms and our markets activities. A number of those are important cash generators and then I think at the most senior levels with our clients. The C suite actually cares about cash today, they care about who they keep it with how it's Matt.

Ronald OHanley: And the belief that those lines really don't make sense and that blended products where you've get sufficient liquidity but enable those that don't lead the liquidity to take advantage of the liquidity premium. So some of this will be in product design whether that's organic or inorganic. I mean we think there's opportunities in both and there's the teams got you know lots of product product development going on. So we're fully committed to that business. We see lots of growth in that business and excited about the prospects there.

How they are renewing rated how it's safe, but also how it can be redeployed.

And so it's become a.

<unk> C suite discussion.

That we think can strengthened both both our relationships given our broad offering but also one that becomes more and more of our business activity in our business growth activity over time.

Mike Mayo: Good, thank you, I'll leave it there. Thank you.

Great I appreciate the color. Thank you.

Thank you there are no further questions at this time I will hand over the conference to Ron <unk>. Please proceed.

Mike Mayo: The next question comes from Mike Mayo of Wells Fargo Securities. Your line is already open. Hi. Well, it's been a long journey for you guys to get the front-of-back solutions and alpha. And I'm just trying to figure out how much traction that has and where we're seeing that in the financial results. I'm the one here. I hear your excitement and you have alternatives now part of that program and you're guiding for positive 2024 fee operating leverage.

Well, thank you operator, and thanks to all on the call for joining us.

Mike Mayo: And you have all these new mandates. On the other hand, I look at the fee growth this quarter. It wasn't that great. Right. And then so are we seeing evidence of the front-to-back momentum and the results? Is it something that you expect to see or is it simply such a long tail cycle that you're going to see? So that we should be taking two, three, four years out.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.

Yeah.

Okay.

Ronald OHanley: Thanks. Let me just start and maybe address the journey here because this was not something that you bought off the shelf. It was actually something that nobody had ever done before. So there was an awful lot of development that we need to do. And I think we signaled that at the beginning. I mean, Charles River was an important acquisition. But to be clear, that was the front and it itself needed some investment, particularly in the fixed income area.

Ronald OHanley: So much of what we've been doing over the last several years is selling and developing. Many of the early, particularly some of the early large ones were explicit development partners. We targeted them. They targeted us and came in as development partners with the idea that they would help us to build this out. They've been purposely taken longer because they're the ones that are actually helping to shape what the overall thing will look like.

Ronald OHanley: This has been a very, very big year. Eric alluded to it in terms of some of the features and functionality, particularly around fixed income and getting up to not just par, but to a market leading position in terms of fixed income capability. So in terms of just getting the program up and running, we're actually quite pleased with where we are. I don't think we would have thought back in 2018, 2019 when we watched this that we'd have the number of clients that we do now.

Ronald OHanley: The other thing that we were convinced of, but we had to prove it to ourselves, was that this could be a tool to actually generate new clients that it wasn't just a way to solidify existing relationships, but it was a way to actually grow share and shift share. And that's what we're starting to see now. Von Tobel was one. There's others in the pipeline. So it's a journey that we believe will see revenue growth at an accelerating rate.

Eric Aboaf: And maybe I'll leave it there. And Mike, it's Eric, on the financials, it's a very fair question. I just remind you the context for the current year, because there are some other large movements on servicing fees. So if you think about it, we recorded a 1% growth in overall servicing fees. But there are tailwinds and headwinds away from the kind of organic do business creation that's important that we need to demonstrate year after year.

Eric Aboaf: The market tailwind for a year and year for this quarter was about 4 percentage points of servicing fees. So you'd say, hey, where is that? Part of that was about 3 percentage points of headwind came from lower client volumes and activity, a little bit of what we described as we've seen less trading activity out there, which comes and goes, tends to be cyclical. And then the other thing we did see this year and this quarter is that previously disclosed client exit was worth almost 2 percentage points as well.

Eric Aboaf: So there are, I think some larger headwinds and tailwinds in particular flowing through the financials, net new business, right? If we just want to take a look at that was a positive 2 percentage points year and year at this quarter. And that's where we'd like to see the value of alpha, the value of traditional servicing fee sales, the value of private servicing fee sales and part of the reasons why we're adding toward disclosures to make that more apparent to everyone over time, and then just one follow-up, Eric and then Ron, just the exit of that large client, what ining are you in as far as that's concerned and then Ron as relates to accelerating revenue growth from the long journey of alpha timing, are we picking quarter here, several years?

Eric Aboaf: Yeah, on the previously disclosed decline or about 30% through that, very roughly, a bulk of that will come through next year and then there's another, there's just because of how year on year, you know, comparisons work, you'll get a tail into 2025. Yeah, and Mike, just can you clarify a question, I just want to make sure I'm under. Yeah, my initial question was, you know, feats aren't growing that much and I, you know, Eric identified some headwinds to that, but you talked about the financial benefits from alpha, the increased activity, through all in accelerating revenue growth.

Eric Aboaf: And I was just wondering a timeframe around that statement that revenue growth should accelerate due to the benefits of alpha. Yeah, so I mean, as we signaled, I think at the beginning, I think probably it came out was, I think it was out, my answer to Alex, the, we're telling you that we believe we're going to achieve positive, the operating leverage. There's, there's revenues there and there's some concepts are on the revenue side.

Eric Aboaf: I believe we've got a program in place that includes alpha that's going to enable us to do that. Some of that's driven by alpha, some of that's driven by actions that we're taking, some of which have been implemented, others that will be implemented this quarter and into next in terms of strengthening sales and revenue related capabilities. So what you should be hearing from us is confidence around our revenue growth generating capability.

Eric Aboaf: Some of it related to the core business and what you should also, and the point we, you know, we normally don't go into a client example that we did there, but it's such a, a pure example of the strength, the montable example is such a pure. Illustration of the strength of alpha because it's an institution we had no relationship with. We began the relationship with front and middle office, and then we brought along the back office, which itself is, is, you know, Mike as well as anybody, generates other kinds of ancillary revenues.

Eric Aboaf: So this is, that's an illustration of how alpha is enabling us. We believe to pick up share that we wouldn't otherwise be able to pick up and to do it in a way that's distinctive from our competitors.

Mike Mayo: All right, thank you.

Gerard Cassidy: Thank you.

Gerard Cassidy: Your next question comes from Gerard Cassidy of RBC. Your line is already open. Thank you. Hi, Eric. I run. Eric, can you share with us? I know you're not going, I'm not asking to go into details on your budget for the upcoming year, but could you have frame out for us though? The outside factors that influence the budget of the budget, including process on expenses such as wage inflation or other types of inflation.

Gerard Cassidy: Do you feel that there's less pressure going into 2024 versus this time last year when you were doing your 23 budget? Yes, the headwinds have lessened. They're still there, but they've lessened. If you think about it, when we were doing the budget for 2023, it was the fall of 2022. We actually, at that point, had done two formal merit increases that year, some of which were going to then play through on a carryover basis.

Gerard Cassidy: That was partly a headwind and then we had a larger than probably typical merit increase by a little bit in the spring of this year in 23. We're not in that environment anymore. We certainly want to reward our employees with annual merit increases, but much more in line with what we've done over the last five or ten years as opposed to something that was much higher. That's on the kind of wage side benefits.

Gerard Cassidy: We're actually continuing to see some amount of inflationary activity, medical claims, dental, etc, as you'd expect. I think that's pretty broad base, but that's probably similar to prior years. Then I think the interesting area where we're doing a lot of work on is all the non-personnel spend, our various partners and vendors and software licenses, cloud computing costs. Every one of those is an area for us to think about what's appropriate. We've been having those discussions this summer and this fall, and we'll continue to have them enter around next year.

Gerard Cassidy: Are we seeing inflationary increases the way we were a year ago there? A little bit less so, but I think we're still seeing higher than we'd like inflationary increases there. Important questions are how do we offset them? How do we use technology if it is a little more expensive to drive increasing process, engineering and automation? How do we partner with fewer suppliers in some cases and get the benefits of our scale? There's a number of initiatives that we're working through, but that's one that takes some work in a way that's part of what we do during the budget process.

Ronald OHanley: Very good. Then as a follow-up, obviously our industry, the world has gone through incredible turmoil in the last three or four years with the pandemic and such. And now we're in this interest rate environment that we have not seen since prior to the financial crisis. And if we assume that the Fed is higher for longer, let's say it's four to five percent for an extended period of time versus the zero to 25 Bips that you all have to operate and the industry operated on post financial crisis going into where we are today.

Ronald OHanley: How is that, or is it changing some of the strategies you may pursue now that the rate environment is not possibly not going back to the 50 basis points that we were accustomed to? Does that change the way you approach the business or approach your customers that you couldn't do because rates for this level three or four years? Thank you. Gerard, I think it has several impacts on us which actually in aggregate tend to be positive for how we manage and engage on our business.

Ronald OHanley: You know, very tactically higher rates, and especially some steepness in the yield curve, we talked about earlier, you know, gives us some ability to adoration and feel like that's valuable. So, you know, there's some tactical effects there. I think more broadly, you know, with higher rates, you know, the value of cash in our ecosystem, we described, you know, a trillion dollars of cash in our ecosystem across, you know, deposits, money market and cash sweeps in our as a management business or repo activity or platform sweep activities is a trillion dollars to us cash is valuable for our clients to keep, especially in risk on versus or especially risk off versus risk on environments.

Ronald OHanley: And they want to be rewarded for it, but it also means there's a whole cash wallet out there that for us is a way to engage with clients, right. We as a bank who's got not only the banking offering of deposits, but the capital markets offering of repo, the money management offering of money markets and, you know, cash management. To us, it's a way to deepen our relationships with clients. And I think over time, you'll see us add to our product offering.

Ronald OHanley: Some that's quite broad today, but we'll think about how else do we integrate cash and to say the alpha proposition is a way to consider it. How do we think about it in terms of, you know, our platforms in our market activities, a number of those are important cash generators. And then I think at the most senior levels with our clients, you know, the sweet sweet actually cares about cash today. They care about who they keep it with, how it's matched, how they are.

Ronald OHanley: Renumerated, how it's safe, but also how, you know, it can be redeployed. And so it's become a real sweet discussion in a way that we think and strengthen both both our relationships given our broad offering. But also one that becomes more and more of a business activity and a business growth activity over time.

Ronald OHanley: Great. Appreciate the color. Thank you. There are no further questions at this time. I will hand over the conference to Ron O'Hanley. Please proceed. Well, thank you, operator. And thanks to all the call for joining us. Ladies and gentlemen, this concludes today's conference call.

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