Q1 2024 State Street Corp Earnings Call
Speaker Change: [music], Okay. Good morning, and welcome to State Street Corporation's first quarter 2024 earnings conference call and webcast. Today's discussion is being broadcasted live on state Street's website at investors.
I'm, sorry investors Dot State Street Dot Com. This conference call is also being recorded for replay State Street's conference call is copyrighted and all rights are reserved this call may not be recorded or rebroadcast or distribution.
In whole or in part without the expressed written authorization from State Street Corporation.
Only authorized broadcast of this call will be housed on the state Street website.
Now I would like to introduce Eileen to sell dealer global head of Investor Relations at State Street. Please go ahead.
Eileen: Thank you good morning, and thank you all for joining us on our call today are CEO, Ron <unk> will speak first then Eric Apple off our CFO will take you through our first quarter 2024 earnings slide presentation, which is available for download in the Investor Relations section of our web site investors that state Street Dot Com afterwards, we'll be happy to take questions.
During the Q&A, please limit yourself to two questions and then re queue.
Before we get started I would like to remind you that today's presentation will include results presented on a basis that excludes or just one or more items from GAAP reconciliations of these non-GAAP measures. 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.
Eileen: Forward looking statements actual results may differ materially from those statements due to a variety of important factors such as those factors referenced in our discussion today and in our SEC filings, including the risk factors in our Form 10-K, our forward looking statements speak only as of today and we disclaim any obligation to update them, even if our views change now let me turn it over to Ron.
Ron: Thank you Eileen and good morning, everyone earlier today, we released our first quarter financial results we.
Ron: We had a strong start to the year with a results demonstrating the breadth of our client franchise, the efficacy of our strategy and our focus on execution, we reported both fee and total revenue growth all while continuing to invest meaningfully in our business and controlling underlying expenses.
Ron: Excluding notable items, we delivered both positive fee and total operating leverage as well as solid EPS growth in Q1 relative to the year ago period.
Ron: But first quarter was an important milestone we have detailed our strategic priorities for 2024, including the growth initiatives. We are undertaking across each of our business areas. As we continue to both invest in our capabilities and also target further productivity gains.
Ron: Guided by our purpose to help create better outcomes for the world's investors and the people. They serve our four strategic priorities are aimed at continuing to extend our competitive advantage, while delivering positive fee operating leverage excluding notable items in 2024.
Ron: These 2024 priorities are.
Ron: Boeing fee revenue.
Pending our leadership in our markets and financing and global advisors franchises.
Enhancing and optimizing our operating model and.
Ron: And continuing to differentiate our business through innovative client solutions and technology led capabilities to support business growth.
We remain intensely focused on executing against the strategic priorities, particularly in a dynamic operating environment in which financial market expectations continue to change significantly.
Ron: For example, as inflation remains elevated and economic data continued to be robust investors push back their expectation for the timing of central bank rate cuts and treasury yields increased during the first quarter. Despite this global equity markets performed strongly and volatility remain muted with many indices setting records.
Ron: As fears of a hard economic landing ceded and optimism surrounding the potential economic benefit from artificial intelligence continued in Q1.
Speaker Change: Turning to slide three of our Investor presentation, I will review, our first quarter highlights before Eric takes you through the quarter in more detail.
Speaker Change: Beginning with our financial performance 2024 has started strongly year over year, we produce both positive fee and total operating leverage as well as good EPS growth excluding notable items.
Speaker Change: First quarter EPS was $1 37, or $1 69, excluding a notable item related to the increase to the FDIC special assessment.
Speaker Change: Underlying year over year EPS growth was supported by total fee revenue growth and continued common share repurchases, which more than offset the impact of lower NII on total revenue.
Underlying expenses continued to be well controlled supported by our ongoing productivity efforts with first quarter expenses, increasing just 1% year over year. Excluding notable items, even as we have increased the level of investments in our business.
Speaker Change: Turning to our business momentum, which can see on the middle of the slide we continue to make progress across our client franchise and generating better fee revenue growth.
Speaker Change: Within asset services AUC, a increased to a record 43 nine trillion, we generated asset servicing wins of 474 billion in Q1 supported by key wins in both North America and Europe.
Speaker Change: Servicing fee revenue wins totaled $67 million.
Speaker Change: After hitting our full year sales target of $300 million in 2023, we remain confident in our ability to achieve our increased servicing fee revenue sales go a $350 million to $400 million in 2024.
Speaker Change: Our priority to grow fee revenue. This year is underpinned by our strategy of leading with service excellence and driving stronger back office sales differentiating with our state Street Alpha and private markets platforms.
Speaker Change: Our two new Alpha mandate wins this quarter demonstrate our ability to execute on this strategy. While also showcasing the clear competitive advantage and differentiation that alpha creates for our business.
Speaker Change: For example, both Alfa mandate wins. This quarter include back office services, which can install quickly, allowing us to realize revenue faster.
Speaker Change: Further one mandate is our second alpha for private markets win a key growth area for us.
Speaker Change: Encouragingly both of these alpha wins were takeaways from a key competitor with one of the wins, having no existing services with state Street prior to becoming an alpha client and the other is share client that will now consolidate back office with State Street.
Speaker Change: Within markets and financing, even as low FX volatility created a headwind for the industry in the first quarter, we attracted higher FX client volumes, both sequentially and year over year supported by our market, leading and wide ranging FX trading solutions.
Speaker Change: In FX, we were pleased to see higher client volumes and the 8% Q over Q fee revenue growth. We also expanded our markets franchise with an outsource trading we continued to expand our product capabilities and geographical reach completing the acquisition of CF global trading in Q1.
Speaker Change: Global advisors performed well buoyed by higher equity markets. The strategic actions, we have taken to position our asset management business for growth and the benefits of the strong finish in step off point at year end 2023.
Speaker Change: <unk> 2020 for management fees of $510 million are the highest since the first quarter of 2022.
Speaker Change: While <unk> experienced total aggregate outflows in Q1. This was driven by the impact of a large but but expected single client redemption within the institutional business.
Speaker Change: We saw continued momentum in the defined contribution business driven by our target date franchise incur.
Speaker Change: Encouragingly, we saw cash net inflows of $9 billion in the quarter the fourth consecutive quarter of positive net inflows of our cash business.
Speaker Change: <unk> AUM reached a record one four trillion at quarter end with GAA, continuing to gather net inflows and expand market share within U S low cost Etfs.
Now, let me spend a moment on our continuing productivity efforts, we have a detailed set of initiatives across our business aimed at creating cost efficiencies and lasting productivity improvements rig.
Speaker Change: Regarding our ongoing operating model transformation, which forms an important part of these productivity initiatives. As you know we are streamlining our operating model in India and last quarter, we consolidated our first operations joint venture in the country.
Speaker Change: I am pleased to note that the consolidation of our second operations joint venture in India closed on April one.
Speaker Change: Combined these two consolidations will propel the continued end to end transformation of our global operations and enable states to unblock productivity savings in the years ahead as we simplify our operating model.
Speaker Change: Before I conclude my opening remarks, I would like to touch on our continuing balance sheet strength.
Total capital return amounted to $308 million in the first quarter, consisting of common share dividends and share repurchases.
Speaker Change: I would highlight that we have returned a substantial amount of capital to our shareholders in recent quarters with total capital return over the last six quarters equivalent to almost 30% of state Street's total market cap at quarter end.
Speaker Change: As we pivot to a more normalized level of capital return. This year as we have outlined previously it remains our intention to return approximately 100% of earnings in 2024 in the form of common share dividends and share repurchases subject to market conditions and other factors.
Speaker Change: To conclude we have delivered a strong start to the year as demonstrated by both sequential and year over year total fee revenue growth and encouraging business wins strong underlying expense discipline and continued capital return.
Speaker Change: As we look ahead, we remain highly focused on the execution of a set of clear strategic priorities for 2024.
Speaker Change: These strategic priorities are backed by detailed action plans aimed at driving growth across each of our business areas.
Speaker Change: Underpinning this execution is a set of business investments paired with a comprehensive set of productivity initiatives aimed at driving longer term improvements in our operating model efficiency and effectiveness and generating positive fee operating leverage in 2024.
Speaker Change: Now, let me hand, the call over to Eric who will take you through the quarter in more detail.
Eric: Thank you Ron and good morning, everyone.
Turning to slide four I'll begin my review of our first quarter financial results, which included a <unk> <unk> EPS impact from an additional FDIC special assessment.
Eric: As described within the notable items table on the right of the slide.
Eric: As Ron noted, we produced a strong start to the year.
Eric: On the left panel you can see that total fee revenue was up both sequentially and year on year.
Eric: Relative to the year ago period, we delivered robust management fee growth higher front office software and data revenue and servicing fee growth, while underlying expenses were well controlled.
Eric: As I mentioned during the first quarter, we recorded a provision for credit losses of $27 million largely due to two CRE names.
Eric: All told we generate both positive total and fee operating leverage relative to a year ago. Excluding notable items. We also delivered solid year on year EPS growth of 11%. Excluding notable items, which was supported by the continuation of our share buybacks in the first quarter.
Eric: Turning now to slide five.
Eric: We saw period end <unk> increased by 17% on a year on year basis, and 5% sequentially to a record level.
Eric: Year on year, the increase in <unk> was largely driven by higher period end market levels net new business and client flows.
Eric: Note that we have seen a mix shift into cash and cash equivalents worth an estimated 1% to two percentage points of total AUC.
Eric: Versus a year ago.
Eric: Quarter on quarter, ACI increased primarily due to higher period end market levels and client flows.
At Global Advisors period end AUM also increased to a record level up 20% year on year, largely reflecting higher period end market levels, and net inflows and up 5% sequentially, primarily due to higher period end market levels.
Eric: At the Reits Center of the slide the market volatility indices provide a useful indicator of client transactional activity that drives servicing fees spreads in FX trading and specials activity and agency lending.
Eric: Turning to slide six on the left side of the page Youll see first quarter total servicing fees up 1% year on year, primarily from higher average market levels, partially offset by pricing headwinds, our previously disclosed client transition and lower client activity and adjustments including changes in.
Certain client asset mix into lower earning cash and cash equivalents and.
Eric: In addition, the pace of installation.
Eric: Started slower than we expected in the first quarter.
Speaker Change: Let me dimension some of these items for you as.
Speaker Change: As I've told you before the impact of the previously disclosed client transition was a headwind of approximately two percentage points to year on year growth.
Speaker Change: In addition, lower client activity and adjustments, including the client asset mix shift to cash was also a headwind of approximately two percentage points of year on year growth. This quarter some of which we believe is cyclical.
Speaker Change: Sequentially total servicing fees were up 1%, primarily as a result of higher average market levels, partially offset by lower client activity and adjustments, including the changes to certain asset mix and pricing headwinds.
Speaker Change: On the bottom of this slide we summarize some of the key performance indicators of our servicing business in the first quarter, we generated $67 million of servicing fee wins nicely spread across both North America and Europe.
Speaker Change: As you recall solid sales in North America like this was one of the goals that we had described at a conference last fall.
Speaker Change: In addition, we had $291 million of servicing fee revenue to be installed at quarter end up 71 million year on year and $21 million quarter on quarter. We also had $2 six trillion of AUC a to be installed at period end.
Speaker Change: Yes.
Speaker Change: Turning now to slide seven first quarter management fees were up 12% year on year, primarily reflecting higher average market levels and net inflows from the prior periods, partially offset by the impacts of our strategic ETF product suite repricing initiative.
Speaker Change: Relative to the prior quarter management fees were up 6% due to similar reasons, partially offset by lower performance fees.
Speaker Change: As you can see on the bottom right of the slide following record inflows in <unk> 'twenty three our investment management franchise remains well positioned with momentum across each of its businesses.
Speaker Change: And Etfs. So overall flows were relatively flat in first quarter, our spider portfolio U S. Low cost suite achieve continued market share gains driven by net inflows of $13 billion.
In our institutional business, we saw first quarter net outflows of 19 billion, primarily driven by a single client that said we saw continued momentum in the U S defined contribution area with record AUM of approximately 730 billion.
Speaker Change: Lastly, in our cash franchise, we saw first quarter net inflows of $9 billion.
Speaker Change: Fourth consecutive quarter of positive net flows into cash.
Turning now to slide eight.
Speaker Change: First quarter FX trading services revenue was down 3% year on year, but up 8% sequentially.
Speaker Change: Relative to the year ago period. The decrease was mainly due to lower spreads associated with a subdued FX volatility, partially offset by higher volumes as client engagement increased across nearly all of our FX venues.
Speaker Change: Quarter on quarter, the 8% revenue increase primarily reflects higher volumes with particular strength in our <unk> business as well as higher direct FX spreads.
Speaker Change: First quarter Securities Finance revenues were down 12% year on year, mainly due to lower agency balances and lower spreads primarily associated with significantly lower industry specials activity.
Speaker Change: On a quarter on quarter basis, we have seen agency lending lending balances up as demand is rising.
Speaker Change: Software and processing fees were up 25% year on year in Q1, largely driven by higher revenues associated with CRD, which I'll discuss in more detail shortly.
Speaker Change: Quarter on quarter software and processing fees declined 13%, primarily due to our lower on premise renewables, partially offset by higher lending related fees.
Speaker Change: Finally, other fee revenue for the quarter increased 5 million year on year sequentially other fee revenue increased $17 million.
Speaker Change: Largely driven by an episodic currency devaluation and the effort and the prior quarter, which did not recur.
Speaker Change: Moving to slide nine you will see on the left panel the that first quarter front office software and data revenue increased 32% year on year, primarily as a result of continued SaaS implementations and conversions driving higher professional services and software enabled revenue growth sequentially.
Sequentially for an office software and data revenue was down 20%, primarily driven by lower on premise renewals and installations.
Turning to some of the Alpha business metrics in the right panel. We were pleased to report two additional alpha wins, including our second alpha for private markets mandate.
Speaker Change: In addition, three mandates went live in the first quarter, bringing the total number of live mandates to 'twenty one.
Speaker Change: First quarter <unk> increased 19% year on year, driven by over 20, SaaS client implementations and conversions over the last year.
<unk>.
Speaker Change: Turning to slide 10, first quarter, NII decreased 7% year on year, but increased 6% sequentially to $716 million.
Speaker Change: The year on year decrease was largely due to deposit mix shift and lower average noninterest bearing deposit balances, partially offset by the impact of higher average interest rates client lending growth and investment portfolio positions.
Speaker Change: We were pleased to report a sequential increase in NII, which was primarily driven by higher investment securities yields an increase in average interest bearing deposits and loan growth, partially offset by the decline in average non interest bearing deposits.
Speaker Change: The NII results on a sequential quarter basis were better than we had previously expected primarily driven by strength in both interest bearing and noninterest bearing deposit balances towards the end of the quarter.
Speaker Change: While it is difficult to forecast the path of deposits in the current environment. We're pleased with the success that we're having and engaging our clients.
Speaker Change: On the right.
Speaker Change: Of this slide we provide highlights from our average balance sheet during the first quarter.
Average deposits increased 4% year on year, and 6% quarter on quarter, mainly driven by client balance growth across the interest bearing deposit stack, partially offset by a reduction in noninterest bearing deposits.
Speaker Change: Average noninterest.
Speaker Change: Non interest bearing deposits decreased by less than 3 billion quarter on quarter.
Speaker Change: Cumulative U S dollar client deposit betas were 80% since the start of the current rate cycle with cumulative foreign currency basis for the same period, continuing to be lower than the 30% to 60% range depending on currency.
Speaker Change: Yes.
Speaker Change: Turning to slide 11 first quarter expenses, excluding notable items increased barely 1% year on year as we both invested more to fuel fee growth and increase the size of our productivity and optimization savings efforts by more than 50%.
Speaker Change: On a line by line basis, excluding notable items on a year on year basis.
Speaker Change: Compensation employee benefits decreased 3%, primarily driven by lower incentive compensation salaries as well as a decline in contracts or spend that was partially driven by the consolidation of one of our operations joint ventures in India.
Information systems, and communications expenses increased 4%, mainly due to higher technology and infrastructure investments, partially offset by the optimization savings and vendor savings initiatives.
Speaker Change: Transaction processing increased 4%, mainly reflecting higher broker fees due to increased global market volumes.
Speaker Change: Occupancy increased 10%, partially due to the real estate costs associated with the consolidation of the joint venture in India, which used to form part of the contractor costs within compensation and benefits, partially offset by footprint optimization and other expenses increased 5% largely due to the timing of foundation funding.
Speaker Change: Yes.
Speaker Change: Lastly, I will spend a moment on our transformation efforts.
Speaker Change: If you recall consolidating the first operations joint venture last October increase our FTE head count as we in sourced those capabilities. However, it also came with an expected financial benefit excluding integration costs of $20 million over the course of the year.
Speaker Change: Yes.
Speaker Change: As Ron mentioned, the consolidation of our second operations joint venture in India closed on April one and this will also come with an increase in additional head count from <unk> as well as expected financial benefits.
The consolidation of these two joint ventures will be a catalyst for the next phase of state Street's global operations transformation and enable us to create a second wave of service improvements and productivity savings next year.
Speaker Change: Moving to slide 12 on the left side of the slide we detail the evolution of our CET, one tier one leverage ratios followed by our capital trends on the right of the slide.
Speaker Change: As you can see our capital levels remain well above the regulatory minimums.
While we continue to focus on optimizing our capital stack the strength of our capital position enables us to extend our balance sheet to support our clients.
Speaker Change: As of quarter end, our standardized CET one ratio of 11, 1% was down approximately 50 basis points quarter on quarter, largely driven by the expected normalization of <unk>.
Speaker Change: The LCR for State Street Corporation was a healthy 107% and 130% of State Street Bank and trust.
Speaker Change: Our exceptionally strong liquidity metrics benefit from a deep and diversified nature of our funding base and active balance sheet management.
Speaker Change: In the quarter, we were pleased to return $308 million to shareholders, consisting of $100 million of common share repurchases and $208 million and declared common stock dividends and as Ron noted, we continue to expect to return around 100% of earnings to shareholders. This year.
Speaker Change: In summary, we're quite pleased with the quarter, we have a clear strategy for growth.
Speaker Change: A detailed set of priorities that we are executing against in order to drive continued positive business momentum.
Unknown Executive: at Investors. StateStreet.com.
Speaker Change: And we expect to deliver increased fee operating leverage this year, excluding notable items.
Unknown Executive: This conference call is also being recorded for replay. State Street's conference call is copyrighted, and all rights are reserved. This call may not be recorded or rebroadcast or distributed, in whole or in part, without the express written authorization from State Street Corporation.
Speaker Change: Finally, let me cover our full year and second quarter outlook, which I would highlight continues to have the potential for variability given the macro environment. We're operating in.
Speaker Change: In terms of our current assumptions as we stand here today, we are assuming global equity markets flat to first quarter and for the remainder of the year, which implies daily averages up 5% quarter on quarter in <unk>.
Unknown Executive: The only authorized broadcast of this call will be housed on the State Street website. Now, I would like to introduce Ilene Fizel Bieler, Global Head of Investor Relations at State Street. Please go ahead. Thank you.
Speaker Change: And up around 17% for the full year.
Speaker Change: Our rate outlook broadly aligns with the current forward curve, which I would.
Speaker Change: I would note continues to move while we expect FX market volatility will remain muted.
Speaker Change: Given our strong start to the year and higher average market levels.
Speaker Change: We think total fee revenue for the full year will now be at the higher end of our prior guide of up 3% to 4% year on year, So up a solid 4%, which is better than our previous outlook.
There are however, episodic and industry headwinds impacting our servicing business this year, including a previously disclosed client transition and the impact of client activity and adjustments, which includes the client asset mix shift into lower earning cash and cash equivalents.
Ilene Fiszel Bieler: Good morning, and thank you all for joining us. On our call today, our CEO, Ron OHanley, will speak first. Then Eric Aboaf, our CFO, will take you through our first quarter 2024 earnings slide presentation, which is available for download in the investor relations section of our website, investors.statestreet.com. Afterward, we'll be happy to take questions. During the Q&A, please limit yourself to two questions and then requeue.
Ilene Fiszel Bieler: 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 in the IR section of our website. In addition, today's presentation will contain forward-looking statements. Actual results may differ materially from those statements due to a variety of important factors, such as those factors referenced in our discussion today and in our SEC filings, including the risk factors in our Form 10-K. Our forward-looking statements speak only as of today, and we disclaim any obligation to update them, even if our views change. Now, let me turn it over to Ron.
Ronald Philip OHanley: Thank you, Ilene, and good morning, everyone. Earlier today, we released our first quarter financial results. We had a strong start to the year, with our results demonstrating the breadth of our client franchise, the efficacy of our strategy, and our focus on execution. We reported both fee and total revenue growth, all while continuing to invest meaningfully in our business and controlling underlying expenses. Excluding notable items, we delivered both positive fee and total operating leverage, as well as solid EPS growth in Q1 relative to the year-ago period. The first quarter was an important milestone.
Speaker Change: We believe some of these factors are cyclical in nature, and we expect to offset a portion with higher sales and additional management actions this year.
Speaker Change: Turning to NII as a result of our first quarter outperformance strong deposit growth and the improved interest rate outlook. We now expect full year NII will be down approximately 5% year on year, which is better than our previous guide of down approximately 11%.
Ronald Philip OHanley: We have detailed our strategic priorities for 2024, including the growth initiatives we are undertaking across each of our business areas, as we continue to both invest in our capabilities and also target further productivity gains. Guided by our purpose to help create better outcomes for the world's investors and the people they serve, our four strategic priorities are aimed at continuing to extend our competitive advantage while delivering positive fee operating leverage, excluding notable items, in 2024. These 2024 priorities are growing fee revenue.
Speaker Change: On expenses, we expect full year expenses ex notables will be roughly in line with our prior guide of up about two 5%, but with the potential for some additional revenue related costs. This year.
Speaker Change: Given our improved outlook, we now expect to deliver additional positive fee operating leverage for the full year, excluding notable items.
Speaker Change: Finally, turning to two Q on a quarter on quarter basis, and excluding notable items, we would expect total fee revenue to be up one 5% to 2%.
Ronald Philip OHanley: Extending our leadership in our markets and financing and global advisors franchises. Enhancing and optimizing our operating model and continuing to differentiate our business through innovative client solutions and technology-led capabilities to support business growth. We remain intensely focused on executing against these strategic priorities, particularly in a dynamic operating environment in which financial market expectations continue to change significantly. For example, as inflation remains elevated and economic data continue to be robust, investors push back their expectations for the timing of central bank rate cuts and treasury yields increased during the first quarter.
Speaker Change: NII to be down 2% to down 5% in.
Speaker Change: And expenses up about two to two 5%, excluding the seasonal compensation expenses and <unk> and notable items.
Speaker Change: We think the provisions for credit losses could be in the 15% to $25 million range in <unk> and we would expect to have a better view on that later in the quarter as we continue to monitor our portfolio.
Speaker Change: Lastly, we expect to <unk> tax rate to be approximately 22%.
Speaker Change: And with that let me hand, the call back to Ron.
Ron: Operator, we can now open the call for questions.
Ron: Thank you, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone you will then hear a sweet home prompt acknowledging your request.
Ronald Philip OHanley: Despite this, global equity markets performed strongly and volatility remained muted, with many indices setting records as fears of a hard economic landing receded and optimism surrounding the potential economic benefit from artificial intelligence continued in Q1. Turning to slide three of our investor presentation, I will review our first quarter highlights before Eric takes you through the quarter in more detail. Beginning with our financial performance, 2024 started strongly. Year over year, we produced both positive fee and total operating leverage, as well as good EPS growth, excluding notable items. First quarter EPS was 137 or 169, excluding a notable item related to the increase in the FDIC's special assessment. Underlying year-over-year EPS growth was supported by total fee revenue growth and continued common share repurchases, which more than offset the impact of lower NII on total revenue.
Ron: I would like to withdraw from the question queue. Please press star followed by two and if Youre using a speakerphone. We ask that you. Please lift the handset before pressing any keys. Please go ahead and press Star one now if you do habits have any questions.
Ron: And your first question will be from Brennan Hawken of UBS. Please go ahead.
Brennan Hawken: Good morning, Thanks for taking my questions.
Brennan Hawken: Eric do you your updated guide sort of suggests that NII.
NII you guys expect to pull back a little bit here from this strong result here in the first quarter, but one of the things that I noticed was repo was particularly robust in the quarter.
Could you give a little color around what drove that strength and how sustainable it is.
Brennan Hawken: Some of that normalization embedded in your outlook.
Brennan Hawken: Brennan, it's Eric there are a number of factors that drove the upswing in NII into the first quarter.
Ronald Philip OHanley: Underlying expenses continue to be well controlled, supported by our ongoing productivity efforts, with first quarter expenses increasing just 1% year-over-year, excluding notable items, even as we have increased the level of investments in our business. Turning to our business momentum, which you can see on the middle of the slide, we continue to make progress across our client franchise in generating better fee revenue growth. Within Asset Services, AUCA increased to a record $43.9 trillion. We generated asset servicing AUCA wins of $474 billion in Q1, supported by key wins in both North America and Europe. Servicing fee revenue wins total $67 million.
Brennan Hawken: The bulk of that was actually deposit balances coming in.
Brennan Hawken: Stronger than we had expected both on the interest bearing side across the stack and noninterest bearing.
Brennan Hawken: Well that made up for the $30 million uptick.
Brennan Hawken: In the.
Brennan Hawken: In terms of our.
Brennan Hawken: Results relative to our expectation.
Brennan Hawken: The repo balances did tick up as well they were.
Brennan Hawken: A small part but.
Brennan Hawken: Worth.
Brennan Hawken: And NII terms about a percentage point of more NII than we had expected and I think what we're seeing is that.
Ronald Philip OHanley: After hitting our full-year sales target of $300 million in 2023, we remain confident in our ability to achieve our increased servicing fee revenue sales goal of $350 to $400 million in 2024. Our priority to grow fee revenue this year is underpinned by a strategy of leading with service excellence and driving stronger back-office sales, differentiated by our State Street Alpha and private markets platform. Our two new alpha mandate wins this quarter demonstrate our ability to execute on this strategy, while also showcasing the clear competitive advantage and differentiation that alpha creates for our business. For example, both alpha mandate wins this quarter include back office services, which can be installed quickly, allowing us to realize revenue faster. Further, one mandate is our second alpha win for private markets, a key growth area for us. Encouragingly, both of these alpha wins were taken away from a key competitor, with one of the wins having no existing services with State Street prior to becoming an alpha client, and the other a shared client that will now consolidate its back office with State Street.
Brennan Hawken: As the.
Brennan Hawken: The conditions in the economy continue to evolve.
Brennan Hawken: Clients are holding more.
Brennan Hawken: Cash on their balance sheets, and then putting that into a variety of different instruments, sometimes its on deposit sometimes tons suites and sometimes it's in repo and that's also been and pick on the repo side Ben.
Brennan Hawken: Aided a bit by the reduction in the fed's overnight repo operation So.
Brennan Hawken: It's really a mix of factors that.
Brennan Hawken: That we're seeing which together, though are are driving a better NII performance, which were which were pleased with.
Speaker Change: Yes, yes, great. Thank you.
Speaker Change: You also quantified the impact of the Blackrock transition. So so thanks for that it does seem as though maybe that impact is a little larger than your prior expectation.
Speaker Change: Do I have the right read on that and maybe could you give us an update on where we stand as far as the ongoing impact us.
Speaker Change: Sure Brennan, it's Eric again.
Eric: The previously announced client transition that we had reference is in line in terms of amounts that we had expected.
Ronald Philip OHanley: Within markets and financing, even as low FX volatility created a headwind for the industry in the first quarter, we attracted higher FX client volumes, both sequentially and year-over-year, supported by our market-leading and wide-ranging FX trading solutions. In FX, we were pleased to see higher client volumes and the 8% Q over Q fee revenue growth. We also expanded our markets franchise. With outsourced trading, we continue to expand our product capabilities and geographical reach, completing the acquisition of CF Global Trading in Q1. Global advisors performed well, buoyed by higher equity markets, the strategic actions we have taken to position our asset management business for growth, and the benefits of the strong finish and step-off point at year-end 2023. 1Q 2024 management fees of $510 million were the highest since the first quarter of 2022.
Eric: You recall, we had said it would be worth about.
Eric: Two percentage points of servicing fees. This year, which is about a percentage point of total fees and remember if you go back to our.
Eric: Original disclosure over the last couple of years. We had described the total amount to be worth about two percentage points of total fees and we're seeing about half of that come through on a year on year basis.
Eric: This.
This quarter end for this year and so in line fully in line with what we had previously described.
Speaker Change: Okay. Thanks for taking my questions.
Speaker Change: Thank you next question will be from Glenn Schorr of Evercore. Please go ahead.
Speaker Change: Yes.
Glenn Paul Schorr: Hello there.
Glenn Paul Schorr: One quick follow up on the NII stuff and thank you for all the detail.
The balance is coming in in March and all these things are really hard to predict but is something happening with the client discussions and the overall profitability management that might give you confidence that those balances stick or should we think of this as.
Ronald Philip OHanley: While GA experienced total aggregate outflows in Q1, this was driven by the impact of a large but expected single client redemption within the institutional business. However, we saw continued momentum in the defined contribution business driven by our target date franchise. Encouragingly, we saw cash net inflows of $9 billion in the quarter, the fourth consecutive quarter of positive net inflows for our cash business. ETF AUM reached a record $1.4 trillion at quarter end, with GA continuing to gather net inflows and expand market share within U.S. low-cost ETFs.
Glenn Paul Schorr: Rates are higher parking bounces.
Glenn Paul Schorr: With the safe custodian.
Glenn Paul Schorr:
Glenn Paul Schorr: Glenn we've been heavily engaged with our clients over the last.
Glenn Paul Schorr: Yeah, I'd say year and a half as we've seen quite a shift in the interest rate environment.
The evolution of.
Glenn Paul Schorr: Deposits in the banking system.
Ronald Philip OHanley: Now, let me spend a moment on our continuing productivity efforts. We have a detailed set of initiatives across our business aimed at creating cost efficiencies and lasting productivity improvements. Regarding our ongoing operating model transformation, which forms an important part of these productivity initiatives, as you know, we are streamlining our operating model in India, and last quarter we consolidated our first operations joint venture in the country. I am pleased to note that the consolidation of our second operations joint venture in India closed on April 1. Combined, these two consolidations will propel the continued end-to-end transformation of our global operations and enable State Street to unlock productivity savings in the years ahead as we simplify our operating model. Before I conclude my opening remarks, I would like to touch on our continuing balance sheet strength. Total capital return amounted to $308 million in the first quarter, consisting of common share dividends and share repurchases.
Speaker Change: I would answer your question.
Speaker Change: A couple of different levels I think first.
Speaker Change: Going into this year, we had expected client total client deposit balances in the $200 billion to $210 billion and we now see that in the 210 to 220 billion for this quarter and to be honest, we expect that that we continue at around that level and a lot of that is both.
Speaker Change: The engagement that we've had with clients.
Speaker Change: All have cash and we certainly encourage them to bring it to us and part of that is the way, we think about client relationships client profitability. The client services that that we can offer and so.
Speaker Change: I think.
Speaker Change: Some of what Youre seeing here and the higher aggregate levels of deposits.
Speaker Change: Is is due to our management action.
Ronald Philip OHanley: I would highlight that we have returned a substantial amount of capital to our shareholders in recent quarters, with total capital return over the last six quarters equivalent to almost 30 percent of State Street's total market cap at quarter end. As we pivot to a more normalized level of capital return this year, as we have outlined previously, it remains our intention to return approximately 100% of earnings in 2024 in the form of common share dividends and share repurchases, subject to market conditions and other factors. To conclude, we have delivered a strong start to the year, as demonstrated by both sequential and year-over-year total fee revenue growth, encouraging business wins, strong underlying expense discipline, and continued capital return. As we look ahead, we remain highly focused on the execution of a set of clear strategic priorities for 2024.
Speaker Change: I think in addition to that.
They do tend to be somewhat higher deposits in the banking system. So the the tide has been.
Speaker Change: Gently rising, but I'd say very gently.
And.
Speaker Change: That's been helpful and we expect that to be relatively neutral going forward, but we'll obviously need to see based on.
Speaker Change: The <unk>.
Speaker Change: The actions.
Speaker Change: Various actions at the fed and how they evolve.
Speaker Change: Very cool appreciate that one quickie.
Speaker Change: You can't comment on the specific more tuck in the big picture.
Speaker Change: You were named in some stores potential interested in some private credit manager.
Speaker Change: Talking big picture of where theoretically that might fit in and just I like the better flows in CNS SBA, but strategically what are you focused on in terms of continuing growth across that franchise.
Ronald Philip OHanley: These strategic priorities are backed by detailed action plans aimed at driving growth across each of our business areas. Underpinning this execution is a set of business investments paired with a comprehensive set of productivity initiatives aimed at driving longer-term improvements in our operating model efficiency and effectiveness and generating positive fee operating leverage in 2024. Now, I will hand the call over to Eric, who will take you through the quarter in more detail.
Speaker Change: Yeah.
Rod: Yes, Glenn it's rod.
Rod: So.
Rod: We've tried to be quite clear about what we're doing over at SSG.
Rod: I mean first is around continuing to grow the ETF franchise as you know our.
Rod: Our legacy strength is in the institutional business, we continue to be quite strong and we focused a lot over the last several years on growing.
Eric Walter Aboaf: Thank you, Ron, and good morning, everyone. Turning to slide four, I'll begin my review of our first quarter financial results, which included a $0.32 DPS impact from an additional FDIC special assessment, as described in the notable items table on the right of the slide. As Ron noted, we produced a strong start to the year. On the left panel, you can see that total fee revenue was up both sequentially and year-on-year. Relative to the year-ago period, we delivered robust management fee growth, higher front office software and data revenue, and servicing fee growth, while underlying expenses were well controlled. As I mentioned during the first quarter, we recorded provision for credit losses of $27 million, largely due to two CRE names.
Rod: Low cost ETF franchise, which tends to find its ways into retail portfolios through intermediaries.
That led to the repricing initiative that we did last year, which.
Rod: In retrospect has proven to be quite a smart move because.
Rod: Market share has gone up and those portfolios.
Rod: These are buy and hold and postures.
Rod: <unk> Etfs would be one.
Rod: We continue to grow the.
Rod: The active space typically with.
Rod: Working with very close partners of ours.
Rod: And we see a lot of runway inactive and then finally fixed income.
Eric Walter Aboaf: All told, we generated both positive total and fee operating leverage relative to the year ago, excluding notable items. We also delivered solid year-on-year EPS growth of 11%, excluding notable items, which was supported by the continuation of our share buybacks in the first quarter. Turning now to slide five.
Rod: Particularly we have a strong fixed income offering here in the U S and we've built it out.
Rod: Wait a bit in the last couple of years in Europe.
Rod: You're seeing lots of strength in the ETF.
Rod: <unk> system in Europe.
Rod: Second area of growth is really trying to leverage the institutional client base because it's.
Eric Walter Aboaf: We saw a period-end AUCA increase by 17% on a year-on-year basis and 5% sequentially to a record level. Year on year, the increase in AECA was largely driven by higher period and market levels, net new business, and client flows. I would note that we have seen a mixed shift into cash and cash equivalents worth an estimated 1 to 2 percentage points of total AUCA versus a year ago. Quarter-on-quarter, AUCA increased primarily due to higher period and market levels and client flows. At Global Advisors, period NAUM also increased to a record level, up 20% year-on-year, largely reflecting higher period and market levels and net inflows, and up 5% sequentially, primarily due to higher period and market levels. At the right center of the slide, the market volatility indices provide a useful indicator of client transactional activity that drives servicing fees, spreads in FX trading, and special activity in agency lending.
Rod: Its legacy as the passive index business, if we have an institutional.
Rod: Relationship we tend to be the number one or number two manager on their platform that leads you that gives you a seat at the table and we believe it gives us an ability.
Rod: To potentially distribute overturns of products and services. So that's where a lot of our focus is now on the institutional business and then finally continuing to deepen we have a global franchise, but there's areas that we can deepen at war.
Rod: You've heard us talk about <unk>.
Rod: Europe.
We're focused just as much on Asia Pacific as those markets continue to grow on a more equal to leverage the positions we have in but really focusing on deepening as opposed to.
Rod: To broadening geographic reach so.
That and that shows how we're thinking about it and we're pleased with how it's playing out.
Rod: Yeah.
Speaker Change: I appreciate that Ron thanks.
Speaker Change: Thank you next question will be from Ken Houston of Jefferies. Please go ahead.
Eric Walter Aboaf: Turning to slide 6, on the left side of the page, you'll see first quarter total servicing fees up 1% year-on-year, primarily due to higher average market levels, partially offset by pricing headwinds, a previously disclosed client transition, and lower client activity and adjustments, including changes in certain client asset mix into lower earning cash and cash equivalents. In addition, the pace of installation started slower than we expected in the first quarter. Let me dimension some of these items for you. As I've told you before, the impact of the previously disclosed client transition was a headwind of approximately 2 percentage points to year-on-year growth. In addition, lower client activity and adjustments, including the client asset makeshift to cash, was also a headwind of approximately 2 percentage points to year-over-year growth this quarter, some of which we believe is cyclical.
Ken Houston: Please go ahead, Ken your line is open.
Ken Houston: Could you please on mute.
Ken Houston: No response moving onto Alex <unk> at Goldman Sachs. Please go ahead.
Alex: Hey, good morning, everybody. Thanks, another one four for NII.
Alex: I guess good good quarter, good guide for the second quarter, as well and Thats sort of elevating your full year NII guidance also but similarly, I guess to kind of what we saw in your guidance last quarter. The back half of the year. It seems to have a pretty meaningful drop off for the tune of maybe 100 million bucks or so versus the quarterly run rate.
Alex: I guess given your comments on deposits being stable and higher rates are kind of are where they are you still getting the benefit of repricing on the securities portfolio, what sort of informs this sort of decline in NII towards the back of the year.
Eric Walter Aboaf: sequentially, total servicing fees were up 1%, primarily as a result of higher average market levels, partially offset by lower client activity and adjustments, including changes to certain asset mix and pricing headwinds. On the bottom of the slide, we summarize some of the key performance indicators of our servicing business. In the first quarter, we generated $67 million of servicing fee wins, nicely spread across both North America and Europe. As you recall, solid sales in North America like this were one of the goals that we had described at a conference last fall. In addition, we had $291 million of servicing fee revenue to be installed at quarter end, up $71 million year-on-year and $21 million quarter-on-quarter. We also had $2.6 trillion of AUCA to be installed at period end.
Eric: Alex It's Eric.
Alex: We're going to continue to see some of the trends that we have been seeing and it's just a matter of.
Eric: How the various pieces.
Eric: Partially or fully offset each other over time.
Eric: We're going to continue to see a tailwind from the level of rates at least given the current forward curve because that.
Eric: Placed through the investment portfolio in play and gives us a tailwind as does.
Eric: Some continued growth in lending the headwind that we've been navigating through which.
Eric: I would describe.
Eric: Comes in.
Eric: In steps and sometimes its a step.
Eric: Down sometimes half a step back up is around the deposit levels across the interest bearing stack.
Eric Walter Aboaf: Turning now to slide 7, first quarter management fees were up 12% year on year, primarily reflecting higher average market levels and net inflows from the prior periods, partially offset by the impacts of the strategic ETF product suite repricing initiative. Relative to the prior quarter, management fees were up 6% due to similar reasons, partially offset by lower performance fees. As you can see on the bottom right of the slide, following record inflows in 4Q23, our investment management franchise remains well positioned with momentum across each of its businesses. In ETFs, though overall flows were relatively flat in the first quarter, our SPDR portfolio U.S. low-cost suite achieved continued market share gains driven by net inflows of $13 billion. In our institutional business, we saw first quarter net outflows of $19 billion, primarily driven by a single client. That said, we saw continued momentum in the U.S.-defined contribution area with record AUM of approximately $730 billion. Lastly, in our cash franchise, we saw first quarter net inflows of $9 billion, the fourth consecutive quarter of positive net flows into cash. Turning now to slide 8.
Eric: Where we're just seeing deposits I think at at.
Eric: At nice levels to be honest.
While we continue to see the grind down of <unk>.
Eric: Non interest bearing deposits and we we do expect another quarter of that the noninterest bearing deposits to trend down and then to flatten out in the second half of the year I think youll see those trends continue.
Eric: I think you'll.
Well, we'll see where we where we come out but if you take our guide together we expect.
Eric: A modest step down into the second quarter, and then we see a leveling off in the third and fourth quarter of it our NII I think in the past we've talked about being in a range of $500 million to $600 million a quarter.
Eric: We're now seeing and expect.
Eric: To be.
Eric: Currently above the $600 million per quarter range, but those steel it's those factors.
Eric: As headwinds and <unk> that will that will play through that.
Eric Walter Aboaf: First quarter FX Trading Services revenue was down 3% year on year, but up 8% sequentially. Relative to the year-ago period, the decrease was mainly due to lower spreads associated with subdued FX volatility, partially offset by higher volumes as client engagement increased across nearly all of our FX venues. Quarter-on-quarter, the 8% revenue increase primarily reflects higher volumes with particular strength in our EM business as well as higher direct FX spreads. First quarter securities finance revenues were down 12% year-on-year, mainly due to lower agency balances and lower spreads, primarily associated with significantly lower industry specials activity.
Eric: Kind of dictate exactly where we come out but.
Eric: I think as I've said earlier the level of client engagement that we've had in terms of <unk>.
Eric: Deposits with us putting deposits at different price points with us some of those are the core transactional deposits that need support custody accounts and some of those are the discretionary.
Eric: Deposits is <unk>.
Eric: Been a real.
Eric: Our priority for the franchise and I think one that we've.
Eric: Showed some some good success in and Thats really creating I think this this better expectation than we had.
Eric Walter Aboaf: On a quarter-on-quarter basis, we have seen agency lending balances rise as demand is rising. Software and processing fees were up 25% year on year in Q1, largely driven by higher revenues associated with CRD, which I'll discuss in more detail shortly. However, quarterly software and processing fees declined 13% primarily due to our lower on-premise renewals, partially offset by higher lending-related fees.
Eric: Earlier signaled at the beginning of the year and one that we think will endure and then provide this.
Eric: Stability and over time upside in NII in the coming years.
Speaker Change: Great Alright, that's helpful.
Speaker Change: My second question is around expenses.
You talked about how consolidation of the JV I guess that took place recently in April here will create a new wave of optimization for next year. If I. If I got that right can you can you just outline of what that could mean in terms of incremental.
Eric Walter Aboaf: Finally, other fee revenue for the quarter increased $5 million year-on-year. However, sequentially, other fee revenue increased $17 million, largely driven by an episodic currency devaluation in the prior quarter, which did not recur. Moving to slide 9.
Speaker Change: Either re junior and benefits our cost benefits. However, you want to frame that and what that means for maybe the overall kind of expense growth for the franchise I know you're holding the line. This year really well, but is there an opportunity to kind of continue that into 2025 as well. Thanks.
Eric Walter Aboaf: You'll see on the left panel that first quarter front office software and data revenue increased 32% year-on-year, primarily as a result of continued SAS implementations and conversions driving higher professional services and software-enabled revenue growth. However, sequentially, front office software and data revenue was down 20%, primarily driven by lower on-premise renewals and installations. Turning to some of the alpha business metrics on the right panel, we were pleased to report two additional alpha wins, including our second alpha for private markets mandate. In addition, three mandates went live in the first quarter, bringing the total number of live mandates to 21.
Speaker Change: Yes, Alex.
Ron: It's Ron here.
Ron: I think it's good to focus on what we said here because we've talked to you.
Ron: And your colleagues just about ongoing productivity improvement we've been at it for years and we do believe this unlocks a potential another potential but a new wave of.
Ron: <unk> productivity growth and why is that.
Ron: Well firstly almost by definition, if you're taking these venture.
Ventures on you're eliminating the margin that was in it.
Ron: In our expenses that now comes out right. So you've got that as a.
Eric Walter Aboaf: First quarter AIR increased 19% year-on-year, driven by over 20 SAS client implementations and conversions over the last year. Turning to slide 10, first quarter NII decreased 7% year-on-year, but increased 6% sequentially to $716 million. The year-on-year decrease was largely due to deposit makeshift and lower average non-interest-bearing deposit balances, partially offset by the impact of higher average interest rates, client lending growth, and investment portfolio positions. We were pleased to report a sequential increase in NII, which was primarily driven by higher investment securities yields, an increase in average interest-bearing deposits, and loan growth partially offset by the decline in average non-interest- The NII results on a sequential quarter basis were better than we had previously expected, primarily driven by strength in both interest-bearing and non-interest-bearing deposit balances towards the end of the quarter.
Ron: On near immediate tailwind, but more importantly.
Ron: And more important to the long term.
Ron: Is that.
Really complete and take advantage of true end to end.
Ron: Process improvement and simplification.
Ron: We had created.
Ron: Jp's, which go back to the early days of our.
Ron: Of our offshoring journey.
Ron: Created a lot of complication unintentionally, we created a lot of complication.
Ron: <unk> enables us to to get it that the work has already started.
Ron: Our operations folks are spending a lot of time in India there.
Ron: Some recent hiring.
Ron: <unk> brought on some great leadership there. So if you think about the importance of India.
Ron: Operations and the amount of work that.
Ron: Passes through there.
Eric Walter Aboaf: While it is difficult to forecast the path of deposits in the current environment, we're pleased with the success that we are having in engaging our clients. On the right, we provide highlights from our average balance sheet during the first quarter. Average deposits increased 4% year-on-year and 6% quarter-on-quarter, mainly driven by client balance growth across the interest-bearing deposit stack, partially offset by a reduction in non-interest-bearing deposits. Average non-interest-bearing deposits decreased by less than $3 billion quarter-on-quarter.
Ron: <unk> this end to end simplification.
Ron: <unk> ability to.
Ron: Eliminate checkers of checkers of checkers, and all those kinds of things we see.
Ron: An enormous amount of opportunity to improve and then finally.
Ron: As we continue our technology investment.
Ron: A lot of that will be directed there.
Ron: It will be directed at.
Ron: Some of the things that in the past you would've said well, let's take advantage of labor arbitrage and now the technology is that a cost level, where we can simply eliminate the labor.
Ron: And not have our particularly for some of these repetitive kinds of tav between machines and other kinds of AI that you can use to.
Eric Walter Aboaf: Cumulative U.S. dollar client deposit basis for 80% since the start of the current rate cycle, with cumulative foreign currency basis for the same period continuing to be lower in the 30-60% range, depending on the currency. Turning to slide 11, first quarter expenses, excluding notable items, increased barely 1% year-on-year as we both invested more to fuel fee growth and increased the size of our productivity and optimization savings efforts by more than 50%, on a line-by-line basis, excluding notable items. Compensation employee benefits decreased 3%, primarily driven by lower incentive compensation in salaries, as well as a decline in contractor spend that was partially driven by the consolidation of one of our operations joint ventures in India. Information systems and communications expenses increased 4%, mainly due to higher technology and infrastructure investments, partially offset by the optimization savings and vendor savings initiatives.
Ron: Place labor.
Ron: And you end up with a one a lower labor costs, but more importantly, you've got job content, that's very attractive to people and people want to make careers here as opposed to feeling like they're stuck in this data and repetitive task. So we are very optimistic about this.
Speaker Change: Great. Thanks, so much.
Speaker Change: Thank you next question will be from Brian Bedell Deutsche Bank. Please go ahead.
Brian Bertram Bedell: Great. Thanks, Good morning, Thanks for taking my questions.
Brian Bertram Bedell: First just a confirmation on the.
Brian Bertram Bedell: The guidance you gave Eric.
Brian Bertram Bedell: On the two Q.
Fee revenue up 1% to 2%.
Brian Bertram Bedell: Down 2% to 5% expenses up two to two 5% is is that sequentially.
Eric Walter Aboaf: Transaction processing increased 4%, mainly reflecting higher broker fees due to increased global market volumes. Occupancy increased 10 percent, partially due to real estate costs associated with the consolidation of the joint venture in India, which used to form part of the contractual costs within compensation and benefits, partially offset by footprint optimization, and other expenses increased 5%, largely due to the timing of foundation funding. Lastly, I'll spend a moment on our transformation efforts. If you recall, consolidating the first operations joint venture last October increased our FTE headcount as we outsourced those capabilities. However, it also came with an expected financial benefit excluding integration costs of $20 million over the course of the year.
Brian Bertram Bedell: <unk> for revenue and year over year for expenses.
Brian Bertram Bedell: Okay.
Speaker Change: No. It was sequential for for every one of those.
Speaker Change: As you as you look forward.
Speaker Change: So it was on a <unk> basis <unk> basis, Okay.
Speaker Change: Then going back to the NII Guide I think you also said down two to two 5% versus the 716 in <unk> and then did you say down again in <unk>, and then flattening out or flattening out in <unk>.
Speaker Change: What I described as a.
Speaker Change: A flatter second half of the year and so.
Speaker Change: There are different paths here to be honest and it really will just depend on the level of deposits.
Eric Walter Aboaf: As Ron mentioned, the consolidation of our second operations joint venture in India closed on April 1, and this will also come with an increase in additional headcount from 2Q, as well as expected financial benefits. The consolidation of these two joint ventures will be a catalyst for the next phase of State Street's global operations transformation and enable us to create a second wave of service improvements and productivity savings next year. Moving to slide 12, on the left side of the slide, we detail 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, our capital levels remain well above the regulatory minimum.
Speaker Change: The level of interest rates just how the.
Speaker Change: The tail of some of the.
Speaker Change: Client deposit repricing. So we've described come through where the back end of those so.
Speaker Change: I gave some high.
Speaker Change: A high level view, but Brian I think there is a range of scenarios what we do.
Speaker Change: Have some confidence is the expectation that in aggregate get NII.
Speaker Change: NII will be down 5% for on a full year basis.
Speaker Change: Thats quite a bit better than the down 10% that we had.
Speaker Change: Previously guided towards.
Brian Bertram Bedell: Right, Yes, maybe if I just if I used a flattish assumption I'm more like flat for the year on that cadence, but this is ed.
Eric Walter Aboaf: While we continue to focus on optimizing our capital stack, the strength of our capital position enables us to extend our balance sheet to support our clients. As of quarter end, our standardized CET1 ratio of 11.1% was down approximately 50 basis points quarter on quarter, largely driven by the expected normalization of RWA. The LCR for State Street Corporation was a healthy 107% and 130% for State Street Bank and Trust.
Brian Bertram Bedell: Would that be sort of a guide.
Brian Bertram Bedell: As you said a range, but a flat NII outcome year over year would be.
Brian Bertram Bedell: Yeah.
Brian Bertram Bedell: Better end of your range or is that sort of really difficult to achieve.
Speaker Change: No. Let me let me let me try to clarify we expect total NII to be down 5% on a year on year basis for the full year, what I did say is that we expect NII.
Eric Walter Aboaf: Our exceptionally strong liquidity metrics benefit from the deep and diversified nature of our funding base and active balance sheet management. In the quarter, we were pleased to return $308 million to shareholders, consisting of $100 million of common share repurchases and $208 million in declared common stock dividends. As Ron noted, we continue to expect to return around 100% of earnings to shareholders this year. In summary, we're quite pleased with the quarter. We have a clear strategy for growth.
Speaker Change: To be in <unk>, and <unk> to be roughly the same to be flattish between those two quarters and so now the question is exactly how much does it come down in the second quarter and then from second quarter into the combination of third and fourth quarter, how much does that come down and there is a range of different.
Speaker Change: So I think you could you could foresee but the reason we're trying not to over a spec the exact quarter by quarter by quarter by quarter.
Eric Walter Aboaf: A detailed set of priorities that we are executing against in order to drive continued positive business momentum and expect to deliver increased fee operating leverage this year, excluding notable items. Finally, let me cover our full year and second quarter outlook, which I would highlight continues to have the potential for variability given the macro environment we're operating in. In terms of our current assumptions, as we stand here today, we are assuming global equity markets flat to first quarter end for the remainder of the year, which implies daily averages up 5% quarter on quarter in 2Q and up around 17% for the full year. Our rate outlook broadly aligns with the current forward curve, which I would note continues to move, while we expect FX market volatility will remain muted.
Our expectation is there is just underlying volatility out there in the.
Speaker Change: Kind of macroeconomic conditions and the risk on risk off sentiment in the central bank's actions.
Speaker Change: And then in our client.
Speaker Change: <unk>.
Speaker Change: Our deposit levels and so.
Speaker Change: Hopefully that gives you enough context to go on.
Speaker Change: That's super helpful. And then maybe just on the private markets wins, it sounds like momentum is improving there.
Speaker Change: Maybe if you could just talk about.
Speaker Change: What your pipeline is looking like in private markets.
Alpha.
Speaker Change: And just kind of your expectations over the next one to two years.
Speaker Change: Brian It's Ron I mean, we've talked about the privates.
Speaker Change: Private businesses being a.
Eric Walter Aboaf: Given our strong start to the year and higher average market levels, we think total fee revenue for the full year will now be at the higher end of our prior guide of up 3-4% year-on-year, so up a solid 4%, which is better than our previous outlook. There are, however, episodic and industry headwinds impacting our servicing business this year, including a previously disclosed client transition and the impact of client activity and adjustments, which includes the client asset makeshift into lower earning cash and cash equivalents. We believe some of these factors are cyclical in nature, and we expect to offset a portion with higher sales and additional management actions this year.
Speaker Change: Double digit growth business, we stand by that we see lots of potential growth private markets.
Speaker Change: Developing nicely for us.
Speaker Change: Virtually for some of this.
Speaker Change: For many of the same reasons that alpha so for us it's an opportunity as these firms become more complex complex operating and technology stacks, that's a way too.
Speaker Change: Not just lower some cost but improve operations.
Speaker Change: And future proof operations so.
Speaker Change: It's developing well.
Speaker Change: So.
Speaker Change: We remain optimistic about it.
Speaker Change: Okay, great. Thank you.
Ronald Philip OHanley: Turning to NII, as a result of our first quarter outperformance, strong deposit growth, and the improved interest rate outlook, we now expect full-year NII to be down approximately 5% year-on-year, which is better than our previous guide of down approximately 11%. On expenses, we expect full-year expenses, ex-departures, will be roughly in line with our prior guide of up about 2.5%, but with the potential for some Given our improved outlook, we now expect to deliver additional positive fee operating leverage for the full year, excluding notable items. Finally, turning to 2Q, on a quarter-on-quarter basis and excluding notable items, we would expect total fee revenue to be up 1.5% to 2%. NII to be down 2% to down 5%, and expenses up about 2 to 2.5%, excluding the seasonal compensation expenses in one queue and notable items. We think the provisions for credit losses could be in the $15-25 million range in 2Q, and we would expect to have a better view on that later in the quarter as we continue to monitor our portfolio. Lastly, we expect the QQ tax rate to be approximately 22%. And with that, let me hand the call back to Ron.
Speaker Change: Thank you next question will be from David Smith at Autonomous Research. Please go ahead.
David Smith: Good morning could.
David Smith: Could you talk a little bit more about your cap capital priorities today your payout ratio in the first quarter was somewhat below your 100% full year target.
Eric: David It's Eric.
David Smith: Gave guidance at the beginning of the year on a full year basis purposely right because each quarter, there's going to be a different set of.
Of variables as we.
David Smith: As we.
Navigate through so we described capital return in aggregate to be around.
David Smith: Total earnings for the year.
And we reaffirm that.
David Smith: Our prepared remarks.
David Smith: You then go into the specifics of the first quarter remember, we had expected normalization of the lower than than the unusual hard up anyway.
David Smith: That came through in the fourth quarter or some of that is just market factors playing through.
David Smith: On the FX book some of that is equity markets up ticking in the.
David Smith: The agency and securities financing space and some of it to be honest is just putting capital to work with our clients, where we're engaging with them and thats driving some of the fee revenue growth.
Unknown Executive: Operator, we can now open the call for questions.
You saw.
David Smith: At the same time, our priority is to get capital back to shareholders. We continued our.
Unknown Executive: Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, please press star followed by two. And if you're using your speakerphone, we ask that you please lift the handset before pressing any key.
David Smith: Our dividend at pace as you would expect we had some buybacks.
David Smith: This this quarter, if you do the math that buyback activity will increase.
Going forward for the next few quarters, we also had.
Unknown Executive: Please go ahead and press star 1 now if you do have any questions. And your first question will be from Brennan Hawken at UBS. Please go ahead. Good morning.
David Smith:
David Smith: The.
David Smith: The new information about the FDIC assessment, and so we had to accrue for that.
Eric Walter Aboaf: Thanks for taking my questions. Um, Eric, your updated guide sort of suggests that AI you guys expect to pull back a little bit here from this strong result here in the first quarter. But one of the things that I noticed was that repo was particularly robust in the quarter. Um, you know, could you give a little color around what drove that strength and how sustainable it is? And is some of that normalization embedded in your outlook?
David Smith: Expanse instead of returning capital to shareholders for this particular quarter. So anyway, just a way to describe where we are on track with our.
Priority and to be honest, our commitment to get capital back to shareholders in.
David Smith: In line with.
David Smith: With earnings this year and it will just.
David Smith: Every quarter is a little bit different, but I think youll see that accelerate into the into the second quarter.
Speaker Change: Thank you and I think you gave the tax rate for the second quarter are you still expecting 21% to 22% for the full year.
Eric Walter Aboaf: Brennan, it's Eric. You know there are a number of factors that drove the upswing in NII into the first quarter. The bulk of that was actually deposit balances coming in stronger than we had expected, both on the interest-bearing side across the stack and non-interest-bearing as well. You know, that made up for the $30 million uptick in terms of our results relative to our expectations. The repo balances did tick up as well. They were, you know, a small part, but worth, in NII terms, about a percentage point of more NII than we had expected. And I think what we're seeing is that as the conditions in the economy continue to evolve, clients are holding more cash on their balance sheets than putting that into a variety of different instruments. Sometimes it's on deposits, sometimes it's on sweeps, and sometimes it's in repo. And that's also been, in particular on the repo side, aided a bit by the reduction in the Fed's overnight repo operation. So it's really a mix of factors that we're seeing, which, you know, together, are driving a better NII performance, which we're pleased with.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: I think I need to.
Speaker Change: Quickly go back to the January remarks, but we did not update those and.
Speaker Change: So I think that that's a.
Speaker Change: A good place a good estimate to use for the full year. The one that you had back on the January call, Yes, that's correct.
Speaker Change: Okay, and just one last clean up.
Speaker Change: The preferred dividend will still be elevated in the $50 to $55 million range in the second quarter, but then there'll be kind of more like $40 million in the second half of the year.
Speaker Change: Yes, yes, that's correct, we're just kind of <unk>.
Speaker Change: Moving through this.
Speaker Change: This path.
Speaker Change: Quarter, one and quarter two between the redemptions the issuance and redemptions and then the the literally the tactical timing of some of the dividend you've got it right. There is one more quarter of elevation in the $50 million to $55 million range next.
Speaker Change: Next quarter, meaning second quarter and then it will.
Speaker Change: Run at about 40 quarter from third quarter onwards.
Speaker Change: Thank you.
Speaker Change: Thank you next question will be from Mike Mayo at Wells Fargo. Please go ahead.
Hi can you hear me.
Michael Lawrence Mayo: We can.
Eric Walter Aboaf: Yeah, yeah, great. Thank you.
Michael Lawrence Mayo: Can you talk about the relationship between stock market. Some revenues used to have that for every 100.
Eric Walter Aboaf: You also quantified the impact of the BlackRock transition, so thanks for that. It does seem as though maybe that impact is a little larger than your prior expectation. Do I have the right read on that? And maybe could you give us an update on where we stand as far as the ongoing impact goes?
Michael Lawrence Mayo: Every 10% change in the S&P 500, it impacts your servicing fees by X amount and remind us what that is these days how much of a lag there is with that and along with that I guess you are in your guidance for NII.
Michael Lawrence Mayo: Instead of being down 10%, what exactly changed from Microsoft.
Eric Walter Aboaf: For Brennan, it's Eric again. The previously announced client transition that we had referenced is in line in terms of amounts that we had expected. If you recall, we had said it'd be worth about two percentage points of servicing fees this year, which is about a percentage point of total fees. And remember, if you go back to our original disclosure of the last couple years, we had described the total amount to be worth about two percentage points of total fees, and we're seeing about half of that come through on a year-on-year basis this quarter and for this year, and so, you know, fully in line with what we had previously described.
Michael Lawrence Mayo: Yeah, Mike It's Eric Let me, let me answer those in reverse order on.
Eric: On NII.
Eric: What happened in the first quarter was really higher deposit balances across the interest bearing stack and even relative to our expectations on non interest bearing in March so that changed.
Eric: In a positive way created an uplift into the first quarter that that we had not expected.
Eric: Last time, we gave full year guidance on NII was back in January when we.
Eric: Expected it to be down on a full year basis, 10% for the full year and it's only today that we've reassessed that we did not reassess that back at the beginning of March we reassess that today and what we're factoring in as the higher step off the higher level of deposits with us generally.
Unknown Executive: Okay, thanks for taking my question. Thank you. The next question will be from Glenn Schorr at Evercore. Please go ahead. Hello there.
Unknown Executive: [inaudible]
Unknown Executive: One quick follow-up on the NII stuff, and thank you for all the detail. The balances coming into March, I know these things are really hard to predict, but is there something happening with the client discussions and the overall profitability management that might give you confidence that those balances stick, or should we think of this as rates are higher, parking balances with a safe custodian?
Eric: And the.
Eric: The fewer rate cuts that were expecting.
Eric: From central banks around the world and so that's what gets us to.
Hey.
Eric: Better full year guide on NII.
Eric: If I then turn to the equity market question, how it factors through servicing fees.
Unknown Executive: Transcribed by https://otter.ai
Unknown Executive: Glenn, we've been heavily engaged with our clients over the last year, I'd say year and a half, as we've seen, you know, quite a shift in the industry environment and, you know, the evolution of deposits in the banking system. I can answer your question at a couple different levels.
Eric: We need to be we need to go through it in.
Eric: In pieces and so let me let me.
Eric: Start.
Eric: <unk>.
Eric: What matters to US is not just the S&P equity index, because we're global right more than 40% of our revenues are abroad, including in emerging markets and while the S&P is up year on year, 28%.
Ronald Philip OHanley: I think first, you know, going into this year, we had expected client, total client deposit balances in the $200 to $210 billion range. And we now see that in the $210 to $220 billion range for this quarter, and to be honest, we expect that we will continue at around that level. And a lot of that is the engagement that we've had with clients, you know, they all have cash, and we certainly encourage them to bring it to us. And part of that is the way we think about client relationships, client profitability, and the client services that we can offer. And so I think some of what you're seeing here in the higher aggregate levels of deposits is due to our management action.
Eric: The all World Index is up only 18% and that's what's.
Eric: More material to our financial statements given the.
Eric: International and global footprint that we have.
Eric: With that 18%, we'd expect a substantial tailwind of servicing fees on a year on year basis.
Eric: Up 4%, 5% range typically.
Eric: But it tends to move around as you said, sometimes there's a bit of timing there, sometimes there's a bit of mix there and so forth.
Eric: What we did see that was a headwind to that this year, where two things one was the previously announced client transition and that was worth about two points of servicing fee headwinds and then we've continued to see.
Eric: A.
Ronald Philip OHanley: You know, I think in addition to that, there do tend to be somewhat higher deposits in the banking system. So the, you know, the tide has been gently rising, I'd say very gently, and, you know, that's been helpful. And we expect that to be, you know, relatively neutral going forward, but we'll obviously need to see based on the actions of the Fed and how they evolve. Very cool, I appreciate that. One quickie, you can't comment on the specifics, but I'm more talking the big picture. You were named in some stories, potential interest in some private credit manager, a bigger picture of where theoretically that might fit in. And, and, and I just like the better flows on CNS SGA. But strategically, what are you focused on in terms of continuing growth across that franchise?
A lower or I'll describe different level of client activity that was worth.
Eric: <unk> two percentage points of headwind this year.
Eric: Which we think is cyclical some of that is transactional activity that we've talked about that we tend to get paid for on a on a unit basis through our fee schedules and then this quarter. We also referenced the shift to client.
Cash and cash equivalents within the AUC, a stack, which tends to come in at a much lower fee rate for custody and accounting services.
Eric: And so those were the pieces that that went against us.
Speaker Change: And just one follow up just.
Speaker Change: Said more than expected deposits why was that.
Speaker Change: I think the more than as expected deposits is really driven by.
Speaker Change: Two factors one is that.
Speaker Change: There tends to be more cash in the system in the banking system. Today, we think that's a mix of central bank.
Ronald Philip OHanley: Yeah, Glenn, it's Ron. So we've tried to be quite clear about what we're doing over at SSGA. I mean, the first is around continuing to grow the ETF franchise. As you know, our legacy strength is in the institutional business, where we continue to be quite strong. And we've focused a lot over the last several years on growing the low-cost ETF franchise, which tends to find its way into retail portfolios through intermediaries. That led to the repricing initiative that we did last year, which, in retrospect, has proven to be quite a smart move, because the market share has gone up, and those portfolios tend not to move. These are buy and hold investors. So ETFs would be one example. Then we continue to grow the active space, typically working with very close partners of ours, and we see a lot of runway in active.
Speaker Change: Actions in particular.
Speaker Change: In the U S a.
Speaker Change: The reduction in the overnight repo operation that the feds running.
Speaker Change: That comes back in a way into our clients or into the banking system.
Speaker Change: And that's been a I think that's generally improves liquidity conditions are added to what is a very liquid condition that made them even more liquid and then the second factor at to be honest is over the last year and a half two years, we've been very engaged and I'd say increasingly engage with clients.
Speaker Change: Sean.
Speaker Change: Where they put their cash they put their cash.
Speaker Change: With us.
Speaker Change: In deposits in repo in money market and money market sweeps because every one of those.
The areas we.
Speaker Change: We offer services.
Speaker Change: Sure.
Speaker Change: To our clients and I think what we've done over time, a sharpened our engagement with our clients and Thats resulted in more cash and deposits with us in a way that we find is healthy obviously for our balance sheet. We're always delighted to keep cash, but also helps with with earnings at <unk>.
Ronald Philip OHanley: And then finally, fixed income, particularly outside, we have a strong fixed income offering here in the US, and we've built it out quite a bit in the last couple of years in Europe, and you're seeing lots of strength in the ETF ecosystem in Europe. The second area of growth is really trying to leverage the institutional client base because its legacy is the passive index business. If we have an institutional relationship, we tend to be the number one or number two manager on their platform. That gives you a seat at the table, and we believe it gives us the ability to potentially distribute other kinds of products and services. So that's where a lot of our focus is now on the institutional business.
Speaker Change: Margin.
Speaker Change: And economically.
Speaker Change: Thank you.
Speaker Change: Thank you next question will be from Rajiv Bhatia.
Unknown Executive: Morning Star. Please go ahead.
Unknown Executive: Great. Good morning can you comment on how the pricing environment is for your severity business if inflation remains higher for longer should we expect lower pricing headwind and then as I understand it about 60% of your servicing fees asset base, how do pricing headwinds compare in the asset base bucket versus the non asset bucket.
Unknown Executive: Thanks.
Okay.
Ronald Philip OHanley: And then finally, continuing to deepen. We have a global franchise, but there are areas where we can deepen it more. You've heard us talk about Europe, and we're focused just as much on Asia-Pacific as those markets continue to grow, and we're able to leverage the positions we have, but really focusing on deepening as opposed to broadening our geographic reach. So that, in a nutshell, is how we're thinking about it, and we're pleased with how it's playing out. I appreciate that, Ron. Thanks.
Speaker Change: It's a broad question, we've been and then.
Speaker Change: <unk>.
Speaker Change: Environment I think last.
Four for four years, or so where we've seen.
Speaker Change: Pricing headwinds in the servicing business to be roughly in the.
Speaker Change: A 2% headwind.
Speaker Change: Level, and Thats kind of how that will float around a bit by quarter.
Speaker Change: It will float around on the margin a little bit by year, but it's substantially below what we had seen way back in 2019.
Unknown Executive: Thank you. The next question will be from Ken Usdin at Jeffries. Please go ahead. Please go ahead, Ken, your line is open. Could you please unmute? No response. Moving on to Alex Blostein at Goldman Sachs. Please go ahead. Hey, good morning, everybody. Thanks.
Speaker Change: Which was all describe a bubble of repricing <unk>.
Speaker Change: Scribe it that way because.
During this time, we've seen to your point Harry.
Speaker Change: Accentuated ryzen inflation, we've now seen a.
Eric Walter Aboaf: Another one for NII. I guess a good quarter, and a good guide for the second quarter as well, and that's sort of elevating your full-year NII guidance also. But similarly, I guess, to kind of what we saw in your guidance last quarter, the back of the year seems to have a pretty meaningful drop-off for the tune of maybe $100 million or so versus the quarterly run rate. Eric, I guess, given your comments on deposits being stable and higher rates are kind of where they are, you're still getting the benefit of repricing on the securities portfolio, what sort of informs this sort of decline in NII towards the back of the year?
Speaker Change: A partial reduction in inflation and thats not really.
Speaker Change: Had a larger.
Substantial effect to our general.
Speaker Change: Fee rates or our.
Speaker Change: Or servicing fees and so it's been.
Speaker Change: I think it's not particularly.
Particularly determinative of that.
Speaker Change: In terms of our fee schedule its youre right. The fee schedules have several components they are asset based.
Speaker Change: Theres, an asset under custody basis for some of the fees.
Eric Walter Aboaf: Alex, it's Eric. You know, we're going to continue to see some of the trends that we have been seeing. And it's just a matter of how the various pieces partially or fully offset each other over time. For example, we're going to continue to see a tailwind from the level of rates, at least given the current forward curve, because that plays through the investment portfolio and gives us a tailwind. As does, you know, some continued growth in lending. The headwind that we've been navigating through, which I would describe as coming in steps, and sometimes it's a step down, sometimes half a step back up, is around deposit levels across the interest-bearing stack, where we're just seeing deposits, I think, at nice levels, to be honest, while we continue to see, you know, the grind down.
Speaker Change: Which is.
Speaker Change: About.
Speaker Change: Have there are some transactional fees. There are just some flat fees there are some per account fees.
Speaker Change: Those usually ends up being negotiated as a package it's not that when there is a.
Speaker Change: When we have negotiations that one particular part of that package is X.
Speaker Change: Is treated very differently, we have large sophisticated clients. They think of it as a package and to be honest theyre looking for a fair.
Speaker Change: Set of.
A fair amount of fee so that.
Speaker Change: As a partnership which lasts often 10 15 20 in some cases 30 40 years right that they feel they're getting value and that they feel that we as a custodian can deliver on what.
Speaker Change: What their expectations are and so it comes to be.
Speaker Change: <unk> accommodation.
Speaker Change: Think in our minds in their minds.
Eric Walter Aboaf: And we do expect another quarter of non-interest-bearing deposits to trend down and then to flatten out in the second half of the year. I think you'll see those trends continue. I think you'll, we'll, we'll, we'll see where we come out. But, you know, if you take our guide together, we expect a modest step down into the second quarter, and then we see a leveling off in the third and fourth quarters of our NII. I think in the past, we've talked about being in a range of, you know, 500 to 600 million a quarter. We're now seeing and expect to be comfortably above the $600 million per quarter range. But those, you know, it's those factors, as headwinds and tailwinds that'll, that'll play out that'll kind of dictate exactly where we come out.
Speaker Change: Got it thanks.
Speaker Change: Thank you next.
Speaker Change: The next question will be from Kennedy Wilson at Jefferies. Please go ahead Ken.
Thanks, Ron and Eric sorry for that earlier, just one follow up on the just a servicing fee algorithm. So with all the commentary you've made.
And you show us a good detail about the business wins and the fees to come on and we know about the headwinds some cyclical some due to the deconversion do you have a line of sight. When we can really start to see that back office line start to move up in a positive way and I know we have to consider the middle office and the whole front office kit.
Speaker Change: Together thing, but that's still the biggest line and that's still kind of flattish on a year over year basis with all the things we talked about but is there any path forward, where you can kind of see some of those headwinds abating in some of the growth starting to come on in transitions that we can see a better growth rate overall.
<unk>.
Speaker Change: Ken why don't I start here.
Eric Walter Aboaf: But I think, as I've said earlier, the level of client engagement that we've had in terms of depositing deposits with us at different price points with us, some of those are the core transactional deposits that need to support custody accounts, and some of those are the discretionary amount of deposits has been a real priority for the franchise. And I think one that we've shown some, some good success in, and that's really creating, I think, this better expectation than we had earlier signaled at the beginning of the year, and one that we think will endure and then, you know, provide the stability and, over time, upside in NII in the coming years.
Ken Houston: The transition I know it feels like it's been going on forever, but.
Ken Houston: That will basically abate the effect of that.
Ken Houston: We will go away.
Ken Houston: More or less go away next year, assuming no other.
Ken Houston: Changes.
Ken Houston: On the client side.
Ken Houston: So.
A headwind goes to zero.
Ken Houston: And perhaps more importantly, <unk> seen you saw the sales performance last year Youre seeing the sales performance. This year, that's building up the to be installed business that still remains.
Very very high for us.
Ken Houston: Part of it is some complicated kinds of alpha clients.
That.
Ken Houston: We'll install they're installing it typically tend to install in waves in tranches.
Ken Houston: So we'll make progress against that.
Eric Walter Aboaf: Great. All right. That's helpful.
Ken Houston: I would note from sales performance last year and a continued in this quarter.
Ken Houston: Theres, a fair amount of back office and some of these recent sales, which just installs faster.
Ken Houston: And so quite optimistic.
Ronald Philip OHanley: My second question is around expenses. You talked about how the consolidation of the JV, I guess, that took place recently in April here will create a new wave of optimization for next year. If I got that right. Can you just outline what that could mean in terms of incremental, you know, either rejuvenating benefits or cost benefits, however you want to frame that, and what that means for maybe the overall kind of expense growth for the franchise? I know you're holding the line this year really well, but is there an opportunity to kind of continue that into 2025 as well? Thanks.
Ken Houston: <unk> about.
Above.
Ken Houston: Opportunities here.
Fee revenue growth, particularly servicing fee revenue growth as you.
Ken Houston: Overcome headwinds, but more importantly.
Ken Houston: To reap the benefits of what we've sold in Alpha what we sold in back office and get those installed.
Ken Houston: And Ken It's Eric I would just add that.
Ronald Philip OHanley: Yeah, Alex, it's Ron here. I think it's good to focus on what we said here, because we've talked to you and your colleagues about ongoing productivity improvement for years. And we do believe this unlocks potential, not just potential, but a new wave of productivity growth. And why is that?
Eric: Had these client activity headwinds that we described which is a mix of in a risk off.
Sentiment, which has led to lower transactions.
Eric: Through the custodial accounts and then we've described this shift towards.
Ronald Philip OHanley: Well, firstly, almost by definition, if you're taking these ventures on, you're eliminating the margin that was in them, that was in our expenses, that now comes out, right? So you've got that as a near immediate tailwind. But more importantly, and more important for the long term, is that we can really complete and take advantage of true end-to-end process improvement and simplification. When we created the JVs, which go back to the early days of our offshoring journey, we created a lot of complication; unintentionally, we created a lot of complication. This enables us to get at that. The work has already started. Our operations folks are spending a lot of time in India. They've done some recent hiring and brought on some great leadership there.
Cash mix right.
Eric: We don't see those just continuing at the same pace.
Eric: C that is somewhat cyclical.
Eric: You would expect us.
Eric: Don't think we generally expect much more cash to be on hand with clients there are.
Eric: I think theres a case, we made that cash levels the declines should actually start to get deployed over the next year and could even.
Eric: Yes.
Eric: Neutral or a possible tailwind so.
We've been going through a bit of a.
Of a cyclical phase here on those environmental and.
Eric: Activity type and.
Eric: And mix headwinds.
Eric: I think without those you could then see through to some of what Ron described around sales and installations.
Ronald Philip OHanley: So if you think about the importance of India to our operations and the amount of work that passes through there, between this end-to-end simplification, this ability to eliminate checkers of checkers of checkers, and all those kinds of things, we see an enormous amount of opportunity to improve. And then, finally, as we continue our technological investment, a lot of that will be directed there. It'll be directed at some of the things that, you know, in the past, you would have said, well, let's take advantage of labor arbitrage.
Eric: And the underlying.
Eric: Growth.
Eric: Of the franchise.
Speaker Change: Okay and thank you for all of that and one follow up then there is also we can see the wins and what you put on in the yet to be installed to Ron's point can you just talk about just the pipeline is the pipeline.
Speaker Change: <unk> to strengthen as a consistent have you now put more of that pipeline through where do we stand on that.
Speaker Change: Yes, Ken I mean, I think what you should.
Speaker Change: We have heard from us today is that we.
Have a.
Speaker Change: Sales target that.
We talked about in January we're standing by that sales target.
Speaker Change: The efficacy up from last year, which was significantly up from the year before so.
Speaker Change: I mean do you get there because of the pipeline. So we're we're encouraged by our pipeline.
Speaker Change: Okay, great. Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you and at this time I would like to turn the call back over to Ron for closing remarks.
Well, thanks to all of you on the call for joining us.
Ron: Thank you ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.
Ron: [music].
Eric Walter Aboaf: Great. Thanks so much. Thank you. The next question will be from Brian Bedell at Deutsche Bank. Please go ahead.
Eric Walter Aboaf: Thanks for taking my questions. First, just confirmation on the guidance you gave, Eric, on the 2Q fee revenue up 1% to 2%, NII down 2% to 5%, and expenses up 2% to 2.5%. Is that sequential for revenue and year-over-year for expenses?
Eric Walter Aboaf: No, it was sequential for every one of those as you looked forward, so it was all on a one-Q to two-Q basis.
Eric Walter Aboaf: Okay, so then going back to the NII guide, I think you also said down 2-5% versus the 716 in 2Q, and then did you say down again in 3Q and then flattening out, or flattening out, in 3Q?
Eric Walter Aboaf: Um... What I described is a flatter second half of the year. And so, you know, there are different paths here. To be honest, And it really will just depend on the level of deposits, the level of interest rates, just how the tail of some of the client deposit repricings that we've described come through, or the back end of those. So I gave you some, you know, a high-level view. But, Brian, I think there's a range of scenarios. What we do have some confidence in is the expectation that, in aggregate, NII will be down 5% from a full-year basis. And that's quite a bit better than the down 10% that we had previously guided toward.
Eric Walter Aboaf: Right, yeah, if I just, if I use the flattish assumption, I'm more like flat for the year on that cadence, but since is that, would that be sort of, as you said, a range, but a flat NII outcome year over year would be at the better end of your range, or is that sort of really difficult to achieve?
Eric Walter Aboaf: No, let me let me let me try to clarify. We expect total NII to be down 5% on a year-on-year basis for the full year. Yeah, what I did say is that we expect NII in 3Q and 4Q to be roughly the same, to be flattish between those two quarters. And so, you know, now the question is exactly how much does it come down in the second quarter, and then from the second quarter into the combination of the third and fourth quarters, how much does that come down? And there's a range of different scenarios I think you're, you know, you could foresee. But the reason we're trying not to overspec the exact quarter-by-quarter-by-quarter expectation is that there's just underlying volatility out there in the kind of macroeconomic conditions, in the risk-on, risk-off sentiment, and in the central bank's actions. And then in our client deposit levels. And so hopefully, that gives you enough context to go on.
Ronald Philip OHanley: That's super helpful. And then maybe just on the private markets wind, it sounds like momentum is improving there. Maybe if you could just talk about what your pipeline is looking like in private markets, alpha, and kind of your expectations over the next one to two years.
Ronald Philip OHanley: Yeah, Brian, it's Ron. I mean, we've talked about the private business as being, you know, a double-digit growth business. We stand by that. We see lots of potential growth. Private markets, Alpha, is developing nicely for us, largely for some of the same reasons that Alpha itself has. It's an opportunity as these firms become more complex and have complex operating and technology stacks. It's a way to not just lower some costs but improve operations and future-proof operations. So it's developing well. So we remain optimistic about it.
Ronald Philip OHanley: Thank you. The next question will be from David Smith at Autonomous Research.
Eric Walter Aboaf: Please go ahead. Good morning. Could you talk a little bit more about your capital priorities today? Your payout ratio in the first quarter was somewhat below your 100% full year target.
Eric Walter Aboaf: David, it's Eric. We gave guidance at the beginning of the year on a full-year basis purposefully, right? Because, you know, each quarter there's going to be a different set of variables as we, you know, navigate through. So we described capital return in aggregate to be around total earnings for the year. And we reaffirmed that in our prepared remarks.
Eric Walter Aboaf: If you then go into the specifics of the first quarter, remember, we had expected a normalization of the lower than usual RWA that came through in the fourth quarter. Some of that is just market factors playing out on the FX book. Some of that is equity markets upticks in the agency and securities financing space. And some of it, to be honest, is just putting capital to work with our clients where we're engaging with them. And that's driving some of the fee revenue growth that you saw. But at the same time, you know, our priority is to get capital back to shareholders. We continue to pay our dividend at pace, as you'd expect. We had some buybacks this quarter. If you do the math, you know that buyback activity will increase going forward for the next few quarters.
Eric Walter Aboaf: We also had, you know, new information about the FDIC assessment, and so we had to accrue for that expense instead of returning capital to shareholders for this particular quarter. So anyway, just a way to describe how we're on track with our priority and, to be honest, our commitment to get capital back to shareholders in line with earnings this year. And it'll just, you know, every quarter is a little bit different, but I think you'll see that accelerate in the second quarter. Thank you.
Eric Walter Aboaf: Thank you. And you gave the tax rate for the second quarter. Are you still expecting 21 to 22 percent for the full year?
Eric Walter Aboaf: I think I need to quickly go back to the January remarks, but we did not update those, and so I think that's a good place, a good estimate to use for the full year, the one that you had on the January call.
Eric Walter Aboaf: Okay, and just one last cleanup. The preferred dividend, it'll still be elevated in the 50 to 55 million range in the second quarter, but then it'll be kind of more like 40 million in the second half of the year.
Eric Walter Aboaf: Yeah, yeah, that's correct. We're just kind of moving through this, this past quarter one, and quarter two between the redemptions, the issuance, and redemptions, and then the literally the tactical timing of some of the dividends. You've got it right, there's one more quarter of elevation in the 50 to 55 million range next, next quarter, meaning second quarter, and then it'll run at about 40 million from third quarter onward Thank you.
Unknown Executive: Thank you. The next question will be from Mike Mayo at Wells Fargo. Please go ahead. Hi, can you hear me? Yes, we can.
Eric Walter Aboaf: Can you talk about the relationship between stock markets and revenues used to have for every hundred... Every 10% change in the S&P 500 impacts your servicing fees by X amount. Can you remind us what that is these days and how much of a lag there is with that? And along with that, I guess for your guidance for NII, instead of being down 10, it's down 5. What exactly changed in the last month or so?
Eric Walter Aboaf: Yeah, Mike, it's Eric. Let me let me answer those in reverse order on NII. What happened in the first quarter was really higher deposit balances across the interest-bearing stack and even relative to our expectations on non-interest-bearing in March. So that changed in a positive way and created an uplift in the first quarter that we had not expected. The last time we gave full year guidance on NII was back in January when we expected it to be down on a full year basis by 10% for the full year. And it's only today that we've reassessed that we did not reassess that back at the beginning of March; we reassess that today.
Eric Walter Aboaf: And what we're factoring in is the higher step-off, the higher level of deposits with us generally, and the fewer rate cuts that we're expecting from central banks around the world. And so that's what gets us to a better full-year guide on NII. If I then turn to the equity market question, how it factors through servicing fees, we need to go through it piece by piece. And so, let me start.
Eric Walter Aboaf: First, what matters to us is not just the S&P equity index because we're global, right? More than 40% of our revenues are abroad, including in emerging markets. And while the S&P is up year-on-year 28%, the all-world index is up only 18%. And that's what's more material to our financial statements, given the international and global footprint that we have. Some of that is transactional activity that we've talked about that we tend to get paid for on a unit basis through our fee schedules. And then this quarter, we also referenced the shift to client cash and cash equivalents within the AUCA stack, which tends to come in at a much lower fee rate for custody and accounting services.
Eric Walter Aboaf: And just one follow-up. You said there were more than expected deposits. Why was that?
Eric Walter Aboaf: I think the more than expected deposits are really driven by two factors. One is that there tends to be more cash in the system, in the banking system today. We think that's a mix of central bank actions, in particular in the U.S., a reduction in the overnight repo operation that the Fed's running.
Eric Walter Aboaf: That comes back, in a way, to our clients or into the banking system, and that's been a – I think that's generally improved liquidity conditions or added to what is – are very liquid conditions that have made them even more liquid. And then the second factor, to be honest, is that over the last year and a half, two years, we've been very engaged, and I'd say increasingly engaged, with clients on where they put their cash. You know, do they put their cash with us in deposits, in repo, in the money market, in money market sweeps? Because every one of those areas, we offer services to our clients. And I think what we've done over time is sharpened our engagement with our clients, and that's resulted in more cash and deposits with us in a way that we find is, you know, healthy, obviously, for our balance sheet. We're always delighted to keep cash, but it also helps with earnings and margin and economically.
Eric Walter Aboaf: Thank you.
Unknown Executive: Thank you. The next question will be from Rajiv Bhatia at Morningstar. Please go ahead. Great. Good morning. Can you comment on how the pricing environment is for your services?
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Eric Walter Aboaf: And then, as I understand it, about 60% of your servicing fees are asset-based. How do pricing headwinds compare in the asset-based bucket versus the non-asset-based bucket?
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Eric Walter Aboaf: You know, it's a broad question. We've been in an environment, I think, for the last four years or so, where we've seen, you know, pricing headwinds in the servicing business to be, you know, roughly in the 2% headwind level. And that's kind of, you know, that'll float around a bit by quarter. It'll float around on the margin a little bit by year, but it's substantially below, you know, what we had seen way back in 2019, which was, I'll describe as a bubble of repricing. I describe it that way because, you know, during this time, we've seen, to your point, a very, you know, accentuated rise in inflation; we've now seen a, you know, a partial reduction in inflation. And that hasn't really had a large or substantial effect on our general fee rates or our servicing fees.
Eric Walter Aboaf: And so it's been, I think it's, it's not particularly determinative of that. In terms of our fee schedules, you're right; the fee schedules have several components. They have asset-based, there's an asset under custody basis for some of the fees, which is about half, there are some transactional fees, there are just some flat fees, there are some per account fees. As a partnership, which lasts often 10, 15, 20, in some cases, 30, 40 years, right, that they feel they're getting value and that they feel that we as a custodian, you know, can deliver on what their expectations are And so it comes to be, you know, a reasonable accommodation, I think, in our minds and their minds.
Unknown Executive: Got it. Thanks. The next question will be from Ken Usdin at Jeffries. Please go ahead. Thanks, Ramanark. Sorry for that earlier.
Ronald Philip OHanley: Just one follow-up on just the servicing fee algorithm. So with all the commentary you've made, and you show us the good detail about the business wins and the fees to come. And we know about the headwinds, some cyclical, some due to deconversion. But do you have a line of sight when we can really start to see that back office line start to move up in a positive way? And I know we have to consider the middle office and the whole front office kit as a as a together thing, but that's still the biggest line. And that's still kind of flattish on a year over year basis with all the things we talked about. But is there any path forward where you can kind of see some of those headwinds abating and some of the growth starting to come in, and transitions so that we can see a better growth rate overall? Thanks.
Ronald Philip OHanley: Ken, why don't I start here? The transition, I know it feels like it's been going on forever, but that will basically abate. The effect of that will go away, more or less go away next year, assuming no other changes on the client side. So the headwind goes to zero.
Ronald Philip OHanley: Secondly, and perhaps more importantly, you've seen, you saw the sales performance last year, and you're seeing the sales performance this year that's building up the to-be-installed business that still remains, you know, very, very high for us. Part of it is some complicated kinds of alpha clients that they will install; they are installing, you know; they typically tend to install in waves and tranches, so we'll make progress against that. But, I would note from sales performance last year, and it continued in this quarter, there's a fair amount of back office in some of these recent sales, which just installs faster. And so we're quite optimistic about the opportunities here for fee revenue growth, particularly servicing fee revenue growth. Overcome headwinds, but more importantly, start to reap the benefits of what we've sold in Alpha, what we've sold in back office, and get those installed.
Ronald Philip OHanley: And Kenneth, Eric, I would just add that, you know, we've had these client activity headwinds that we described, which is a mix of kind of risk-off sentiment, which has led to lower transactions through the custodial accounts. And then we've described this shift towards a cash mix, right? We don't see those, you know, just continuing, you know, at the same pace.
Eric Walter Aboaf: We see that as somewhat cyclical; I don't think we generally expect much more cash to be on hand with clients. I think there's a case to be made that cash levels with clients should actually start to get deployed over the next year and could even be a neutral or a possible tailwind. I think we've been going through a bit of a cyclical phase here on those environmental and activity type and mixed headwinds. And I think without those, you could then see through to some of what Ron described around sales, installations, and, you know, the underlying growth of the franchise.
Ronald Philip OHanley: Okay. And thank you for all that.
Eric Walter Aboaf: And one follow-up then is also, we can see the wins and what you put on and the yet-to-be-installed, to Ron's point. Can you just talk about just the pipeline? Is the pipeline continuing to strengthen? Is it consistent? Have you now put more of that pipeline through? Where do we stand on that?
Ronald Philip OHanley: Yeah, Ken, I think what you should have heard from us today is that we, you know, we have a sales target that we talked about in January. We're standing by that sales target. That's significantly up from last year, which was significantly up from the year before. So, I mean, you get there because of the pipeline. So, we're encouraged by our pipeline. Okay.
Eric Walter Aboaf: Great, thank you.
Ronald Philip OHanley: Thank you. And at this time, I would like to turn the call back over to Ron for his closing remarks.
Ronald Philip OHanley: Well, thanks to all of you on the call for joining us.
Unknown Executive: Thank you. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your lines.