Q2 2025 State Street Corp Earnings Call
Operator: Corporation's second quarter 2025 earnings conference call and webcast.
Elizabeth Lynn: Today's call will be hosted by Elizabeth Lynn, Head of Investor Relations at State Street. We ask that you please hold all questions until the completion of formal remarks, at which time you will be given instructions for the question and answer session. Today's discussion is being broadcasted live on State Street's website at investors.statestreet.com. This call is also being recorded for replay. State Street's conference call is copyrighted and all rights are reserved. This call may not be recorded for rebroadcast or distribution in part or in whole without the express written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street website.
The conference is now in presentation mode, your line is muted Corporation, second quarter, 2025 earnings conference call and webcast.
Today's call will be hosted by Elizabeth Lynn head of investor relations at State Street.
We ask that you please hold all questions until the completion of formal remarks at which time you will be given instructions for the question and answer session.
Today's discussion is being broadcasted live on stage. Street's website at investors.com
This call is also being recorded for replay.
Elizabeth Lynn: Now I would like to hand the call over to Elizabeth Lynn. Thank you, operator. Good afternoon, and thank you all for joining us.
Speaker Change: State Street's conference call is copyrighted and All rights are reserved. This call may not be recorded for rebroadcast or distribution in part or in whole without the express written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street website. Now, I would like to hand the call over to Elizabeth Lynn
Elizabeth Lynn: On our call today, our CEO, Ronald OHanley, will speak first, then Mark Keating, our interim CFO, will take you through our second quarter 2025 earnings presentation, which is available for download on our website, investors.statestreet.com. Afterward, we'll be happy to take questions.
Elizabeth Lynn: Thank you, operator. Good afternoon and thank you all for joining us.
Speaker Change: On our call today our CEO Ron o'hanley will speak. First then Mark Keating our interim CFO will take you through our second quarter 2025 earnings presentation, which is available for download on our website, investors statestreet.com
Elizabeth Lynn: Before we get started, I'd like to remind you that today's presentation will include results presented on a basis that excludes or adjusts one or more items from GAP. Reconciliations of these non-GAP measures to the most directly comparable GAP or regulatory measure are available in the appendix to our presentation.
Afterward, we'll be happy to take questions.
Elizabeth Lynn: Before we get started, I'd like to remind you that today's presentation will include results presented on a basis that excludes or adjusts 1 or more items from Gap.
Elizabeth Lynn: In addition, today's call will contain forward-looking statements. Actual results may differ materially from those statements due to a variety of important factors, such as those referenced in our discussion today and in our SEC filings, including the risk factors section 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 should change.
Elizabeth Lynn: Reconciliations of these non-gaap measures to the most directly comparable, gaap or regulatory measure are available in the appendix to our presentation.
Elizabeth Lynn: In addition today's call will contain forward-looking statements.
Ronald OHanley: With that, let me turn it over to Ron. Thank you, Liz. And good afternoon, everyone.
Actual results May differ materially from those statements due to a variety of important factors such as those reference in our discussion today. And in our SEC filings, including the risk factor section in our form 10K, our forward-looking statements speak only as of today and we disclaim any obligation to update them even if our views should change with that. Let me turn it over to Ron.
Ronald OHanley: Before we begin, I want to take a moment to acknowledge the devastating floods in Texas. Our thoughts are with those who have tragically lost their lives and with the people and communities who have been affected by this event. Now turning to the second quarter, in a period characterized at times by significant financial market volatility driven by geopolitical and economic uncertainty, our strong 2Q results demonstrate the powerful and diversified nature of our franchise. By advancing and leveraging our deep capabilities in technology and investment services, markets, and investment management, we continue to strategically position State Street as our client's essential partner and execute it on our purpose to help create better outcomes for the world's investors and the people they serve.
Thank you, Liz and good afternoon everyone. Before we begin, I want to take a moment to acknowledge the devastating floods in Texas.
Our thoughts are with those who have tragically lost their lives, and with the people and communities, who have been affected by this event.
Elizabeth Lynn: Now turning to the second quarter in a period characterized at times by significant financial Market, volatility driven by geopolitical and economic uncertainty are strong. 2q results demonstrate the powerful and diversified nature of our franchise.
Ronald OHanley: Disciplined execution of this strategic approach is delivering positive results, including accelerating financial performance and strong business momentum. For example, on a year-over-year basis, our 2Q results mark the fourth consecutive quarter of positive fee operating leverage and the sixth consecutive quarter of positive total operating leverage, excluding notable items. New business was strong, as we generated a near-record quarter for sales and investment services, surpassed $5 trillion in AUM at State Street Investment Management, and generated record FX trading volumes in 2Q. This positive momentum reflects the strong strategic operating and technology foundation we have built over the past several years to support the long-term growth of our businesses.
Elizabeth Lynn: By advancing and leveraging our deep capabilities and technology and Investment Services markets and Investment Management. We continue to strategically position State Street is our clients essential partner and executed on our purpose to help create better outcomes for the world's investors and the people they serve.
Elizabeth Lynn: Disciplined execution of this strategic approach is delivering positive results, including accelerating financial performance and strong business. Momentum for example, on a year-over-year basis, our 2q results marked. The fourth consecutive quarter of positive fee, operating leverage and the sixth consecutive quarter of positive, total operating leverage excluding notable items.
Elizabeth Lynn: New business was strong, as we generated a near record quarter for sales and Investment Services for past 5 trillion in AUM at State Street investment management and generated record FX trading volumes in 2q.
Ronald OHanley: As we work to build on this progress, we remain focused on disciplined execution against our strategy, delivering consistent growth for our shareholders, and maintaining operational excellence in the service of our clients.
Elizabeth Lynn: This positive momentum, reflects the strong strategic, operating and Technology Foundation. We have built over the past several years, to support the long-term growth of our businesses.
Ronald OHanley: Turning to slide two of our investor presentation, I will cover our second quarter highlights before Mark takes you through the quarter in more detail. Beginning with our financial performance, reported earnings per share were 217 as compared to 215 in the year-ago period. Excluding notable items, which Mark will speak to, fee and total revenue increased 12% and 9% year-over-year, respectively. We delivered positive fee and total operating leverage, increased pre-tax margin to nearly 30%, and achieved a 19% return on tangible common equity, while EPS increased 18% year-over-year, all excluding notable items. Turning to our business momentum, within investment services, we delivered a very strong sales performance this quarter, securing over $1 trillion in new AUCA asset servicing wins and generated $145 million of related new servicing fee revenue wins, including two new State Street Alpha mandates.
As we work to build on this progress, we remain focused on disciplined execution against our strategy, delivering consistent growth for our shareholders and maintaining operational excellence in the service of our clients.
Turning to slide 2 of our investor presentation. I will cover our second quarter highlights before Mark takes before. Mark takes you through the quarter in more detail.
Beginning with our financial performance, reported earnings per share with 27 as a compare as compared to 2 15 in the year ago. Period.
Elizabeth Lynn: And total revenue increased 12% and 9% year-over-year respectively.
We delivered positive fee and total operating leverage increased pre-tax margin to nearly 30% and achieved a 19% return on tangible. Common equity.
Elizabeth Lynn: While EPS increased 18% year-over-year all excluding notable items.
Turning to our business momentum, with an Investment Services. We delivered a very strong sales performance. This quarter securing over 1 trillion in new auca asset, servicing wins and generated 145 million of related. New servicing. People Revenue wins.
Ronald OHanley: With this continued good sales performance, we remain confident in our ability to meet our full year servicing fee and a wins target of $350 to $400 million for a second consecutive year.
Including 2 new State Street Alpha mandates.
Ronald OHanley: Second quarter marked an important milestone for our asset management business, which we rebranded State Street Investment Management. This new name reflects our commitment to investing in our relationships, innovation, and in the future. Among other benefits, this new brand name reinforces our One State Street approach that aims to leverage collaboration across our firm, expand product offerings, and deepen relationships with our clients. This moment for our investment management business came as period-end AUM exceeded $5 trillion for the first time. Quarterly net inflows were over $80 billion, and we continued to gain market share in this strategically important U.S.
With this continued. Good sales performance. We remain confident in our ability to meet our full-year servicing fee Revenue wins Target of 350 to 400 million for the for a second consecutive year.
Elizabeth Lynn: Second quarter marked an important milestone for our asset management business, which we rebranded, State Street Investment Management. This new name, reflects our commitment to investing in our relationships, Innovation, and in the future,
Among other benefits. This new brand name, reinforces our 1 State Street approach, that aims to leverage collaboration across our farm, expand product, offerings and deepen relationships with our clients.
Ronald OHanley: low-cost ETF market segment. The second quarter also offered further evidence of the strength and depth of our ETF franchise as our U.S. ETFs led the industry in trading volume, surpassing $4.6 trillion in total volume for the quarter, ranking number one in equity, number one in commodities, and among the top three in fixed income. Markets is seeing the results of its efforts to deepen client relationships, and in Q2, clearly demonstrated its ability to support clients through volatile periods with deep liquidity and trading expertise, while also providing important diversification to our revenue profile. Amid a constructive environment for our markets business, we saw significant year-over-year increases in both FX trading and security finance revenues driven by higher client volumes.
Elizabeth Lynn: This moment for our investment management. Business came is period, end AUM, exceeded 5 trillion, for the first time quarterly. Net inflows were over 80 billion and we continue to gain market, share in the strategically important us, lowcost ETF market segments,
The second quarter also offered further evidence of the strength and depth of our ETF. Franchise is our, you us ETFs led, the industry in trading volume. They're passing 4.6 trillion in total volume for the quarter ranking. Number 1 in equity, number 1 in Commodities. And among the top 3 in fixed income,
Elizabeth Lynn: State Street Markets is seeing the results of its efforts to deepen client relationships. And in Q2 clearly demonstrated its ability to support clients through volatile periods with deep liquidity and trading expertise while also, providing important diversification to our Revenue profile.
Ronald OHanley: Our FX trading business recorded its best quarter since 2020, and security finance revenues rose to the highest level since 2019.
Elizabeth Lynn: Amid a constructive environment for our Market's business. We saw significant year-over-year increases in both FX trading and Security Finance revenues driven by higher client volumes.
Ronald OHanley: Turning to our balance sheet, our strong financial position enabled over $500 million in capital return in the second quarter and over $800 million year-to-date. Our financial strength was further underscored by the results of the Federal Reserve's annual stress test in June, subsequent to which we were pleased to announce our intention to increase State Street's quarterly per share common stock dividend by 11% to $0.84 beginning in the third quarter, subject to approval by our Board of Directors. As we look ahead, we remain committed to returning capital to our shareholders, subject to market conditions and other factors.
Our FX trading business recorded, its best quarter since 2020 and Security Finance revenues Rose to the highest levels since 2019.
Burning to our balance sheet, our strong financial position enabled, over 500 million in capital return in the second quarter and over 800 million year to date.
Elizabeth Lynn: our financial strength was further underscored by the results of the federal reserve's annual stress tests in June,
Elizabeth Lynn: Subsequent to which we were pleased to announce Our intention to increase dates. Quarterly per share, common stock dividend by 11% to 84 cents beginning in the third quarter subject to approval by our board of directors.
Ronald OHanley: Turning to our operational efficiency, we have a well-established track record of expense discipline. This continues to be supported by a proven ability to generate productivity savings to fund investments in our business, which in turn is driving revenue growth and operating leverage. For example, over the last three years, we have generated over $1 billion of expense savings, largely from productivity initiatives. And we anticipate that number will increase to over $1.5 billion by year-end as we continue to progress well against our $500 million expense savings target in 2025.
Elizabeth Lynn: As we look ahead, we remain committed to returning Capital to our shareholders subject to market conditions and other factors.
Elizabeth Lynn: Starting to our operational efficiency, we have a well-established track record of expense discipline. This continues to be supported by a proven ability to generate productivity savings to fund investments in our business, which in turn is driving Revenue growth. And operating, Leverage
Ronald OHanley: Importantly, as we look further ahead, the next generation of our operating model transformation remains our priority and a key opportunity to add even more value for clients and shareholders. The charge we received in the second quarter illustrates this opportunity as we drive further operational efficiency and unlock productivity gains over time, supported by AI and continued platform scaling.
Elizabeth Lynn: for example, over the last 3 years, we have generated over 1 billion of expense savings largely from productivity initiatives and we anticipate that number will increase to over 1.5 billion by year end as we continue to progress well against our 500 million expense savings, Target in 2025
Elizabeth Lynn: Importantly, as we look further ahead the next generation of our operating model transformation remains our priority and a key opportunity to add even more value for clients and shareholders.
Ronald OHanley: To conclude, our first half results billed meaningfully on 2024. The second quarter included a number of strategic and platform milestones for State Street, offering tangible proof points that our strategy is delivering, reflected in the continuing improvement in our financial performance and the strong momentum we're seeing across our businesses. These results underscore the strength of our franchise and the disciplined execution of our strategy by our team. As we look ahead, we have strong conviction in our strategy and in our ability to serve our clients well, underpinned by our distinctive value proposition, financial strength, and the next generation of our technology and operational transformation.
Elizabeth Lynn: The charge, we second quarter illustrates this opportunity. As we drive further, operational, efficiency and unlock productivity, gains over time. Supported by Ai and continued platform scaling.
To conclude our first half results. Build meaningfully on 2024, the second quarter included, a number of strategic and platform. Milestones for State Street offering tangible proof points that our strategy is delivering reflected in the continuing improvement in our financial performance and the strong momentum, we're seeing across our businesses
Elizabeth Lynn: These results underscore the strength of our franchise and the disciplined execution of our strategy by our teams.
Mark Keating: With that, let me hand the call over to Mark who will take you through the quarter in more detail. Thank you, Ron, and good afternoon, everyone.
Elizabeth Lynn: Position Financial strength, and the next generation of our technology and operational transformation.
With that, let me hand the call over to Mark who will take you through the quarter in more detail.
Mark Keating: Picking up on slide three, before turning to our second quarter financial results, let me briefly walk you through the notable items we recognized this quarter. Notable items totaled $138 million pre-tax, or $0.36 per share, primarily driven by a $100 million repositioning charge associated with our ongoing operating model transformation. This action relates to the severance of approximately 900 employees and, as we noted in June, is expected to drive expense savings, mostly in 2026, with a payback period of roughly four to five quarters. We also recognized roughly 40 million of notable items related to a re-scoping of an alpha client contract, along with a few smaller items as detailed on the slide.
Thank you, Ron and good afternoon, everyone.
Elizabeth Lynn: Picking up on slide 3 before turning to our second quarter Financial results. Let me briefly walk you through the notable items, we recognized this quarter.
Elizabeth Lynn: Notable items totaled 138 million pre-tax or 36 cents per share primarily driven by a 100 million repositioning charge associated with our ongoing operating model transformation.
Elizabeth Lynn: This action relates to the severance of approximately 900 employees. And as we noted in June, is expected to drive expense savings. Mostly in 2026 with a payback period of roughly 4 to 5 quarters.
Mark Keating: Turning to slide four, excluding notable items, second quarter EPS grew a robust 18% year over year to $2.53 a share. Total revenue increased 9% and fee revenue increased 12% year over year, each excluding notable items, reflecting strong business momentum across the business. Expenses increased 6% year-over-year, excluding notable items. Approximately half of the year-over-year increase was driven by a combination of higher performance and revenue-related costs associated with the more constructive revenue environment in the second quarter, and to a lesser extent, the unfavorable impact of currency translation. The remaining increase primarily reflects continued investments in the franchise, including technology and infrastructure.
We also recognized roughly 40 million of notable items related to a reopening of an alpha client contract along with a few smaller items as detailed on the slide.
Turning to slide 4, excluding notable items. Second quarter, EPS grew a robust 18% year-over-year to $2.53 a share.
Elizabeth Lynn: Total revenue increased 9% and fee, Revenue, increased 12% year-over-year. Each excluding notable items reflecting strong business momentum across the business.
Elizabeth Lynn: Expenses, increased 6%. Year-over-year excluding notable items.
Elizabeth Lynn: Approximately half of the year-over-year. Increase was driven by a combination of higher performance and revenue related costs.
Elizabeth Lynn: Associated with the more constructive Revenue environment in the second quarter.
Elizabeth Lynn: And to a lesser extent the unfavorable impact of currency translation.
Mark Keating: This performance enabled us to deliver meaningful fee and total operating leverage, 526 basis points and 241 basis points respectively, excluding notable items. Accordingly, our pre-tax margin expanded to nearly 30%, while ROTCE was approximately 19%, excluding notable items. Turning now to slide five. AUCA reached a record $49 trillion, up 11% year over year, driven by higher period and market levels and client flows. AUM also reached a new record in the second quarter, increasing 17% year-over-year to over $5 trillion, reflecting higher period-end market levels and positive net inflows. Key market indicators reflected the dynamic operating environment in the second quarter, with higher period-end market levels and elevated FX volatility across both developed and emerging markets.
The remaining increased primarily reflects continued investments in the franchise including technology and infrastructure.
This performance enabled us to deliver meaningful fee and total operating leverage, 526 basis points and 241 basis points respectively, excluding notable items.
Elizabeth Lynn: Accordingly, our pre-tax margin expanded to nearly 30%. While rotce was approximately 19%, excluding notable items.
Elizabeth Lynn: Turning now to slide 5.
Elizabeth Lynn: Auca reached a record 49 trillion up 11% year-over-year driven by higher period and market levels, and client flows.
Elizabeth Lynn: AUM. Also reached a new record in the second quarter increasing 17% year-over-year to over 5 trillion reflecting higher period and market levels and positive net inflows.
Mark Keating: Against this backdrop, our markets business performed well, supported by record quarterly FX volumes, as we helped clients navigate a shifting market landscape, which I'll speak to in more detail shortly.
Key market indicators reflected the dynamic operating environment in the second quarter with higher period and market levels. In the elevated FX volatility across both developed and Emerging Markets.
Mark Keating: Turning to slide 6. Servicing fees increased 5% year-over-year, supported by higher average market levels, net new business, improved client activity, and the favorable impact of currency translation. We were encouraged by the strong sales momentum in our investment services business this quarter, with $145 million of servicing fee revenue wins. These wins were well-distributed across regions, with key new mandates in Europe and North America, and are closely aligned with our strategic priorities, particularly in core back-office solutions and private markets. Installations progressed steadily and as expected during the quarter.
Elizabeth Lynn: Against this backdrop, our Market's business performed. Well, the ported by record, quarterly FX volumes, as we helped clients navigate a shifting Market landscape, which I'll speak to in more detail shortly.
Elizabeth Lynn: Turning to slide 6.
Elizabeth Lynn: Servicing fees, increased 5% year-over-year supported by higher average market levels, net new business, improved client activity and the favorable impact of currency translation.
Elizabeth Lynn: We were encouraged by the strong sales. Momentum in our Investment Services business, this quarter with 145 million of servicing fee Revenue wins.
Elizabeth Lynn: These winds were well distributed across regions with key, new mandates in Europe and North America and are closely aligned with our strategic priorities, particularly in core back Office Solutions, and private markets.
Mark Keating: Onboarding our $441 million of to-be-installed servicing fee revenue, the highest on record, remains a key priority as we aim to drive consistent, sustainable servicing fee growth. In addition, we reported two new alpha mandates representing $380 billion of our AUCA wins this quarter. Our interoperable front-to-back alpha platform remains a key enabler in deepening and expanding client relationships.
installations progressed steadily and as expected during the quarter,
Onboarding our 441 million of 2B installed servicing fee Revenue. The highest on record remains a key priority. As we aim to drive consistent, sustainable servicing, fee growth,
In addition, we reported 2, new Alpha mandates representing 380 billion of our auca wins this quarter.
Mark Keating: Moving to slide seven. Management fees increased 10% year-over-year, primarily reflecting higher average market levels and the benefit of prior period net inflows. For the quarter, net inflows totaled $82 billion, driven by solid performance across ETFs and institutional. In ETFs, we saw healthy inflows across the product set, including U.S. low-cost, gold, SPY, and U.S. fixed income. Our U.S. low-cost offering achieved continued market share gains in the quarter, reflecting the strength of our strategic positioning in this segment. As Ron noted, the market volatility in the second quarter further highlighted the deep liquidity of State Street Investment Management's ETF franchise, which led the industry in U.S.
Our interoperable front to back Alpha platform, remains a key enabler in deepening and expanding client relationships.
Elizabeth Lynn: Moving to slide 7.
Elizabeth Lynn: Management fees increased 10% year-over-year primarily reflecting higher average market levels and the benefit of Prior period. Net inflows.
Elizabeth Lynn: For the quarter. Net inflows totaled. 82 billion driven by solid performance across ETFs and institutional.
Including us, low cost, gold spy, and US, fixed income.
Elizabeth Lynn: Our us lowcost offering achieved continued market share gains in the quarter reflecting the strength of our strategic positioning in this segment.
Mark Keating: ETF trading volumes.
Mark Keating: In our institutional business, we delivered a record $68 billion of quarterly net inflows driven by continued momentum in retirement, including our strategically important U.S.-defined contribution business. Overall, we were pleased with the strong performance of our investment management business in the second quarter, which generated a pre-tax margin of approximately 33 percent.
As Ron noted, the market volatility in the second quarter further highlighted the Deep liquidity of State Street investment Management's ETF franchise which led the industry in US, ETF, trading volumes.
Elizabeth Lynn: In our institutional business, we delivered a record 68 billion of quarterly. Net inflows driven by continued momentum in retirement including our strategically important us. Defined contribution business
Mark Keating: Turning now to slide eight.
Elizabeth Lynn: Overall, we were pleased with the strong performance of our investment management business in the second quarter, which generated a pre-tax margin of approximately 33%.
Mark Keating: FX trading revenue increased 27% year-over-year, excluding notable items. This strong performance was driven by record client volumes, with solid activity across our trading venues, reflecting heightened FX volatility in the quarter. Security's finance revenues increased 17% year-over-year, with strong balanced growth across both agency lending and prime services. Within our prime services business, fee revenue increased 29% year-over-year, supported by higher balances and continued momentum in client engagement.
Turning now to slide 8.
Elizabeth Lynn: FX trading Revenue, increased 27% year-over-year, excluding notable items. This strong performance was driven by record client volumes with solid activity, across our trading, venues reflecting heightened FX volatility in the quarter.
Elizabeth Lynn: Security's Finance revenues increased 17% year-over-year with strong balanced growth across both agency, lending and Prime services.
Within our Prime Services business fee, Revenue increased 29% year-over-year supported by higher balances and continued momentum in client engagement.
Mark Keating: Moving to slide nine. Software and processing fees increased 19% year-over-year in the second quarter, excluding notable items. front office software and data revenue increased 27% compared to the prior year quarter, excluding notable items. This strong performance was primarily driven by higher on-premises renewals, largely associated with CRD wealth clients.
Elizabeth Lynn: Moving to slide 9.
Elizabeth Lynn: Software and processing fees. Increased 19% year-over-year in the second quarter excluding notable items.
Elizabeth Lynn: Front office, software and data Revenue. Increased 27% compared to the prior year, quarter excluding notable items.
Mark Keating: In addition, software-enabled and professional services revenues increased 10% year-over-year, excluding notable items, reflecting continued momentum in SaaS client conversions and implementation. We are pleased with our ongoing success in transitioning clients to our cloud-based SaaS platform, with annual recurring revenue increasing by approximately 10% year-over-year to $379 million in the second quarter.
Elizabeth Lynn: This strong performance was primarily driven by higher on premises renewals largely associated with crd wealth clients.
Elizabeth Lynn: In addition software enabled and Professional Services revenues increased 10% year-over-year excluding notable items reflecting continued momentum in SAS client, conversions and implementations.
Mark Keating: Moving to slide 10. Net interest income of $729 million was down 1% year-over-year, primarily due to the impact of lower average short-end rates and changes in deposit mix. These headwinds were partially offset by continued loan growth and securities portfolio repricing. On a sequential basis, NII increased 2% supported by growth in non-U.S. deposit balances, securities portfolio repricing, and loan growth, partially offset by the impact of lower average short-end rates. As detailed on the right of the slide, the average balance sheet size expanded relative to 1Q, driven by a 7% increase in average deposit balances. The sequential increase in average balances was partly a reflection of the more uncertain macro backdrop that we observed early in the quarter, which moderated through May and June.
Elizabeth Lynn: We are pleased with our ongoing success in transitioning clients to our cloud-based SAS platform with annual. Recurring, Revenue increasing by approximately 10% year-over-year to 379 million in the second quarter.
Elizabeth Lynn: Moving to slide 10.
Elizabeth Lynn: Net interest income of 729, million was down, 1% year-over-year.
Due to the impact of lower average, short-end rates and changes in deposit. Mix
Elizabeth Lynn: these headwinds were partially offset by continued loan growth and securities portfolio repricing.
Elizabeth Lynn: On a sequential basis. Nii increased 2% supported by growth in non-us deposit. Balances, Security's portfolio, repricing and Loan growth partially offset by the impact of lower average. Short-end rates
Elizabeth Lynn: as detailed on the right of the slide, the average balance sheet size expanded relative to 1 Q driven by a 7% increase in average deposit, balances.
Mark Keating: We remain committed to supporting our clients with our strong, highly liquid balance sheet. Looking ahead, while we expect deposit balances to remain somewhat elevated relative to our expectations coming into the year, we do anticipate that balances will continue to moderate over the coming months and quarters subject to market conditions.
Elizabeth Lynn: the sequential increase in average balance balances was partly a reflection of the more uncertain macro backdrop that we observed early in the quarter which moderated through May and June,
Elizabeth Lynn: We remain committed to supporting our clients with our strong. Highly liquid balance sheet looking ahead while we expect deposit, balances to remain somewhat elevated relative to our expectations, coming into the year. We do anticipate that balances will continue to moderate over the coming months and quarters subject to market conditions.
Mark Keating: Turning to slide 11, expenses increased 6% year over year, excluding notable items, as I mentioned earlier. Compensation-related costs were up 7% year-over-year, excluding notable items, mainly reflecting higher performance-based costs and the impact of currency translation, while total headcount was down slightly. Information systems and communications expense increased 11% year-over-year, excluding notable items, as we continue to invest in technology and infrastructure to modernize our platforms while enhancing data delivery and user experience. At the same time, we continue to execute on our productivity and optimization savings initiatives, which generated over $150 million in year-over-year savings during the quarter.
Turning to slide 11.
Expenses, increased 6%, year-over-year, excluding notable items as I mentioned earlier.
compensation related costs were up 7% year-over-year, excluding notable items mainly reflecting higher performance-based costs and the impact of currency translation while total headcount was down slightly
Elizabeth Lynn: information systems and Communications expense, increased, 11% year-over-year, excluding notable items as we continue to invest in technology and infrastructure to modernize our platforms, while enhancing data delivery and user experience.
Elizabeth Lynn: At the same time, we continue to execute on our productivity and optimization savings initiatives.
Mark Keating: Year-to-date, these efforts have delivered approximately $250 million of savings towards our $500 million full-year target. Our ability to consistently generate productivity and optimization savings reflects the intense work of recent years and is a key enabler of strategic investment, fueling technology modernization, supporting revenue growth, and helping us drive six consecutive quarters of positive operating leverage, excluding notable items. We expect the repositioning actions taken in the second quarter to build on this momentum and support the continued transformation of our operating model in the quarters and years ahead.
Which generated over 150 million in year-over-year savings during the quarter.
Elizabeth Lynn: Year to date. These efforts have delivered a proximately 250 million of savings towards our 500 million, full-year Target.
Elizabeth Lynn: Activity and optimization savings reflects the intense work of recent years and is a key enabler of Strategic investment.
Elizabeth Lynn: Fueling technology modernization supporting Revenue growth and helping us drive 6. Consecutive quarters of positive operating leverage excluding notable items.
We expect the repositioning actions taken in the second quarter to build on this momentum and support the continued transformation of our operating model in the quarters and years ahead.
Mark Keating: Moving to slide 12. Our capital and liquidity levels remain strong, enabling us to continue supporting our clients as we look ahead. As of quarter end, our standardized CET1 ratio of 10.7% was down approximately 30 basis points from the prior quarter. Risk-weighted assets increased approximately $8 billion from the prior quarter, reflecting growth in our lending and securities finance businesses, as well as higher volumes and volatility in our FX trading business. The LCR for State Street Bank was a robust 136% in the quarter. Capital return increased to $517 million during the quarter, consisting of $300 million of common share repurchases and $217 million in declared common stock dividends, for a total payout ratio of 82%.
Moving to slide 12.
Our capital and liquidity levels, remain strong enabling us to continue supporting our clients as we look ahead.
Elizabeth Lynn: As of quarter end, our standardized, cet1 ratio of 10.7% was down approximately 30 basis points from the prior quarter.
Risk weighted assets increased approximately 8 billion from the prior quarter. Reflecting growth in our lending and securities Finance businesses, as well as higher volumes and volatility in our FX trading business.
Elizabeth Lynn: The LCR for State Street, Bank was a robust 136% in the quarter.
Mark Keating: As Ron noted, following our strong performance in this year's Federal Reserve Stress Test, we also announced our intention to increase our per share quarterly common dividend by 11 percent in 3Q, subject to board approval. Looking ahead to the second half of the year, we continue to expect a progressive cadence of common share repurchases, targeting a total payout ratio of approximately 80% for 2025.
Elizabeth Lynn: Capital return increased to 517 million during the quarter. Consisting of 300 million of common share, repurchases, and 217 million in declared, common stock, dividends for a total payout ratio of 82%,
As Ron noted following our strong performance in this year's Federal Reserve stress test. We also announced Our intention to increase our per share, quarterly. Common dividend by 11% in 3, Q subject to board approval.
Elizabeth Lynn: Looking ahead to the second half of the year. We continue to expect a progressive, Cadence of common share repurchases targeting a total payout ratio of Approximately 80% for 2025.
Mark Keating: In summary, we are encouraged by our second quarter and first half results, which highlight our ability to execute on our strategy, driving sustained business momentum while delivering positive fee and total operating leverage, excluding notable items. With that, let me turn to our improved full year outlook, which as a reminder excludes notable items and remains subject to significant variability given the current economic and geopolitical environment.
Elizabeth Lynn: In summary, we are encouraged by our second quarter and first half results, which highlight our ability to execute on our strategy, driving sustained business momentum, while delivering positive fee and total operating leverage, excluding notable items.
Mark Keating: Over the first half of 2025, we have demonstrated our ability to drive sustainable growth across our core business Given this strong performance, plus the current more constructive market environment and the anticipated impact of currency translation, we now expect 2025 total fee revenue growth in the 5 to 7 percent range, which is an improvement to our prior 3 to 5 percent full-year outlook.
Elizabeth Lynn: With that, let me turn to our improved full year outlook, which as our as a reminder, excludes notable items and remains subject to significant variability, given the current economic and geopolitical environment.
Over the first half of 2025, we have demonstrated our ability to drive sustainable growth growth across our core businesses.
Mark Keating: We expect full-year NII to be roughly flat to last year's record performance, with the potential for some variability driven by global monetary policy and changes in deposit mix and levels, which are difficult to predict. With our improved revenue expectations, full-year expense growth is now expected to be roughly 3 to 4 percent, up from our prior full-year outlook of 2 to 3 percent, reflecting higher revenue-related costs, as well as expectations of a negative impact from currency translation. And importantly, we continue to expect to generate both positive fee and total operating leverage this year.
Elizabeth Lynn: Given this strong Performance Plus the current more constructive Market environment and the anticipated impact of currency translation. We now expect 2025 total fee Revenue growth in the 5 to 7% range which is an improvement to our prior 3 to 5% full year outlook.
Elizabeth Lynn: We expect full year knee to be roughly flat to last year's record performance with the potential for some variability driven by global monetary policy and changes in deposit. Mix and levels, which are difficult to predict
With our improved Revenue, expectations, full year expense growth is now expected to be roughly 3 to 4% up from our prior full year outlook of 2, to 3%, reflecting higher Revenue related costs as well as expectations of a negative impact from currency translation.
Operator: And with that, operator, we can now open the call for questions. At this time, we will open the floor for questions. If you would like to ask a question, please press star 5 on your telephone keypad. You may remove yourself at any time by pressing star 5 again. Please note, you will be allowed one question and one follow-up question. Again, that is star 5 to ask a question. We will pause just a moment.
Elizabeth Lynn: An importantly, we continue to expect to generate both positive fee and total operating leverage this year.
And with that operator, we can now open the call for questions.
At this time, we will open the floor for questions.
If you would like to ask a question, please press star 5 on your telephone keypad. You may remove yourself at any time by pressing Star 5 again.
Please note, you'll be allowed 1 question and 1. Follow-up question again. That is Star 5 to ask a question. We will pause just a moment.
Kenneth Usdin: Okay, our first question will come from Ken Ustin with Autonomous. Please ask your question. Hi, guys. Good afternoon. I just wanted to just ask on kind of like fees and fee operating leverage, just kind of walking through the slide of fee update. And what drives that? Is it mostly just the market's backdrop?
Okay, our first question will come from can Houston with autonomous. Please, ask your question.
Ronald OHanley: Is it what we see in terms of the yet to convert and anything in terms of like how that timing of these, you know, great new wins and still left to convert will come through? Thank you.
Ronald OHanley: Yeah, Ken, it's Ron. Why don't I start that? So it's As we've noted, our pace of sales continues to be at an accelerated level. We said we were going to do in servicing fees 350 to 400, and we're on track to do that. That's what we did last year. That has led to a fairly sizable, in fact, a record level of fees to be installed, roughly $440 million. About half of that's going to install this year, and yet we're adding to that at about the same pace. Just on sales alone, there's a bit of a flywheel element to it.
Hey guys, good afternoon. Um, I just wanted to just ask on kind of like fees and fee operating leverage just kind of walking through the side of fee update. And uh, you know what drives that is? It mostly just the markets backdrop, is it what we see? In terms of the uh yep to convert and and anything in terms of like how that how that timing of these, you know, great new winds and still left to convert. It will come through. Thank you.
Ronald OHanley: We've talked about what's occurred in the asset management business that continues to grow these at a double-digit rate, some of that market. There's been positive organic revenue growth throughout these whole periods. Then finally, in markets, we've invested heavily in client relationships that really do pay off when you get times of elevated volatility. The organic elements in here are the primary driver of what we're talking about, assisted by some constructive marketing. Okay, great.
Couple, uh, we said we were going to do in servicing fees, 350, to 400. We're on track to do that. That's what we did last year. That has led to a fairly sizable. In fact, a record level of fees to be installed, roughly 440 million, um, about half of that's going to install this year. And yet, we're adding to that at about the same pace. So, uh, just on sales alone. There's a bit of a, a flywheel element to it. Uh, we've talked about what the asset management business, uh, that continues to grow these at a, uh, at a double digit rate some of that market, but, um, there's been positive, uh, uh, organic, uh, Revenue growth throughout this, uh, uh, throughout these whole periods. And then, finally in markets, uh, we'd invested heavily in client relationships, um, that really do pay off when you get times of elevated volatility. So the organic elements in here are the primary drivers
Elizabeth Lynn: Of what we're talking about, assisted by some constructive markets.
Ronald OHanley: And can you talk about just, you know, the new ones you're putting on and put it in context with the the client rescoping that occurred? Like, is that now kind of a done in the past issue? And or is there anything else that we could see with regards to that type of thing going forward?
Ronald OHanley: Yeah, we don't anticipate anything like that going forward. As we noted, we had two new alpha wins this quarter, three alpha installs. In terms of the nature of our servicing P revenue wins, about half of that are back office related, which that's a combination of pure back office sales plus alpha, which now only comes with back office sales. We will not do something alpha related without some kind of back office element to it because as you know, back office drives recurring fees but also gives us the right to other revenue sources like deposits, like FX, like securities, finance, and that.
Elizabeth Lynn: Okay, great. And um, can you talk about just you know, the new ones you're putting on and putting it in context with the, the client resc that occurred. Like, is that now kind of a done in the past issue and or is there anything else that we could see in regards with regards to that type of thing going forward?
Ronald OHanley: So in terms of that one client, it remains a very important client to us where it's very important partner to us and basically, they changed one element of it. Instead of going to a single platform, they're going to be a multi-platform in their front office and we have built alpha to be interoperable. So whether it's Charles River or some other provider or Charles River plus another provider as it will be in this case, we've got the ability to interoperate in that way and we'll be providing all the other services that we intended to.
Yeah, we don't anticipate, uh, anything like that. Going forward. Um, as we noted, uh, we had 2 new Alpha wins this quarter, uh, 3 Alpha installs. Um, in terms of the nature of the back of of our, uh, servicing P Revenue wins about half of that are back office related, um, which uh, that's a combination of pure back office Sales, Plus Alpha, which uh, now only comes with, uh, back office sales, we will not do something, uh, Alpha related without some kind of uh, back office element to it. Because uh, as you know, back office drives recurring fees, but also gives us the right to other, uh, Revenue sources, like deposits, like, um, FX like Securities Finance. Uh,
Ronald OHanley: More importantly, this was a client that worked with us right from the very beginning on the development side of all we were doing, so going back to the 2019 timeframe and all that development IP still remains with us, which is important because it's being extended to other clients.
And that. So, in terms of of that 1 clients, a very important client to us where it's very important partner to us, and basically, they changed 1 element of it. Uh, instead of, uh, going to a single platform, they're going to be, uh, multi-platform in their front office, and we have built Alpha to be interoperable. So, uh, whether it's Charles River or some other provider or Charles River, plus another provider, as it will be, in this case, uh, we've got the ability to interoperate, uh, in that way. And we'll be providing, um, all the other services.
Mark Keating: And Ken, it's Mark. Maybe I'll just add to that just to make sure. This was very contained to a software client contract re-scoping, so it had no impact on the servicing fee revenue to be installed, did not have an impact on our assets to be installed.
Elizabeth Lynn: That we intended to uh more importantly. Uh, this was a uh this was a client that worked with us, right from the very beginning, on the development, side of what we were doing. So going back to the 2019 time frame and all that development IP Still Remains with us uh which is important because it's being extended to other clients.
Mark Keating: It was very contained, as Ron said, to one particular aspect of a software agreement, which we renegotiated and took the appropriate kind of actions that we've talked about here and are notable. Okay, thank you.
Elizabeth Lynn: And and Ken, it's Mark, maybe I'll just add to that. Um, just to, to make sure, um, you know, this is was very contained to software client, uh, contract res scoping so it had no impact on the servicing fee. Um, Revenue to be installed, did not have a impact on our assets, to be installed. It was very contained. As Ron said to, you know, 1 particular aspect of a software agreement which we um, you know, renegotiated and uh and took the appropriate kind of actions on our uh, that we've talked about here and our notables.
Elizabeth Lynn: Thank you.
Glenn Schorr: Our next question comes from Glenn Schorr at Evercore. Please ask your question. Hi, thanks very much.
Our next question comes from Glenn Shore at evercore, please ask your question.
Mark Keating: Maybe we could step back and ask just a big picture question of NII that feels a little different for you guys. And you've been consistent in talking about something in the range of flat year-on-year after a good 24, but it feels like the NIM has moved lower more so than others and balances your thought process on moderating is more so. Is there something maybe related to your client base that's a little bit different? I appreciate the full package of operating leverage and better margins and all that. I just want to focus on NII. Yeah, thanks, Glenn.
Glenn Shore: Hi. Thanks very much.
Speaker Change: Um, maybe we could step back and and ask just the big picture, question of knee that deals a little different for you guys. And you've, you've been consistent in in talking about something in the range of flat year and year after good 24. But feels like the Nim has moved lower more. So than others and balances your thought processes are moderating is more. So is that did is there something maybe related to your client?
Base. That's a little bit different. I appreciate the full package of operating leverage and better margins, and all that. I'm just want to focus on knee for a sec.
Mark Keating: It's Mark. I mean, let me take you through this kind of two-parter there. One was kind of our overall NII guide, and then secondly, there's, I think, a specific question on NIM, which I can get at as well. So, First, I'd say our guide, as you mentioned, is generally consistent with our original outlook of flat year-over-year. I said roughly flat because there's still some amount of variability of the factors that we always talk about in terms of rates and deposit mix and levels. I think now that we're halfway through the year, you'd expect that we'd be able to start to narrow, possibly narrow the outcome that we're seeing here.
Yeah, thanks glance Mark. Um, Let me let me take you through. Um, this kind of 2 part of their 1 was kind of our overall nii guide and then the secondly um, is I think a specific question on Nim which I can get at as well. Um, so
Mark Keating: But again, we feel good about being able to continue to deliver on our guide of roughly flat standing here today. If you look at the first half of 2025, NII has been roughly flat to slightly down versus, again, the record year we had in 2024. The first half was down about 0.6 percent versus the first half of last year. We're tracking well to our guide, given some puts and takes that I can get into in a little more detail. Again, holding NII flat to a record year after 6 percent growth last year means we're delivering on our guide and executing well in terms of what we've laid out for you.
Mark Keating: We understand how important NII is, obviously.
Original Outlook of, you know, flat year-over-year and I said, roughly flat because there's still some amount of variability of the factors that we always talk about in terms of rates and deposit mix and levels. Um, you know, I think now now that we're halfway through the year, you'd expect that we'd be able to start to narrow, you know, possibly narrow the uh the outcome that we're seeing here. Um, but again we feel good about being able to, uh, you know, continue to deliver on our our guide of roughly flat. You know, standing here today. You know, if you look at the first half of 2025 and II has been roughly, you know, flat to slightly down versus again. The record year we had in 2024. Uh, first half was down about 0.6% versus the first half of last year. So we're tracking well, uh, to our guide, you know, given some puts and takes that I can get into um, and a little more detail. Um, so again holding nii flat to a record year after 6% growth last year, you know, means we're delivering on our guide and you know, executing well in terms of what we've laid out
Mark Keating: If we unpack the NII guide with a little more detail, and I'll frame it in the same way that we've been doing it since January and then again in April, using the four buckets of drivers and describing what the impact is to us as a firm in terms of tailwinds and headwinds. The first one would be deposit levels. Obviously, you saw those go up this quarter. Interest-bearing deposits have certainly provided upside versus our expectations in what we talked about in January and then again in April, while non-interest-bearing deposits have actually largely played out as expected, notwithstanding an early pop in the second quarter.
Speaker Change: For you. And you know, we understand how important and II is obviously. Um but you know if we unpack the knee guide with a little more detail,
And I'll frame it in the same way that we've been doing it, you know, since January, and then again in April, you know, using kind of the 4 buckets of drivers and describing what the impact is to us as a firm in terms of Tailwinds and headwinds. So you know, the first 1 would be, you know, deposit levels and obviously you saw those um, you know, go up this quarter. So
Mark Keating: We did have a near-term benefit in April during the peak of market volatility and uncertainty. However, in May and June and then again as we sit here in mid-July, we have seen some normalization in deposit balances since the quarterly high point in April. I'd also point out the majority of the spike in asset and deposits that we saw happened in lower spread buckets like market rates and exception rates, and so they did carry a more limited benefit for us. So mix is important. So while deposits are up about 7% sequentially, our non-interest-bearing balances where we have the widest liability spread, that was down sequentially roughly a billion.
Mark Keating: So we think deposits will remain somewhat elevated, but we do expect to see some leveling off over the coming months, and we'll obviously continue to track that closely. In terms of other impacts, again, to us as a firm, our loan growth we've talked about. That's also played out as expected. It's been a tailwind year over year, and I can talk about that a little bit more in depth. The investment portfolio reinvestment, we talked about about $4 billion a quarter at 100 to 150 basis points. In terms of benefit there, given where rates are, we're seeing it more at the lower end, around 100 basis points.
Speaker Change: So, you know, interest bearing deposits have certainly provided, you know, upside, uh, versus our expectations. Uh, in what we talked about in January, and then again in April, you know, while non-interest bearing deposits have actually largely played out as expected. Notwithstanding, you know, an early pop, uh, in the second quarter. Um, you know, we did have a near-term benefit in April, you know, during the peak of Market volatility and uncertainty, you know, however, in May, and June. And then, again, as we sit here in mid July, we have seen some normalization in deposit, balances, you know, since the quarterly High Point in April. Um, I'd also point out the majority of the spike in assets and deposits. That we saw happened in uh lower spread buckets like Market rates and exception rates. And so they did carry a more limited, you know, benefit for us. Uh, so mix is important. So, while deposits are up about 7% sequentially are non-interest-bearing, balances, uh, where we have the widest liability spread, you know, that was down, sequentially, roughly a billion.
Speaker Change: Um so we think deposits will remain like somewhat elevated, um but we do expect to see some leveling off over the coming months and we'll obviously continue um, to track that closely. Uh, you know, in terms of other uh, impacts again to us as a firm, our loan growth. We've talked about that's also played out as expected. It's been a Tailwind year over year and I can talk about that a little bit more in depth. The Investment Portfolio reinvestment. Um, you know, we talked about about 4 billion a quarter at 100 to 150 basis.
Mark Keating: You know, which brings us then to, like, the major, you know, bucket for us, which is short-term rates. And as we've discussed previously, we are an asset-sensitive bank. We've seen rates come down faster than expected. If you look at the U.S. Treasury curve, the 2, 3, 5-year, rates are down 50 to 60 basis points over the first six months of the year on a spot basis. Also, non-U.S. central banks, you know, while the ECB and the Bank of England have largely been in line with expectations, albeit a little more aggressive in the case of Bank of England in terms of timing, other central banks have actually been relatively more aggressive in lowering of their rates, such as the Reserve Bank of Australia and Canada.
Speaker Change: This point um, you know, in terms of benefit there given where rates are we're seeing it more at the lower end uh around 100 basis points.
Mark Keating: You know, I've talked previously about a cut at the ECB or Bank of England being worth, you know, about $5 to $10 million per cut per quarter for 25 basis points. And while, you know, Australia and Canada may not be that large to us, you know, when you start to look across, you know, several of the central banks, you know, it does start to add up as a headwind. So hopefully that helps, you know, in that we're putting all this together, we're kind of standing back from it, we have some positives, like short-term pop in interest rates and interest bearing deposits, some negatives, like the pacing of cuts.
Speaker Change: You know, which brings us then to, like, the major, uh, you know, bucket for us, which is is short-term rates. Uh, and as we've discussed previously, we we are an asset sensitive Bank. Uh, we've seen rates come down, you know, faster than expected. If you look at the US Treasury curve, the 2 3, 5 year rates are down 50 to 60 basis points. Over the first 6 months of the year on a spot basis. Um, also non us central banks, you know, while the ECB and the bank of England have largely been in line with the expectations. Um, I'll be a little more aggressive in the case of uh, uh, Bank of England. In terms of timing, other central banks have act, uh, actually been relatively more aggressive in their lowering of their rates such as the Reserve Bank of Australia. And Canada. You know, I've talked previously about
Mark Keating: But we see it as being relatively balanced, you know, which brings us back to a guide of roughly, you know, flat, you know, to our record year of NII in 2024. So again, we understand how important NII is. We've been pleased with our ability to deliver on our guidance. You know, this is 20% of the revenue of the company.
Speaker Change: a cut at the ECB or Bank of England being worth, um, you know, uh, about 5 to 10 million per cut per quarter for 25 basis points. And while, you know, Australia and Canada may not be that large to us, you know, when you start to look across, you know, several of the central banks, um, you know, it does start to add up as a headwind. Um, so hopefully that helps, you know, and that we're, you know, putting all this together, we're kind of standing back from it. We have some positives like, uh, short term pop and interest rates and interest bearing deposits. Um, some negatives, like, the pacing of cups, um, but we see it as being relatively balanced,
Mark Keating: And when we stand back and look at what we are delivering for our shareholders, it's really the momentum across the fee revenue franchise, which is roughly 80% of the firm's revenue, which for us is really the story. That was awesome.
Speaker Change: Which is roughly 80% of the firm's Revenue which for us is really the story.
Mark Keating: I really appreciate all that.
Ronald OHanley: Ron, I got one quick one for you.
Ronald OHanley: I can't resist. You guys have been great acquirers in the past and integrators. You almost got BBH done, but through no fault of your own, that one fell through. I'm curious if you'd share any thought process with us on what you thought when you saw the news, when we saw the news that maybe BK and we're doing the dance. I'm just curious what crossed your mind and how we should think about that.
Ron O'Hanley: That was awesome. I really appreciate all that Ron. I I got 1 quick 1 for you. I can't resist. Uh, you guys have been great acquires in the past and integrators.
Ronald OHanley: Well, you know, I'm not going to comment on market rumors either about ourselves or others, but our view on M&A remains consistent. We have a lot of confidence in the organic growth capability and potential of our franchise, but we've always viewed M&A as an important complement to our strategy. But it's a high bar, right? You have to show that is it actually a good tradeoff for shareholders to sacrifice a return on capital to some kind of investment that's going to yield some kind of return? And so it's a high bar. But as you know from us, we evaluate these things.
Ron O'Hanley: Um you almost got BBH done but through no fault of your own that 1 fell through. What? I'm I'm curious if you share any thought process with us on what you thought, when you saw the news, when we saw the news that maybe BK and Northern were were doing the dance, I'm just curious. Uh, what what cross your mind and and how we should think about that.
Ronald OHanley: Our focus of late has largely been around capability building. So if you think about some of the relatively small investments we've done over the past year or two, Smallcase, the technology platform in India, Ethic, the direct indexing player, the investment in investment, all about helping to augment our capabilities and propel us forward. We will always look for opportunities to build scale, and you've seen us do some of those in the past. But right here, right now, we're quite happy with our position, and we'll continue to focus on serving our clients well and building out our capabilities.
Ron O'Hanley: Oh, you know, I'm I'm not going to comment on Market rumors either about ourselves or others but um, our, our view on m&a remains consistent. Um, we uh, have a lot of confidence in the organic growth capability, uh, and potential of our franchise. Uh, but we've always viewed m&a as an important complement to our strategy. But it's a high bar, right? You have to, uh, show that, um, is it actually, uh, or is, is it a good trade-off for shareholders to sacrifice a return on Capital to some kind of investment? That's going to, uh, yield some kind of return. And so, it's a high bar and, uh, but it's, you know, from us. Uh, we we, we evaluate these things. Our focus is, uh, of late has long.
Ronald OHanley: And if something comes along that makes sense, we'll evaluate it.
James Mitchell: I appreciate Our next question will come from Jim Mitchell with Sequel Global. Your line is open. You may ask your question.
Largely been around capability building. So if you think about some of the, uh, relatively small and Investments, we've done over the past year or 2. Um, small case, the technology platform in India. Uh, ethic the direct indexing player, the investment and investment all about helping to augment our capabilities and Propel us forward. Um, we will always look for opportunities to uh, to build scale. Um, and you know you've seen us do some of those in the past. But um, right here right now. We're quite happy uh, with our position and we'll continue to focus on serving our clients well uh and building out our capabilities and it's something comes along that makes sense. We'll evaluate it.
Okay, cool. I appreciate it. Ron
Speaker Change: Our next question.
Ron O'Hanley: Will come from Jim Mitchell with C for Global.
James Mitchell: Hey, good afternoon. Maybe just talk a little bit about the asset management business record net inflows in the institutional channel and long-term assets. That's a pretty big change from what we've seen in recent years. So can you just talk to, is there anything kind of lumpy in there that maybe not to get too excited about, or do you feel like there's a real turn in sort of the organic growth in that space? And how do we think about the fee rates in the long-term institutional AUM space? Thanks.
Speaker Change: Your line is open, you may ask your question.
Speaker Change: Hey, good afternoon. Um, maybe just talk a little bit about the asset management business, um, record net inflows in the institutional, uh, channel in long term assets. That's, uh, a pretty big change of what we see in a recent year. So, um, could you just talk to you? Is there anything kind of lumpy in there that maybe uh, not to get too excited about or do you feel like there's a real turn in sort of the organic growth in that space? And and how do we think about the fee rates in, in the long term institutional AUM?
Ronald OHanley: Yeah, so I'll answer for the second quarter first. For the second quarter, it's a little bit of both. We have seen and talked about consistent organic growth in the institutional channel, mostly in defined contribution. And that's in the US, but not just the US. That's been led by a combination of innovative product. We were the first to be out the door with some kind of an income protection product embedded in a target date fund. We've got a... We're doing lots of different partnerships to add innovation to target date funds. And we're doing that not just in the US, but outside the US.
Speaker Change: Space. Thanks.
Ronald OHanley: In addition, in the second quarter, we had a large new mandate from an existing client in Asia Pacific. And so that... have helped drive that number, which was a record quarterly inflow for us in the institutional business. But kind of, if you will, on a structural basis here, the investment in DC, for us, has been very important. We're very tied in with the investment consultants. We've got a very strong product set that we're constantly innovating in, bringing both our know-how to it, but also, when it makes sense, bringing in partner know-how.
Yeah, so, uh, the ant I'll answer for the second quarter, uh, first for the second quarter. It's a little bit of both. Um, we have seen and talked about, uh, consistent organic growth, um, um, in the institutional Channel mostly in defined contribution, uh, and that's in the US, but not just the US, uh, that's been led by a combination of innovative product. You know, we were the first to be out the door with some kind of an income, uh, protection product embedded in a Target date fund. Uh, we've got a, uh, we're doing lots of different Partnerships to add Innovation to Target date funds, uh, and we're doing that not just in the US. But uh, but outside the US in addition, in the second quarter uh we had a large uh new mandate uh from an existing client in uh Asia Pacific. And so that uh that
Helped drive that number which was a record. Uh, quarterly in flow for us in the in the institutional business, but kind of on a on a, if you will on a structural basis here, the investment in DC uh for us has been very important. Uh we're very tied in with the investment Consultants. Uh we've got a uh a very strong product set that we're constantly innovating and bringing both our know-how to it. But
Ronald OHanley: And so we're quite bullish on that segment. Okay, that's helpful.
Speaker Change: Also, uh, when it makes sense, uh, bringing in partner, know how. And so, we're quite bullish on that segment.
Ronald OHanley: And maybe just pivoting to regulation. It seems like some of your bigger peers benefit from the SLR being lowered. You guys already had some exemptions. So you're still somewhat constrained by the tier one leverage ratio. Do you in your conversations with regulators, do you think there's any acknowledgement of the tier one leverage constraint? And do you think that could also be lowered in the future? What's your sense?
Ronald OHanley: Jim, so I mean, you've portrayed it accurately. We've gotten relief earlier. So Tier 1 leverage, as it relates to leverage constraints, that is the binding constraint at this moment. I think there's some acknowledgement amongst regulators, this is something to be looked at. I don't think it's something that's going to be looked at immediately. You know, it may take till the end of the year for that, because there's other things, obviously, around G-Cyb and stress tests and things like that that are reportedly higher up on the agenda, but I would say that we're in this period where I think 15, 16, 17 years after the financial crisis and all the changes that were put in place after that.
Speaker Change: You in your conversations with Regulators. Do you think there's any acknowledgement of the Tier 1? Leverage constraint? And do you think that could also be uh, lowered in the future? What's your sense?
So, I mean you you you portrayed it accurately, we'd gotten relief earlier. Um, so uh, Tier 1, leverage, as it relates to uh leverage uh constraints that is the uh The Binding constraint at this moment. Um, I I think there's uh, some acknowledgement amongst Regulators. This is something to be looked at. I don't think it's something that's going to be looked at immediately. Um, you know, it may take till the end of the year for that because there's other things, obviously around uh, around G sub and and thrust test, and things like that that are, uh, reportedly higher up on the agenda. But I, I would say that we're in this period where I, I think,
Ronald OHanley: I think there's, for the first time, at least in the U.S., there's a real look at this. And while I don't think any of us expect or even are asking for a, you know, a massive across-the-board rollback, I think that you're seeing a very sensible look both within agencies and across agencies. And I think that will play out favorably both in regulation and also even how the supervisory environment works. And so it's a, I think it's a constructive environment now for large GSIBs. Right. Okay. Thanks so much.
15, 16 17 years after the financial crisis, and all the changes that were put in place after that. I think there's um, for the first time at least in the US, there's a real look at this. And well, I don't think any of us expect or even are asking for a, you know, a massive across the board roll back. I think that you're seeing a very sensible look, uh, both within agencies and across agencies and I think that will play out favorably, uh, both in regulation. And, and also even how the, the, the supervisory,
Speaker Change: Uh, environment works. And um, so it's a I think it's a constructive environment now, uh, for large G Subs.
Right? Okay, thanks so much.
Alexander Blostein: Our next question will come from Alex Blostein with Goldman Sachs. Your line is open. Please ask your question. Hey, good afternoon. Thanks for the question. Ron, I want to go back to the sales momentum you highlighted and the institutional service and business. And again, I appreciate the disclosure you guys put out there a couple of quarters ago, both on the feedback log and the few wins that's obviously relevant. In the last several quarters, maybe a year or so, the redemptions have been fairly elevated. Obviously, part of that is BlackRock. But are you, I guess, aware of anything notable on the redemption side that could sort of offset some of the strong wins you're having?
Our next question will come from Alex Blossom. With Goldman Sachs your line is open. Please ask your question.
Hey, uh, good afternoon. Thanks for the question. Um, Rod I want to go back to the, the, the sales momentum you highlighted in the institutional service and business. And again, appreciate the the disclosure you guys put out there a couple of quarters ago, both on the feedback log in the future. That's obviously relevant in the last
Ronald OHanley: And maybe a little bit more color on the sources of these wins and how investors should think about sustainability of this new business within servicing, potentially turning kind of the growth alga around in that part of the business.
Ronald OHanley: Alex, let me let me start. I think that we We've been quite consistent now going back two or three years that we had recognized we need to make some changes on the servicing side. And we also, at the same time, were investing. over the past several years in our operating model, which drives service quality. And service quality does two things for you. One, it drives retention rates up. And two, it gives you the right to win, right to win with existing clients, to deepen relationships with existing clients, but also to be able to show up with new clients or takeaway clients.
Speaker Change: several quarters you know maybe maybe a year or so the redemptions have been fairly elevated. Obviously part of that is black rock but are you I guess aware of anything notable um on the Redemption side that could sort of offset. Um some of the strong winds you're having and maybe a little bit more color on the sources of these winds and how the investors should think about sustainability of this new business within servicing potentially turning kind of the growth Olga around in that part of the business.
Speaker Change: This is Alex. Let me let me start, I think that um, you know, we
Speaker Change: We've been quite consistent now going back 2 or 3 years that we had recognized. Uh we need to make some changes on the servicing side and we also at the same time we're investing heavily over the past several years in our operating model which drives service quality and service quality is does 2 things for
Ronald OHanley: And that's all playing out as we said it would. So we do not see any kind of elevated loss rate. In fact, we're quite pleased with where our retention rates are now. In terms of the nature of the clients, again, alpha is a very important platform for us. So that's driving retention rates. That's driving fee wins kind of across the stack, front office, middle office, back office. But if we really think about it as... If it doesn't, as I said earlier, if it doesn't come along with back office, then we're really not interested in it, or it'll be a lower priority for us.
1 could drive retention rates up and 2. It gives you the right to win, uh, right to win with the existing clients of deep in relationships with existing clients, uh, but also to, uh, be able to show up with new clients or takeaway clients and and that's all playing out as we, uh, as, as we said it would. So we do not see any kind of, uh, any kind of elevated, um, uh, loss rate. In fact, we're quite pleased with where our retention rates are now, uh, in terms of the nature of the clients, um, again, Alpha is a very important platform for us. Um, so that's driving, uh,
Speaker Change: There, that's driving fee. Wins kind of across the stack, front office middle office back office. Um, but if we really think about it as
Ronald OHanley: What we're also finding is, is that there's an increasing appeal for alpha within the private space, as we're seeing an increasing appeal just in general, as the private markets move from an in-source market to an outsource market.
Ronald OHanley: And then finally, our global footprint is really helpful, because we saw a lot of wins, a fair number of wins this quarter outside the U.S., which, again, shows the power of the global franchise here.
Mark Keating: And it's Mark, maybe I'll just jump in to offer a couple of maybe proof points and some context on that and to kind of maybe talk through how this has been building. This is not a kind of just, you know, recently we've started looking at posting these type of sales results. So, and I think I've talked about this before, you know, back in 2019 and 2020, we were doing $140 million, $160 million in servicing fee sales. And then we started to take that up, you know, in, you know, $250, $260, and $21, and $22. And that's when we started talking to all of you about setting, you know, a more aggressive target for that of the $350 to $400.
If it doesn't, as I said earlier, if it doesn't come along with back office, then we're really not interested in it, or it'll be a lower priority for us. Uh, what we're also finding is is that uh there's an increasing appeal for Alpha within the private space. Um, as we're seeing an increasing appeal just in general, uh, as the private markets move from an insource Market to an outsourced Market. Um, and then finally, our Global footprint is really helpful because we saw a lot of wins uh uh a fair number of wins this quarter outside the US um which again shows the power of the global franchise here.
Yeah, in May. It's Mark maybe I'll just jump in to offer a couple of maybe proof points and some context on on that and to kind of maybe talk through how this has been building. This is not a um kind of just, you know, recently we've started looking at posting these type of sales results. So
Mark Keating: And, again, that came from understanding our business. And we've talked you through this before, the kind of, you know, rubric we have around, you know, fee compression and, you know, deinstalled business each year. And we knew that that number needed to be much higher. So then we did, you know, we did $300 million in 2023, and then we did $380 million last year. And, you know, if I put it in context, we just talked about $145 million, you know, for the second quarter. And it was a very good quarter, and we've talked about how it can be lumpy and all that.
Mark Keating: But it was a very good quarter. And you go back and put that in context, that's more in the second quarter than we did in all of 2020. So, to me, that's like real change. That didn't just happen. You know, we changed our organization, our incentives. We focused on service excellence, like Ron talked about. And we invested in products and features and functionality. So we expect, you know, the performance to stay in that range. And we know we need to target that going forward. And with proper execution, that's going to really power the business forward.
Speaker Change: And then we started to take that up, you know, in uh, you know, 250, 260 and 21 and 22 and that's when we started talking to all of you about setting. You know, a more aggressive Target for that, um, of the 350 to 400 and again, that came from understanding our business. And we've talked you through this before that kind of, you know, rubric we have around, you know, the compression and and, uh, you know, deinstall business each year. And we knew that that number needed to be much higher. So, then we did, you know, we did 300 million in 23 and then, we did 380 Million last year. And, you know, if I put it in context, we just talked about 145 million, you know, for the second quarter and it was a very good quarter and we've talked about how it can be lumpy and all that, but it was a very good quarter and you go back and put that in context, that's more in the second quarter than we did in all of 2020. So to me, that's like a real change that didn't just happen. You know, we changed our organization, our incentives, we focused on service Excellence. Like, Ron talked about
Speaker Change: And we invested in products and features and functionality. So we expect uh, you know, the performance to stay in that range and we know we need to Target that going forward. Um and with proper execution, that's going to really power uh the business forward
Mark Keating: Gotcha. All right, great. That's very helpful.
Mark Keating: Mark, I wanted to follow up with you on your answer to Glen's question around NII and sort of how you guys are thinking about it on a forward basis. So, you know, obviously no 2026 guidance just yet, but as you sort of pointed to being, you know, asset sensitive bank, the forward curve is what it is. So help us maybe think about what are the things you guys could do and what are you working on to perhaps mitigate the effects of lower interest rates as you look out beyond this year? And importantly, is the interplay between NII and operating leverage.
Mark Keating: You guys have been focused correctly on both positive fee operating leverage and positive total operating leverage. Is that kind of total operating leverage dynamics still possible if NII sort of peaks and starts to go down?
Gotcha. All right, great. That's that's very helpful. Um, Mark, I wanted to follow up with you on, uh, on you answered to, uh, to go ask a question around knee, um, and sort of how you guys are thinking about it on the forward basis. So, you know, uh, obviously no 2026 2026 Guidance, just yet. But as you sort of pointed to being, you know, assets down to the bank, uh, the forward, curve is what it is. So, help us maybe think about what are the things you guys could do. And what are you working on to perhaps mitigate the effects of lower interest rates. Uh, as you look out Beyond this year and importantly, is the interplay between knee and and operating leverage, you guys have been focused, uh, correctly on both, um, positive fee, operating leverage and positive to Total operating Leverage is that kind of total operating leverage, um, Dynamic still possible. Uh, if an AI sort of Peaks and uh, starts to go down from here.
Yeah. Yeah. I mean thanks Alex. I guess at obviously you don't want to get into anything around, you know, 2026. I mean there are things that we you know have been doing in terms of looking at our um you know client deposit pricing. We've been looking at our balance sheet strategy. We've been looking at our Investment Portfolio. Um, so there's many things, you know, that we can look at and all those things that we have been, uh, and trying to gauge, you know, where we're going into 2026 with knee. But I think it's just, it's pretty early to start talking about that now.
Michael Mayo: Our next question will come from Mike Mayo with Wells Fargo.
Michael Mayo: Your line is open, please ask your question. Hi, I just wanted a clarification just for all the discussion here. So, did you benefit from heightened volatility and now you see that going down and NII is at a peak and now you see that going down. I guess, are you over-earning the way you look at things or not?
Speaker Change: Our next question will come from Mike met with Wells, Fargo, your line is open, please ask your question.
Hi, I just wanted a clarification just for all the discussion here. So did you
Mark Keating: Hi, Mike. It's Mark. I can start with that. And in terms of the volatility, so maybe let me talk a little bit about our FX, our markets business. And again, as we've said, we think that business performed very well in the second quarter. We saw and we did see some heightened FX volatility, but we also saw the payoff in our strategy of expanding geographically in continental Europe, for example, has been a big focus for us. We've increased our product mix, added some capabilities and things like derivatives. We've deepened our client engagement, both existing clients and new clients and privates and hedge funds, which, again...
Benefit from paying volatility. And now you see that going down and knee is at a peak. And now you see that going down, I guess, are you over earning the way you look at things or or not?
Mark Keating: those businesses, you know, the private markets business, we've been talking about that. I mean, that has been growing, I think, year-over-year for 19%. And again, that brings new clients, new opportunities for our markets business as well. And that's what really powered sequentially FX trading being up 18%, you know, sequentially and year-over-year 27%, again, X notables. So in how we look at the second half, you know, with the continued, you know, political and economic risks, you know, we expect, you know, the investment climate is going to remain challenged. The volatility we've seen is really from multiple sources, so geopolitics, national economics and politics, differing central bank policies.
Hi Mike, it's Mark, I can start with that and um, you know, in terms of the volatility. So maybe let me talk a little bit about our FX. Um, you know, our Market's business and um again as we've said, we think that business performed very well in the second quarter we saw and we did see some heightened FX volatility, but we also saw the payoff uh, in our strategy of expanding, uh, geographically and Continental Europe. For example, has been a big Focus for us. Um, you know, we've increased our product mix, you know, added some capabilities and things like, derivatives, we've deepened our client engagement, you know, both existing clients and and new, uh, you know, new clients and privates and and hedge funds, which um, again, uh,
That was businesses, you know the private markets business. We've been talking about that. I mean that has been growing I think year over year through 19%. Um and again that brings new clients, new opportunities for our markets business as well. Uh, and that's what really powered sequentially FX trading being up 18%, you know, sequentially and year-over-year, uh, 27% again, X notables and so in how we look at the second half.
Mark Keating: So that type of divergence between countries we think is reflected in the FX markets. And so while, you know, a replay of the second quarter is not our base case, you know, we do expect volatility to likely be more sustained. We're going to have to see where it plays out from here. But hopefully, that gives you a little more color on the market side.
Ronald OHanley: Mike, John, I'd add two things to that. Heightened volatility in markets was really an April event, real spike in volatility then, but it came back down, you know, this is as well as anybody. So I think that after April, the benefit of our deep and client relationships were important as anything here. On the other hand, I get the cyclical high point here, that you come down to that volatility. On the other hand, seems like some of the core businesses are doing better, like Charles River, quarter over quarter, that some kind of growth rate, you've been up tiering the sales force, are you still upgrading?
Speaker Change: Side.
Ron O'Hanley: Mic. Uh, it's Ron. I've got 2 things. I got 2 things to that. Um, the the heightened volatility in markets was really an uh, an April event, uh, real spike in volatility then but it came back down. You know, this is as well as anybody. So, um, I, I think, uh, after April the benefit of our deep and client relationships were important, it's um, as uh, as anything here.
Ronald OHanley: Seems like you have some core business momentum that you didn't have a few years ago. Am I looking at the right data? Do you have anything to substantiate that? Yeah, I mean, you are, and I'll just pick up on what Mark said a few minutes ago. $145 million in servicing fee sales in 2020. $145 million of servicing fee sales in the second quarter of this year. And I think that actually does paint a good picture. Secondly, I would just point to the guide. And we try and be very straight with you when we give guides.
Uh, on the other hand, I I get the the cyclical High Point here um that you come down to that volatility. On the other hand seems like um some of the core businesses are doing better like Charles River quarter of a quarter. That's some kind of growth rate, you've been up to hearing the sales force. Are you still upgrading seems like you have
Ron O'Hanley: some Core Business momentum that you didn't have a few years ago, um,
Ron O'Hanley: Am I?
Speaker Change: Looking at the right data. It's it's everything is substantiate that. Yeah I mean you you are and I I'll just pick up on what Mark said a few minutes ago um 145 million in servicing the sales in 2020 145 million of servicing fee sales in the second quarter of this year. Um and I I think that actually does uh paint a good picture. Secondly I would just point to the guide and uh we try and be very straight with our with you.
Ronald OHanley: At the beginning of the year, we gave you a 3% to 5% guide. We're giving you a 5% to 7% guide now, which I think reflects what we're seeing in terms of the increased power of the franchise. All right, thank you.
Speaker Change: Um when we give God, the beginning of the year, we uh gave you a 3 to 5% guide. Uh we're giving you a 5 to 7% guide now, which I think reflects uh what we're seeing in terms of uh the increased power of the franchise.
Speaker Change: All right. Thank you.
Betsy Graseck: Just a reminder, analysts are allowed one question and one follow-up. Thank you. Our next question will come from Betsy Graseck with Morgan Stanley. Your line is open. Hi, good morning. Hi Betsy. Hi.
Speaker Change: Just a reminder.
Analysts are allowed, 1 question and 1 follow-up.
Thank you. Our next question, will come from Betsy gresik with Morgan, Stanley. Your line is open.
Betsy gresik: Hi, good morning.
Ronald OHanley: I have a question on an announcement that was made on July 1st with University of California on building a super app for individuals. And it was interesting. I wanted to understand the thought process behind investing in this. And is this a one-off or are you anticipating broadening this out to other participants, partners? And is there any way this would feed into other parts of State Street or is it a goodwill venture?
Speaker Change: I thought see morning.
Hi. Um I have a question on an announcement that was made on July 1st uh with University of California on building a super app for
Speaker Change: individuals.
Speaker Change: And it was interesting. I I wanted to understand, uh, thought process behind in, you know, investing in this and is this a 1 off or, or are you anticipating?
Ronald OHanley: Yeah, so, Betsy, personally, the University of California is a longtime partner of ours. And this initiative is quite consistent with our strategic commitment to the wealth business. Within State Street Investment Management, wealth now is about little over a trillion, about 1.2 trillion of our total assets and growing quite rapidly through the ETF channel. And we have a commitment to the wealth services business, but part of this is an overall belief that the democratization of wealth is continuing unabated. And in spending some time with the University of California, we realized that they were a quite interesting partner, because if you add up all of their stakeholders there, so you look at students, faculty, employees, and alumni, there's 350,000 potential stakeholders there.
Speaker Change: Um, broadening this out to other participants Partners um, and is there. Anyway, this would feed into other parts of State Street or is it a Goodwill Venture? Just thank you.
Speaker Change: Yep. So, uh, Betsy personally, the University of California, uh, it's a, it's a long time, partner of ours. Um, and this initiative is quite consistent with our strategic commitment to the wealth business, um, within State Street Investment Management, you know, wealth now is about, uh, um, it's a little over a trillion about 1.2 trillion, uh, of our total assets and growing quite rapidly uh, through the ETF channel. Uh, and we have a a a a a commitment to the wealth Services business. But part of this is an overall
Speaker Change: Uh, belief that the that the democratization of wealth is continuing on abated.
Ronald OHanley: They're quite close to most of them and it becomes an interesting platform to start to experiment with with new sorts of offerings. So it's a bit of an experiment for both of us but certainly our objective would be to develop something that firstly worked for the University of California and then was leverageable in other places. So we look at it as a way to, at scale, develop some innovative offerings for the wealth market consistent with this idea of democratizing investing and being able to extend that, or potentially being able to extend that.
And um in spending some time with the University of California uh uh we realized that they were quite interesting partner because if you add up all of their stakeholders there so you look at uh students faculty employees and alumni uh there's 350,000 potential stakeholders there.
Speaker Change: They're quite close to most of them. And, uh, it becomes an interesting platform to start to experiment with, uh, with new sorts of offerings. So, uh, it's a bit of an experiment for both of us, but certainly are objective, would be to develop something that firstly, uh, work for the University of California.
Speaker Change: Uh, and then was uh, leverageable in other places.
Speaker Change: So we we look at it as a way to at scale, uh develop some uh, Innovative offerings, uh, for the wealth Market, consistent with this idea of democratizing invest investing, um, and being able to extend that or potentially being able to extend that elsewhere.
Okay, thank you.
Abraham Poonwalla: Our next question will come from Abraham Poonwalla with Bank of America. Your line is open. Please ask your question. Thank you. Just a couple of follow ups. One on capital and apologize if you clarified on this, but I think I heard you. talk about 80% payout for the full year.
Speaker Change: Thanks Betsy.
Yeah, thank you. Uh, just a couple of follow-ups.
Speaker Change: 1 on Capitol and apologize if you clarified on this. But I I think I heard you.
Mark Keating: Just give a sense, remind us in terms of, from a capital perspective, what we are managing to, in terms of the ratio, feels like you have a lot of flexibility there, and what stops you from leaning in and doing more in buybacks than the 80%? Thanks. Yeah, sure.
Mark Keating: It's Mark. Let me just, maybe a two-parter. I'll talk a little bit about our capital return, and then I'll talk a little bit about, you is really the ratio that we're managing to here. So you're right. I mean, we've previously talked about 80% payout. So we've also highlighted previously that our intention is to return capital at a progressive cadence through the year. So you saw that going from Q1 up into Q2 now at 517, which was an 82% payout, with 320 in Q1. So we expect to move through the third quarter and then into the fourth quarter, anticipating additional step-ups as we move to deliver on our overall payout target of 80%, subject to market conditions and other factors, obviously.
Speaker Change: Uh, talk about 80% payout for the full year, just give us a sense. Uh, remind us in terms of from a capital perspective, what we are managing, uh, to in terms of the ratio, feels like you have a lot of flexibility there and what stops you from leaning in and doing more in BuyBacks than the 80% thanks? Yeah, sure it's Mark. Let me just maybe a 2-part or I'll talk a little bit about our Capital return and then I'll talk a little bit about, you know, C1, which is is really the ratio that we're managing to here. So, um, so you're right. I mean, we've previously talked about 80% payout so we've also highlighted, you know, previously that, you know, our intention is to, you know, return uh, Capital at a progressive Cadence through the year. So you saw that um you know going from q1 up into Q2 now at 517 which uh was an 82% payout uh it was 320 in uh in q1. So you know, we expect, you know, to move through the third quarter and then into the fourth quarter,
Mark Keating: So that's kind of still our guide, and that's what we're committed to.
Mark Keating: In terms of CET1, I think we've talked about this before. Given the current environment, we continue to prudently manage toward the higher end of our 10% to 11% DE1 target range. You should generally expect us to continue in that range and managing to that as our clients really appreciate the value, financial stability and soundness, and appreciate us running the business at healthy capital levels. And also, I'd say we're cognizant of our own sensitivities around our RWA stack, which can swing several billion at quarter end with market volatility, and that's what you saw this quarter with our 10.7 print.
Mark Keating: So still, again, very much in line with what we've talked about over the last few quarters.
Speaker Change: Um, you know, anticipating additional step-ups as uh as we move to deliver on our overall payout Target of 80%, you know, subject to market conditions and other factors obviously. So that's kind of still our guide and that's that's what we're committed to, um, in terms of, uh, C1, I think we've talked about this before, you know, current, you know, given the current environment we are, you know, continue to prudently manage toward the higher end of our 10 to 11, uh, 11% C1 target range. Uh, you should generally expect us to continue, uh, in that range and managing to that as our clients. You know, really appreciate the value, uh, you know, Financial stability and soundness and appreciate us running the business at healthy Capital levels. Um, and also I'd say, we're cognizant of our, um, own sensitivities. Uh, you know, around our our wa stack which can swing, you know, several billion that quarter end um with Market volatility. And that's what you saw this quarter right with our 10.7 uh print. So you know, still again.
Mark Keating: Thanks, Mark. And just one quick, I think you talked about deposit balances elevated but maybe drifting lower in the back half. Just give us a sense of when you think about non-interest betting or overall deposit balances, what gets them growing again? Is there a trough that we should look at from a cycle standpoint or just how you're thinking about it? Yeah. So maybe a couple of things. First, in terms of overall levels, so Ron mentioned it earlier too, April was really the month that had the most volatility and we saw the quarterly period spike, right?
Speaker Change: Very much in line with what we've talked about over the last, uh, last few quarters.
Speaker Change: Thanks Mark in just 1 quick. Uh I I think you talked about deposit balances elevated but maybe
Mark Keating: That's what happened in April. And then we saw deposit levels overall come down in April, sorry, in May and then again in June. And then sitting here in mid-July, our deposit levels are not too far off like our expectations that we had given back in April around the kind of high end of the $2.30 to $2.40. It's not quite down back to that high end of that range, but it's approaching it, sitting here kind of middle of July. So that's number one. Number two on non-interest bearing, again, it was down a billion quarter to quarter.
Drifting lower in the back half just, uh, give us a sense of when you think about non-interest bearing or overall deposit, balances, what gets them growing again? If they're a trough that we should look at from a cycle standpoint or just how you're thinking about it? Yeah, yeah. So maybe a couple things first in terms of overall levels. So um, you know, in Ron mentioned that earlier too April was really the month that had the most volatility and we saw the quarterly like period Spike, right? That's what, um, what happened in April. And then we saw, um, deposit levels, overall, you know, come down in April, uh, sorry in May. And then again in June. And then, you know, sitting here in mid July, you know, our deposit levels are, you know, not too far off like our expectations that we had given back in April around the kind of high end of the 230 to 240. It's not quite down back to that high, end of that range, but it's approaching it, you know, sitting here kind of, uh, middle of July. So that's number 1, uh, number 2 on non-interest.
Mark Keating: We expected, as we've said before, we expect that to continue to moderately decline, maybe into the low 20s is what we've talked about. So that's kind of generally deposit levels.
Mark Keating: Your question about raising deposits, the best way that we can raise deposits is to sell and install back office business. right? Custody brings deposits. Custody brings FX trading revenues, securities finance revenues, all the kind of good stuff that goes around, you know, custody as the hub of the company. So, you know, $444 billion in to-be-installed revenue, of which roughly 60% of that is back office, which means custody. That's a good sign in terms of our ability to generate, custody, client-related deposits. And if we keep the flywheel spinning on the servicing fee sales target, that's what we'll see.
Bearing, um, again it was down a billion quarter to quarter. Um, you know we expected as we've said you know, before we expect that to continue to, you know, moderately decline, you know, maybe into the low 20s is what we've talked about. Um, you know, so that's that's kind of generally a deposit levels. You know your question about raising deposits. You know, the best way that we can raise deposits is to sell and install back office business.
Speaker Change: Write custody brings deposits.
Speaker Change: Custody brings FX trading Revenue, Securities, Finance revenues, all the kind of good stuff that goes around, you know, custody as the Hub of the company. So, you know, 444 billion in 2B installed revenue of, which roughly 60% of that is back office, which means custody. Um, that's a good sign in terms of our ability to generate, you know, custody client related deposits. Uh, and if we keep the flywheel spinning on the servicing fee sales Target, um, that's what we'll see.
Mark Keating: Thanks, Mark.
Speaker Change: Thanks Mark.
Brian Bedell: Our next question will come from Brian Bedell with Deutsche Bank. Your line is open. Please ask your question. Great, thanks. Good afternoon, folks. Just one housekeeping one quickly and then a longer term one.
Speaker Change: Our next question will come from Brian Bedell with Deutsche Bank? Your line is open. Please ask your question.
Mark Keating: The housekeeping is just the, your assumptions on market returns for the second half that underpinned the 5 to 7% guide. Yeah, sure. Let me take the opportunity to maybe take you quickly through kind of the macro points that are underpinning the guide. And I guess I'll just start with the equity market. So, you know, entering the year, right, we expected 5% point to point, which implied average market levels up, you know, 8% for the year. Obviously, you know, as we sit here today, we're tracking a bit better than the assumptions we had coming into the year.
Speaker Change: Great thanks. Good afternoon, folks. Um, just 1 housekeeping 1 quickly and then a longer term, uh, 1. Uh, the housekeeping is just the, um, your, your assumptions on market returns for the second, half that under uh underpin, the 5 to 7% guide.
Speaker Change: Through kind of the macro.
Mark Keating: So, you know, that's constructive in our current guide. So you expect that to be a tick higher. You know, that said, we've seen, you know, considerable volatility over the past quarter. So we'll continue to monitor developments there and see how the averages go up from here. So that should, you know, cover the equity market appreciation side.
Points that are underpinning, the guide and I guess I'll just start with the equity Market. Um, so, you know, entering the year, right? We, we, we expected 5% point to point which implied, average market levels up, you know, 8% for the year. Um, obviously, you know, as we sit here today, uh, we're tracking a bit better, uh, than the assumptions, we had coming into the year. So, you know, that's constructive in our current guide. So you expect that to be a tick higher, um, you know, that said we've seen, you know, considerable volatility over the past quarter. So, you know, we'll continue to monitor developments there and see how the average just go up from here. So that should, you know, cover the equity. Uh, the, you know, Market appreciation side.
Ronald OHanley: Great. And then a longer-term one for Ron.
Ronald OHanley: Just on the concept of tokenization of equities and ETPs and other assets, how are you thinking about that longer-term, I guess just your view, and whether you think that will evolve more slowly over time, or do you think there's a stronger movement, and maybe some of the pros and cons of that, and what is State Street doing to you know, to be a participant in any kind of trend? Yeah, Brian. So we think about it in two ways. One, as a bank ourselves, but maybe more importantly, as an important servicer to other asset managers.
Ronald OHanley: So we do see tokenization has been slower than I think anybody anticipated, if you go back three, four years. But I think with the current administration, and the regulatory frameworks really in most parts of the world starting to emerge, we think that the pace on that will continue to accelerate. And the opportunities for tokenization are really broad. I mean, we Not just the tokenization of deposits, tokenization of money market funds enables uses of that money market, of these kinds of assets in a different way than originally anticipated. It could be, in some cases, used for collateral better than it could be in other cases, for example.
Okay, great. And then, uh, longer term 1 for for Ron, um, just on the, the concept of tokenization of of, of equities, and, and etps and other assets, um, how how are you thinking about that, um, longer term, I guess just your view and whether you think that will, um, evolve, you know, more more slowly over time or do you think there's a, a stronger movement, um, and maybe some of the pros and cons of that and, um, and and what is what is State Street doing to um you know to uh be a participant in in any kind of trend. Yep Brian. So we think about it in 2 ways 1 is is is a bank ourselves. Um but maybe more importantly as the uh as a important serer to other
Ronald OHanley: So, we think this will, as regulatory frameworks are developed, we think this actually will accelerate. I think the question that the regulators, particularly the bank regulators, need to deal with all of these things is, how do they think about core deposits, and how do they think about banks as the transmitters of monetary policy, and to the extent to which any of this causes more deposits to leave the banking system. I mean, remember, money market funds seemed like a passing fad four years ago, and now $6 trillion is out of the banking system. So, I think that's a little bit of the unknown, and where regulators come down on this.
Speaker Change: Asset manager. So we do see a tokenization has been slower than I think anybody anticipated. If you go back, 3, 4 years, uh, but I think with uh the current Administration and the regulatory Frameworks really in most parts of the world starting to emerge. Uh, we think that the pace on, that will continue to accelerate and the opportunities for tokenization of are, are really broad. I mean, we it's, it's not just the tokenization deposits, tokenization money market, funds enables, uh, uses of that money market of that of these kinds of assets in a different way than, uh, originally anticipated. It could be in some cases used for collateral better than it could be. In other cases, for example. So we think this will. Uh, as regulatory, uh, Frameworks are developed. We think this actually will accelerate. Um, I think the question,
That The Regulators, particularly the bank Regulators need to deal with, with all of these things is, how do they think about, um, core deposits? And how do they think about, um, Banks as, uh, the transmitters of monetary policy and to the extent to which any of this causes more deposits to leave the banking system? I mean, remember money market funds seem like a passing fad, 40 years ago and now 6 trillion is out of
Speaker Change: System.
Ronald OHanley: But given the breadth of tokenization opportunities, let's broaden it out to real assets, and the ability to actually take assets that right now are paper intensive, very legal intensive, and be able to make them much more liquid. We think that this will start to take off at an accelerating pace, but probably nowhere near as fast as the optimists think it will. But for us, we need to be there and intend to be there, first and foremost, as a major servicer to these markets, and secondly, as a bank ourselves.
Ronald OHanley: That's a great color. Thank you.
Speaker Change: So I I I think that's a little bit of the unknown and where Regulators come down on this, but given the breadth of tokenization opportunities, uh, let's broaden it out to real assets and the ability to actually take uh assets that right now are paper intensive uh very legal intensive and be able to make them much more liquid. We think that um this will start to take off at an accelerating Pace but probably nowhere near as much as The Optimist think of nowhere near as fast as the optimists, think it will. But for us we need to be there and intend to be there. Um, first and foremost as a serer uh, as a major service or to these markets and secondly as as as a bank ourselves
Speaker Change: That's a great caller. Thank you.
Gerard Cassidy: Our next question comes from Gerard Cassidy with RBC Capital Markets. Your line is open. Please go ahead. Thank you. Good afternoon. Can you guys come back to the sensitivity of revenues to market moves? I think in your 10-K, you give us that 10% increase in global equity valuations generally leads to maybe a 3% increase in service fee revenues.
Speaker Change: Our next question comes from Gerard Cassidy with RBC Capital markets. Your line is open, please go ahead.
Thank you, good afternoon.
Mark Keating: When you look at your service fee revenue growth this quarter of 12% X notable items, how much was associated to market conditions moving higher?
Mark Keating: Hi Gerard, it's Mark. I guess I would just say that 10%, 3% is servicing fees, and so our servicing fee growth year over year is 5%, so the 12% is total, including software and trading and asset management. So obviously the, I don't have it in front of me, but obviously the impact year over year of where markets have been has been positive, it's been a positive to us, and that has generally been pretty consistent in terms of the, if you see a 10% growth, again over time because quarter to quarter can be, we talked about this before in terms of billing cycles and whatnot, but the 10%, 3% for servicing fees, and it's like 10%, 5% over from asset management has been pretty consistent.
Speaker Change: Can you guys come back to the sensitivity of revenues to Market moves? I think, in your 10K, you you give us that 10% increase in equity of global Equity, valuations, generally leads to maybe a 3%, increase in surface fee revenues. When you look at your service fee, Revenue growth, this quarter of 12% X notable items. How much was Associated to, you know, market conditions, moving higher.
Hey Gerard, it's Mark. Um, I guess I would just say that 10% 3% is servicing fees and so our servicing fee grows year-over-year is 5%. So the 12% is total including software and trading and
Ronald OHanley: I see. Thank you.
Speaker Change: It's been a positive to us and that has generally, you know, been pretty consistent in terms of the, you know, if you see a 10% growth again over time because quarter to quarter can be. Um, we've talked about this before in terms of, you know, billing cycles and whatnot. But the 10% 3% for, um, for servicing fees and it's like 10% 5% over, um, from Asset Management has been pretty consistent,
Ronald OHanley: And maybe, Ron, just a broader question. You referenced in your opening comments about the rebranding of State Street Investment Management and how that reinforces your One State Street strategy approach and how you're going to, you know, leverage the collaboration between different product offerings and deepening your relationships with your clients. How, as outsiders, can we measure that success as you achieve those deeper relationships?
Speaker Change: I see thank you and and maybe Ron just a broader question. Are you referenced in your opening comments about the rebranding of State Street investment management and how that reinforces your 1 State Street, uh, strategy approach? And how you're going to, you know, Leverage The collaboration between different product offerings and deepening your relationships with your clients.
Is Outsiders, can we measure that success as you achieve, those deeper relationships?
Ronald OHanley: I have a question, Gerard, and we should take that away and think if there's some additional disclosures that we want to make to help on that. But if you – let me talk about it at a kind of conceptual level. If you think about our client base, and this is across the firm, we have one broad set of clients, which is really the global institutional investors, is our client base. If you think about the subsegments of that, for example, asset owners, pension funds, sovereign wealth funds, insurance companies, those clients, we serve them both from an A large segment is our asset managers.
Speaker Change: gerarden, we
Speaker Change: should take that away and think if there's some additional disclosures that we want to make to, uh, to help on that. But if you let me talk about it at a kind of conceptual level,
Ronald OHanley: There we're really not servicing them out of their investment management business, but we're providing services and marketing. So this idea of one State Street and how do we deliver the whole firm, part of it is because if you think about who we are, notwithstanding our size, right, we've got a relatively small number of relatively large clients. So it's very important that we be able to... One, help them deal with their issues and address their strategic objectives at the highest level and be able to do that across our firm. So it's not just about words. I mean, part of that is you have to then think about how your relationship facing force is squared off against that.
Speaker Change: If you think about our client base, um, and this is across the firm. We have 1, uh, broad set of clients which is really the global, uh, institutional investors. It's our it's our client base. Um, if you think about, uh, the sub segments of that, for example, asset owners, uh, Pension funds, Sovereign wealth funds, insurance companies, uh, those clients, uh, we serve them both from an Investment Services basis from an asset management basis and from a market basis, um, a large segment is our asset managers. There were, uh, really not servicing them out of their Investment Management business, but we're providing services and markets. So this idea of, uh, of 1 State Street and how do we deliver the whole firm part of it is because, uh, if you, if you think about who we are, not withstanding, our size, right? We've got a relatively small number of
Speaker Change: Relatively large clients. So it's very important that we uh, be able to 1 help them, uh, help deal with their issues and address their strategic objectives, at the highest level and
Ronald OHanley: We've made a lot of changes over the years in that regard, so that rather than have just product-specific sales efforts, we have, particularly for our largest clients and our global clients, we have relationship managers that think about the total of State Street. And your point's a good one, and we'll think about how we can actually show you the results. We see them, but we'll think about how to.
Ronald OHanley: Appreciate it. Thank you.
Be able to do that across our firm. So, um, it's not just about words. I mean, part of that is you have to then think about um, how your relationship facing force, uh, is squared off against that. We've made a lot of changes over the years in that regard, uh, so that rather than have just product specific sales, uh, efforts we have particularly for our largest clients and our Global clients. We have relationship managers that think about the total of State Street and your points of good 1. And we'll think about how we can actually, um, show you the results. We see them, but we can think about how to uh, disclose those in some way.
Speaker Change: Appreciate it. Thank you.
Operator: There are no further questions.
Speaker Change: Thank you.
Operator: I will turn the call back to management for closing remarks. Well, thank you all for joining us this afternoon. The host has placed this conference on hold. Call.
There are no further questions, I will turn the call back to management for closing remarks.
Speaker Change: Well, thank you all for joining us this afternoon.
Speaker Change: The host has placed this conference on hold.
Goodbye.