Good morning, and welcome to State Street Corporation's Third Quarter 2024 Earnings Conference Call and Webcast. Today's discussion is being broadcasted live on State Street's website at investors.statestreet.com. This conference call is also being recorded for replay. State Street's conference call is copyrighted and all rights are reserved. This call may not be recorded for rebroadcast or distribution, in whole or in part, without the expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street website. Now, I would like to introduce Elizabeth Lynn, Global Head of Investor Relations at State Street.

Good morning, and thank you all for joining us. On our call today, our CEO, Ron O'Hanley, will speak first, then, Eric Aboaf, our CFO, will take you through our third quarter 2024 earnings presentation, which is available for download on the Investor Relations section of our website, investors.statestreet.com. Afterward, we'll be happy to take questions. 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 GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our presentation. In addition, today's call will include 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 the SEC filings, including the Risk Factors section of our Form 10-K. Our forward-looking statements speak only as of today, and we disclaim any obligation to update them even if our views change. Now, let me turn it over to Ron.

Thank you, Liz, and good afternoon, everyone. Our third quarter results, which we released earlier this morning, demonstrate the accelerating financial performance and strong business momentum we are achieving this year, which in turn positions State Street well for future growth. We achieved robust fee and total revenue growth and generated positive fee and total operating leverage in 3Q, which, when combined with increased capital return quarter-on-quarter, drove strong earnings growth for our shareholders on both the year-over-year and sequential basis, with quarterly EPS reaching the highest on record. In addition to strong 3Q results, our year-to-date results also highlight the strength of our franchise and financial performance in three quarters of the way through the year, with solid fee and total revenue growth and good expense discipline driving better than expected positive fee and positive total operating leverage, as well as strong earnings growth relative to the same period in 2023 and excluding notable items. The operating environment in the third quarter was dynamic. While global equity and fixed income markets moved notably higher, the world's investors faced a number of risk-off events in 3Q, including fears of a U.S. recession, the unwinding of the carry trade, concerns over tech valuations and continued geopolitical tensions. These events drove bouts of negative market sentiment and significant market volatility. However, these market dislocations proved to be short lived with markets taking comfort from a host of subsequently dovish Central Bank pivots, including the first rate cut from the Federal Reserve in four years, as well as improved economic data in the U.S. We supported clients and navigated well through this market backdrop, delivering strong business and financial performance. We remain laser-focused on successfully executing against our key strategic priorities to drive better results, which I will now discuss. Turning to Slide…

Thank you, Ron. Before I get into the numbers, I want to say that it has been a privilege to have been here at State Street and to have worked with you and the team. I'm proud of all that we've accomplished together over the past eight years, and it's with mixed feelings that I'm moving on. But I know that the progress will continue and that State Street is well-positioned with a strong financial foundation and strategy for success. And I look forward to working with the team into 2025 during the transition. Now, let me walk everyone through our results for the third quarter. Starting on Slide 3, we reported record EPS of $2.26 for the third quarter, which included notable revenue items that, in aggregate, were neutral to earnings and are detailed on the right side of the page. You can see that we took the opportunity to do some additional repositioning of the investment portfolio this quarter, which I'll talk more about in a moment. We delivered robust EPS growth of 17% year-on-year, excluding notable items, reflecting broad-based fee growth, higher NII and continued capital return, which increased on a sequential quarter basis. Our third quarter performance builds upon our strong first half of the year, as healthy fee and total revenue growth coupled with expense discipline delivered both positive fee and positive total operating leverage, excluding notable items, in the quarter and on a year-to-date basis. The quarter clearly demonstrates good margins and returns with pre-tax margin at almost 28.5% and ROE of 12% and a return on tangible common equity of over 19%. Turning now to Slide 4, the third quarter period-end AUC/A and AUM, again, increased to record levels, supported by both equity and bond market tailwinds as well as strong client flows.…

Thank you, Eric. To conclude, I'm pleased with how we have been able to deliver stronger financial performance so far this year. We entered 2024 expecting roughly 3% to 4% fee revenue growth together with positive fee operating leverage, while NII was expected to be a headwind to our financial results on a full-year basis. However, with successful execution against our strategic and client engagement priorities, together with a more constructive operating environment and strong balance sheet management, we now expect to notably outperform our outlook relative to where we started the year with higher fee revenue growth and NII comfortably up year-over-year. As a result, we expect to deliver both healthy positive fee and total operating leverage this year, excluding notable items. We are positioned for a strong finish to 2024 and we are confident as we look into next year. Operator, we can now open the call for questions.

[Operator Instructions] Your first question comes from the line of Glenn Schorr with Evercore. Please go ahead.

Thanks very much. I appreciate all that detail. I like the NII guide, and what that, I think, implies for next year. Can you talk about the management actions taken? You mentioned the five-year -- the five-quarter payback. I want to be blunt and say, does that mean you'll make at least the $81 million of that cost over the next five quarters? And then maybe a little more color on what within the book you actually restructured and offloaded? Thank you.

Glenn, it's Eric. You've interpreted that exactly correctly. The $80 million loss that was booked in the quarter will reverse out in the next -- within the next five quarters, and then, we'll have some, and it'll be a positive for the company. As we continue to manage the investment portfolio, we have north of $100 billion of assets. They range from treasuries, MBS securities to supranationals and foreign sovereigns. There were some securities that we felt were lower coupon that could be restructured or repositioned through a sale. We bought back some additional securities. In this particular set of actions, it was mostly in the treasury and international sovereign and supra space. It was $4 billion or $5 billion of securities on $100 billion book, so relatively modest. And it also allows us to just adjust the position of the book across the curve slightly, which was also beneficial. So, kind of, as I think you'd expect, but this will be helpful going forward and part of the management actions that we've been talking about as we manage NII. Some of those are around the investment portfolio, some of those are around lending growth, and some of those are around our engagement with clients on deposits as we've talked about in the past.

That's a nice parting gift. Thank you. Maybe one quick one. You mentioned in the SSGA conversation about the hybrid product with Apollo. I'm curious if you'd give us any bits in detail of how it will work and why you chose maybe 15% going to private credit. Is that enough to drive differentiated performance and scalability? Is this just like a toe in the water to see how this is going to be received?

Yeah, Glenn, it's Ron. We're in a quiet period now with the SEC, so we're really constrained about what we can say about this. But what I will say is, we've been -- much of our innovation in the past has been about how do you democratize access to more sophisticated clients and put them in structures that are broadly available. And what we're talking about here is consistent with that. We'll have a lot more to say about it after the SEC has completed its process.

Okay, cool. Thank you. I appreciate it.

Your next question comes from the line of Brennan Hawken with UBS Financial. Please go ahead.

Good morning. Thanks for taking my question. And Eric, congrats on the new role. Big change in the multiples. Hope that doesn't create issues, give you the bends or something when you go up. So, curious about -- with Eric's departure, kind of bring succession to mind. So Ron, could you maybe update us on the latest on that front and what you can tell us about the Board's plan?

Are you referring to my succession, Brennan?

That's right. Yeah, overall.

So, as you would expect, succession is something that well-managed and well-overseen companies talk about all the time. And there's a near constant discussion about this at the Board and there's a plan in place for when that time comes.

Okay, great. And then, repo has been pretty solid. Clearly, you guys see some continued strength, hence, the updated NII outlook for the year. But could you tell us about how repo comes into play there into your expectations? And what we should think about the recent strength there?

Glenn, it's Eric. The repo product is one of many that we offer for clients, right? We offer them cash on deposit in various forms. Money market sweep repo is a collateralized activity. So, in a way, think of it as one of the broad range of elements that we offer. What we found is as the Fed has trended down its reversed repo operation, there's been more repo activity in the market and we've obviously wanted to be there to help our clients. That said, the repo activity, the sponsored repo activity that we do is 10%, 11%, 12% of our NII typically. It will bounce around by 1 percentage point or 2 percentage point. This quarter, I called it out because I think we added about 1 percentage point of NII due to the increase in repo activity. And what you're working through is sometimes balances are up a bit, sometimes margins are up a bit, and we just found more activity in the market. There's more cash out there as you've seen. And there are also more borrowers who are looking for cash and have collateral to post. And those are markets where we're happy to serve our clients on both sides of that transaction and stepped in and stepped up for them.

Great. Thanks for that color.

Your next question comes from the line of Alex Blostein with Goldman Sachs. Please go ahead.

Hey, good afternoon, everyone. Thanks. Eric, congrats to you as well. I guess, in that vein and the question for both of you guys, State Street has made some pretty meaningful progress improving profitability recently, but with the new CFO search underway, how durable do you think these profitability improvements are likely to be? So, like, in other words, how much of this is already in motion and sort of on the rails that can more seamlessly perhaps transition to whoever comes next? And what are your ultimate sort of aspirations for pre-tax margins for the firm as a whole over time?

Yeah, Alex, I'll start on that. I mean, we've been fairly transparent about what we've been doing across the board at the firm, both revenues and expenses. So, starting with our Investment Services business, I mean, we've talked a lot about what we've done to restore and regain and really distinguish ourselves in service quality, which in turn has enabled us to actually grow and restore the growth that we've had in the past. We talked a lot about some of the new sales and client service kinds of actions we have in place. That's all in motion. Is there more to do? For sure. But is the plan clear? Yes, it is. But we would expect to see continued benefits being derived from that. In GA, we've got a broad-based strategy and they're really aimed at how do we actually broaden the appeal and broaden the franchise beyond its traditional institutional core. We've talked a lot about what we've done in the retail area with the low-priced ETFs. Product innovation is occurring at a really breakneck clip there. We launched 20 new ETFs this year. We've talked about some of the new partnerships that we've had, which assuming we get through all the regulatory hurdles there, we're very optimistic about. And so, we feel like we've got that side covered in a pretty clear path. In the Markets business, the Markets client franchise largely overlaps with our Investment Services franchise, but that's not enough, right? You have to be able to distinguish yourself in there. And I think the progress that you're seeing over the past couple of quarters reflects some of the work that we've done there with more to come. I mean, this is a franchise that's based on innovation. And then finally, in terms of productivity, we've been talking to you about productivity and transformation since 2019. And every year, we go at it in a different way, typically a more sophisticated way each year. The early years are about what, I guess, we'd all describe as low-hanging fruit. These later years have been about fundamental operating model transformation, including a much more sophisticated application of technology. That's where a lot of our investment is going, but we see much more to do there. So, I wouldn't anticipate a new CFO signaling any kind of change in strategy. Now, it's not to say that it isn't a vitally important role and we're going to -- the search process is literally commencing today. We've already engaged a firm to help us. We'll look both inside and outside, but we're very confident coupled with the plan we have in place, four months of transition that we have with Eric, and just the overall performance of the firm that we're going to be in good shape through this transition.

Alex, I'd also add, our medium-term targets stand as stated. They are deeply embedded in our culture, in our senior executive and management teams and with our Board. And so, the 4% to 5% revenue growth rate, pre-tax margin target of 30%, those are there for the medium term purposely and topics and areas that we continue to strive for and deliver on.

And Alex, also, I'm glad Eric mentioned that. Also, it's part of our long-term incentives. It's the achievement, realization of those targets.

Yeah, all makes sense. Just wanted to clarify that. So, for my follow-up, maybe quickly on NII, obviously, very nice update for the fourth quarter. Probably too early to talk about '25 with a lot of specificity. But as you sort of think about how the balance sheet is positioned, especially in the back of the recent securities repositioning you've talked about earlier today, how should we think about the sustainability and just durability of this kind of NII run rate over the next couple of quarters? I think, in the past, you talked about being a little more asset sensitive in Europe still, maybe a little bit more neutral in the U.S., but maybe help us with some broader framework of how to think about '25. Thanks.

Yeah, Alex, it's Eric. As you say, it's still early. We're operating through deposit levels, interest-bearing, noninterest-bearing, our portfolio composition, quarter by quarter by quarter. And so, we don't have additional information really to share regarding next year other than what we've said before, right? We've said that we continue for this past quarter and into the fourth quarter, expect some modest or slight amount of deposit rotation. That's a headwind. We've got the investment portfolio rolling through, but some quarters you get a bigger, smaller benefit just depending on the exact bond. And then, you've got lending activity. And then, you've got repo, as we talked about earlier on the call, bouncing up and down. We've said that it's really in the next few quarters, and I've used that language purposely, that we expect to see the stabilization of NII and then some growth from that level, but it's hard to pin exactly which quarter. But I think what you can do is if you open up the lens over one-year, three-year, five-year period, you can see where we've come from. You can see the zone that we're operating in. And I'll define the zone not as 1 percentage point difference, but the kind of a zone as you'd expected in a colloquial sense. But we're -- I think we're in a nice zone generally. It's helpful for our margin. And while the next few quarters we'll see some movement, we also see some stability and some growth thereafter.

Got you. All right. Well, I think we'll get you for one more quarter after that. So, I'm sure that will be another topic yet again. So, thank you.

Your next question comes from the line of Betsy Graseck with Morgan Stanley. Please go ahead.

Hi, good afternoon.

Hi, Betsy.

Eric, I'll miss you. Sorry to see you go. Good luck in the next role. And, I guess, my final question for you is just around how we should be thinking about the trajectory here of NII in an environment where maybe we get slower pace of cuts? Is that better for State Street?

Thank you, Betsy, for the question and for the thoughts. Yeah, I think, directionally, our balance sheet is relatively neutral. We have a slight asset sensitivity. And so, as rates come down, that has a slight impact to NII on a quarterly basis, but it's not dramatic. But given that direction or position, we'd have slightly better NII if rates didn't fall as quickly. I think our collective view here is rates will come down, but we've seen the market overshoot on the rate reductions. Our economists think that the terminal rate is likely to be subsequently higher than what it's been in the past. And so, I think, we're reasonably well positioned, and we'll absorb some of the central bank actions. And as we do that, we'll continue to build out our client lending activity, repo activity, our deposit engagement activity and so forth. And those will all contribute to stabilization of NII around this zone and then growth from there.

All right. Thanks so much. And then, Ron, one for you on -- I think, recently I saw a headline about State Street leaning into Mexico, and wanted to understand, is this a new effort or this is an expansion of existing business? And maybe just put it into context around your growth strategy, and are there other countries that you're looking to lean into? Thanks.

Yeah, Betsy, so we have a -- we certainly have a presence in Latin America. It's smaller than EMEA and APAC for us. But as you would expect, we tend to -- this is on the servicing, little bit in the markets area, but it's on the -- it really rise out of services. And as countries develop and as investment markets develop, that's the opportunity for us. And so, we are building out at a, I would say, moderate pace our capabilities and activity in Latin America, and what you saw there really reflected that. Our core markets, as you could imagine, remain the U.S., EMEA and APAC, but as you've seen from our growth over the past couple of years, it's -- we've had lots of growth in EMEA and APAC. More recently, we've gotten the growth rate in the U.S. kind of back on what had been traditionally. But as these markets grow, they start to need the same kind of capabilities that we've got in those developed markets, and also, in many cases, you have so-called emerging or developing markets that are really skipping over some of the milestones that developed markets had done in their development. So, again, it's an opportunity to bring some advanced technology and those kinds of things. But it's a modest investment. And we would expect over the short term, modest growth, but it's important to get the foothold there.

Thank you.

Your next question comes from the line of Brian Bedell with Deutsche Bank. Please go ahead.

Great, thanks. Good afternoon. And congrats, Eric, also. Maybe just taking on a comment that you mentioned Eric about putting more of your balance sheet to work to support clients, can you just go into a little bit more detail in terms of which areas? I assume you mean on the asset side and lending. And then, in conjunction with that, maybe if you can talk about deposit pricing strategies with your asset servicing clients in terms of either deposit beta or also supporting your clients in terms of the revenue model?

Brian, sure. Let me cover those in -- one by one. On the asset side of the balance sheet, we've got a $300 billion balance sheet. We've got about $120 billion of risk-weighted assets. And as we think about capital deployment, it continues to be in three areas that we've historically supported our clients in, and we want to continue to expand. So, the first one is lending, as you mentioned. And we do everything from capital call financing to BDC lending, really an ecosystem of lending that we do for our private markets clients, our asset management clients and so forth. And there's real growth there for us, there's growth there for them. And what we find constructive is that, with many of those clients, if you support them with your balance sheet, they're that much more encouraged and likely to come to you for servicing activities, for asset management activities. And that's a very constructive and kind of virtuous circle of relationship that we and they benefit towards. So, lending is a very important part of what we do. Secondly, our trading activities in FX require a balance sheet. If we do more than just one, two, three month forwards and swaps, if we do options to support our clients, those require balance sheet. And again, we're happy to do that for our clients, especially for our substantial clients that we have large relationships with. And we'll do that around the world. So that's a good part. And then thirdly, it's really around the thirdly, it's really around the securities financing business, which has both an agency lending component where we're lending out of the box, but that requires some capital under the Basel III rules. And then, the prime services business, right, where we're lending out to those who are borrowers in the capital markets. And that's been an area of growth as well. So, those are the areas. The way we think about it is, we think of ourselves and we really act as relationship lenders, right? We lend not for itself, but we lend because it's to support our clients. It comes at good returns, but it comes as a way to deepen and broaden and expand the relationships that we have. So that's what we've been doing. We like to continue to do that. And the more we lend and support them across those different areas that I described, those three areas, the more growth we'll see both in NII and in the fee line. On the question of -- is that...

Yeah, perfect. Actually, I can tie in the back half of that question with the second one, and that's just on the revenue -- on the fee revenue side of your new wins, particularly the Alpha products, I know -- the Alpha platform rather, and I know the private market initiatives as well. Should we be thinking of those as fee rate accretive or are you also flexible on pricing some of those with deposits as well on compensating balances?

I'd say it's a little bit of both, to be honest. We have, for example, in the servicing fee area, we booked $330 million of wins on a trailing 12-month basis. We continue to target $350 million to $400 million of fees. But it's obviously lumpy and a mandate sometimes pulls forward from a quarter, sometimes moves out a quarter. We'll see exactly where we land, but we are continuing to hone in on delivering substantial amounts of fee wins this year and have that target clearly in sight. As we do that, deposits are a part of the relationship, but more and more clients think of it both ways. They understand that there's a balance of trade. They understand that if they are pushing too much on one lever, then the other levers have to move in the opposite direction. On the other hand, there is real opportunity to work with clients to see how we can serve more and more of their needs. And what we found that as we've got that -- as we have those discussions, we end up doing more work with our clients and more support of our clients in more areas. And so, they tend to build and feed on each other as opposed to being offsetting.

That's great color. Appreciate your detailed answers as always, Eric. Thanks very much.

Your next question comes from the line of Jim Mitchell with Seaport Global Securities. Please go ahead.

Hey. Good afternoon. Hey, Eric, just on deposit behavior, after the rate cut, how did mix and volume growth look and pricing? Any thoughts on the initial reaction to the rate cuts in the deposit side?

Jim, it's Eric. We really just saw more of what we've been seeing over the last few months. I don't think we saw any discernible change. Deposits in the system are generally been trending up 1 point or 1.5 point a quarter. That's across the banking system. You've seen our results are a little more of that. And we didn't really see a lot of changes. We continue just to see a market environment where there's a fair amount of cash in the system. Part of that is positioning. Part of that is, I think, carefulness on our investors -- that our investors have given the political and economic uncertainty. And so, the cuts didn't have a discernible impact on deposit levels. And in general, we think we're going to operate in and or around this level for the time being.

Okay. That's helpful. And maybe just pivoting to servicing fees, still a significant backlog, yet to be installed business in asset servicing. So, can you discuss how you're -- how quickly you expect that new business to be onboarded and how you're thinking about the quarterly trajectory from here?

Yeah, the servicing backlog, we've enjoyed continuing to build. We, obviously, want to build it and deploy it, right? Both are important to our business system. And I think over time, it will continue to trend up somewhat and then get to a steady state level. Right now, as we look forward, we think about the installation of that backlog in two ways. On an AUC/A basis, we think about the installation coming in the next few years with somewhere between half to three-quarters of that coming through in the next year. And in terms of the servicing fee backlog itself, we roughly expect about half of that to come through over the course of the fourth quarter and all of next year, if you want to kind of rough it out and just think about the pace of installation. What that means is that we're always installing revenues from our backlog onto the balance sheet, right, or onto the -- into the P&L, I should say. And then, at the same time, our coverage and relationship force is out there winning new business. And there's business that then installs within three months, six months, nine months and 12 months. And so, over the -- every year, you'll see a mix. You'll see business that comes from a backlog that had a longer installation time period and then you'll have business that comes from within that fiscal year itself.

Okay. Appreciate the help. Thanks.

Your next question comes from the line of Gerard Cassidy with RBC. Please go ahead.

Hi, Ron. Hi, Eric. Congratulations, Eric, on the new position. Ron, you mentioned about the new business wins in the quarter. And I think you said $466 billion in assets under custody/administration. Can you share with us how much of that came from existing clients where you grabbed the bigger wallet share from those clients versus new customers? And second, were the wins primarily in the U.S., or were they outside the United States, Europe or Asia?

Yeah. Thanks for the question, Gerard. So, for this quarter, there was -- we had two Alpha wins, and the two Alpha wins dominate that AUC/A. It's just -- it's about $380 billion of the $460 billion is Alpha. And that's divided between U.S. and non-U.S., with a very, very significant global player in there that has a lot of U.S. presence. And what's interesting about both of them is -- both these wins is, they were existing, but in one case, we had a very, very modest service footprint with this institution. We were Charles River only with them. And as a result of this Alpha win, we will have a true front-to-back relationship with them, including importantly to move the asset servicing from a competitor to us. And with the asset -- excuse me, I'm sorry, moving the custody from a competitor to us. And with custody comes lots of opportunities to do things like deposits and foreign exchange and things like that. So -- and I think for years now as we've talked about the strategy and why this has been -- why we think it's important and why we think it gives us a competitive advantage. One of the reasons is just that, it's the opportunity to deepen relationships. And the other reason why it's so important is the flip side of taking long to install is that the business tends to be quite sticky because this is really -- it's much more analogous to enterprise outsourcing where the institution is actually making a choice of either, in most cases, moving from an insourced model to an outsourced model, and in some cases, moving from one outsourcer to another, but that doesn't happen quite as frequently. And as a result, because of the work that both parties are doing, we insist upon a longer contract period and the client itself understands these are very sophisticated buyers, understand that they're generational decision here, and so they want to get it right.

Very good. Thank you for that color. And then, as a follow-up question, obviously, you guys are well-capitalized. You've been using your capital to support organic growth, as Eric pointed out, with lending, and you're paying obviously dividends and increasing them and buying back your stock. Alternatively, obviously, capital can be used for acquisitions. Can you give us an update on your appetite for acquisitions recognizing, of course, the Brown Brothers transaction did not work out the way you intended, but can you share with us your thoughts there as well?

Well, Gerard, we think about M&A not as a strategy, but as a way to implement our strategy either more rapidly or more efficiently. So, we'll always be paying attention to opportunities like that, but we see a lot of promise in the organic plans that we have developed and are now seeing the fruits of. So, our last significant acquisition, as you know, was Charles River that was done for important strategic reasons to enable the creation of the Alpha front-to-back platform. It was a dilutive acquisition, we knew that at the time, but we felt it was a very important long-term investment, and it's proven to be, but that's also costly and oftentimes disappointing to shareholders. So, we take our stewardship of capital responsibility very seriously, and we like what we're able to do on an organic basis or building on what we've done. So, not to say, we'll never do these things, but it's a high bar and it's got to be about -- as I said at the beginning of this answer, it's got to be really about accelerating the strategy and/or realizing the strategy more efficiently than we could organically.

Very good. Thank you.

I will now turn the call back over to Ron O'Hanley for closing remarks. Please go ahead.

Thanks to all for joining us on the call. And just to emphasize, you get one more quarter of Eric. So, he'll be with us for the fourth quarter report in February and, basically, with us through mid-February -- in January and, basically, with us through mid-February. So, thank you all.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.