State Street Corporation is hosting a Second Quarter 2023 Earnings Conference Call and Webcast, which is being broadcast live on their website. Ilene Fiszel Bieler, Global Head of Investor Relations, introduces the call and mentions that their CEO and CFO will speak and take questions afterwards. The slide presentation is available to download on their website and reconciliations of non-GAAP measures to the most directly comparable GAAP or regulatory measures are also available. The presentation will contain forward-looking statements and actual results may differ due to various factors.

In the second quarter, ROE was 13% and pre-tax margin expanded by 1.2 percentage points year-over-year. EPS increased by 14% to $2.17 due to common share repurchases, higher NII, front office software and data revenue growth, and an increase in securities finance revenue. There were headwinds in some of the fee-based businesses, but these were offset by the release of an allowance and an accounting adoption. Client onboarding is expected this year due to strengthened implementation capabilities.

In the second quarter, State Street Alpha onboarded $1.2 trillion of AUC/A, leading to a total AUC/A of $39.6 trillion and a decrease in the installation backlog. There were also $140 billion of asset servicing wins, largely driven by strong sales in the desirable asset owner, official institutions and alternatives client segments. Additionally, State Street Alpha now supports the entire ETF lifecycle, and CRD's front office products have been converted to recurring SaaS revenue, increasing annual recurring revenue by 12%.

Charles River Wealth Management Solution experienced a significant increase in on-prem revenues this quarter, driving wealth-driven revenue to more than double year-to-date. State Street Global Advisors reported $3.8 trillion in assets under management, with net inflows of $27 billion from the SPDR ETF business and $10 billion from the cash business. The company's CET1 ratio was 11.8% at quarter-end, and they returned approximately $1.3 billion of capital to shareholders through share repurchases and common stock dividends over the last three quarters.

In the second quarter of the year, global equities experienced growth while emerging markets saw weakness and fixed-income markets were affected by inflation and rate hikes. Despite this, State Street achieved a number of positive outcomes including reducing its asset servicing backlog, recording new asset servicing wins, and gathering net inflows at Global Advisors. They also achieved double-digit year-over-year EPS growth thanks to capital management and the higher interest-rate environment. However, they need to demonstrate fee growth every quarter and focus on controlling their expense base.

In the second quarter, the company reported EPS of $2.17, a 14% increase from the same period the year prior. Revenue grew 5% year-on-year due to growth in front-office solutions, securities finance and net interest income, and was further boosted by an accounting change. Year-on-year, period-end AUC/A increased 4%, driven by higher equity market levels and client net inflows, and increased 5% sequentially due to a large Alpha installation and higher market levels. The company is focused on managing costs in the current operating environment and is prepared to intervene further on expenses if the global environment remains soft.

Global Advisors saw an increase in AUM of 9% year-on-year and 5% sequentially due to higher period-end market levels and strong net inflows. Total servicing fees were down 3% year-on-year due to lower client activities and adjustments, but up 3% sequentially due to higher average market levels and net-new business. Middle office services fees were up 3% year-on-year and 10% sequentially due to net-new business and installation of a client at a modest fee rate. Sales performance indicators showed a positive business momentum in the quarter.

In the second quarter, AUC/A wins were not as robust in volume terms but there was still healthy client engagement and wins in strategic segments such as mandates, asset owners, and alternatives. Management fees were down 6% year-on-year due to net outflows and pricing headwinds, but were up 1% quarter-on-quarter due to higher market levels and cash net inflows. In ETFs, there were strong net inflows of $27 billion and in the institutional business there were net inflows with continued momentum in the index fixed-income and defined contribution franchises. In the cash franchise, there were strong demand for money market funds with $10 billion net inflows. FX trading services revenue was down 8% year-on-year and 11% sequentially due to lower client FX volumes and lower industry FX volatility compared to the period a year ago.

In the second quarter, securities finance saw an increase in revenues of 9% year-on-year and 7% sequentially, driven by higher agency spreads and deeper client engagement. Software and processing fees were up 18% year-on-year and 34% sequentially due to higher front office software and data revenue. Lending fees were down 5% year-on-year but up 5% sequentially due to strong client demand. Other fee revenue increased due to a tax credit investment accounting change. Front office software and data revenue increased 29% year-on-year due to on-premise renewals and continued growth in software-enabled and professional services revenue, and two-thirds of the uptick was driven by wealth management mandates.

In the second quarter, Alpha had three more mandates go live and installed a portion of assets related to Alpha, leading to an 18% year-on-year increase in NII. However, NII decreased 10% sequentially due to rotation of non-interest-bearing deposits and rate pressure in the US back-book, partially offset by higher short-term market rates from international central bank hikes. Average deposits declined 2% quarter-on-quarter, and the global floating-rate loan book and investment portfolio positioning provided a tailwind. US dollar client deposit betas were 100%, leading to some sequential NII compression.

The US rate cycle is adjusting back-book pricing to accommodate larger clients and foreign currency deposit betas are in the 45% to 50% range. There is a new slide in the appendix that shows NII trends, and second quarter expenses excluding notable items increased 6% year-on-year and 1% sequentially. Year-on-year, compensation employee benefits increased 7% due to salary increases and higher headcount, and information systems and communications expenses increased 3% due to higher technology and infrastructure investments.

Transaction processing decreased 2%, while occupancy increased 7% and other expenses were up 7%, mainly due to higher professional fees. The company has strong capital levels, with a standardized CET1 ratio of 11.8%, an LCR of 108%, and a CCAR stress capital buffer well above the 2.5% minimum. In June, they announced a 10% increase for their 3Q '23 quarterly common stock dividend and plan to repurchase up to $4.5 billion in 2023. In the second quarter '23, they returned roughly $1.3 billion to shareholders in the form of common share repurchases and dividends.

In the second quarter, the company saw strong growth in net interest income and front office solutions, offsetting some of the headwinds in other fee areas. The company expects rate hikes from the Fed, ECB, and BOE in the third quarter, and flat equity markets. Fee revenue is expected to be down 1-1.5% sequentially, with servicing fees down 1-2%, management fees up 0.5-1.5%, and front office software and data down 7%. Other fee revenue is expected to be $30-35 million, lower than prior years but down from the accounting change impact in the second quarter.

Eric discussed the outlook for NII, expecting a decrease of 12-18% on a sequential-quarter basis due to lower deposit levels and rate hikes continuing into 3Q. He also expects expenses to be down 0.5-1% on a sequential-quarter basis and the effective tax rate to be between 21-22%. Eric further discussed the back-book pricing in the US dollar book and the expectation that deposits will decline by $3 billion from 3Q to 4Q.

Eric Aboaf explains that due to the swiftness of the current interest rate cycle and the inverted yield curve, large, sophisticated clients have become active in exploring their alternatives. This has caused the US deposit betas to be in the 80-90% range in the last couple of quarters, and this quarter they have reached 100%. Aboaf expects the betas to exceed 100% next quarter, which is due to clients coming to banks asking for lower transactional rate levels.

Eric Aboaf explains that the spread widening on deposits has been converging back to normal levels and this is what is driving the 10% reduction in NII in the current quarter. He also mentions that the betas have been around 50% quarter-on-quarter, but that further details can be discussed offline. Lastly, he notes that the large client migration will take multiple years and will impact 1.7% of fee revenue in the third quarter.

Eric Aboaf explains that the current rate environment is one that has not been seen in two decades, and the cycle has moved twice as far in terms of the uptick in rates in half the time of the last cycle. He then provides information on page 16 of their materials regarding the current rate environment. Alexander Blostein then asks why the catch-up is happening now and for more color on customer segments driving the deposits. He also inquires as to where the deposit price in the US will stabilize.

Clients have been engaging in discussions with the bank over the past few quarters about appropriate balance tiers and expectations as the rates of interest have been changing. This increase in rates has given clients an alternative to money funds and treasuries, leading to a decrease in non-interest-bearing deposits. The bank has done some analytic work to separate out higher balance non-interest-bearing clients from lower balance ones.

Eric Aboaf is discussing the burn down of the higher balance accounts, which have decreased by 70%, and the smaller accounts, which have decreased by 15%. He believes the peak of the catch-up will occur in the third quarter, and that NII will settle in the $550 million to $600 million range per quarter. He is willing to provide further calculations to Alexander Blostein if needed.

Ronald P. O'Hanley answered a question from Alexander Blostein about measuring productivity efforts in light of a more challenging revenue backdrop. He explained that the measures used are the traditional productivity measures and that the key outcome they are managing to is operating leverage. Rob Wildhack then asked about the asset side and the securities book, to which Eric Aboaf answered by providing information about the front book and back-book difference and how much repricing can assist NII going forward.

Eric Aboaf explains that there is a good bit of tailwind from the front and back book on a year-on-year basis, with the long rate tailwind being in the $100 million range and quarter-on-quarter being closer to $15-20 million. There is also a tailwind from short rates for international currencies. Average rates on the investment portfolio are 270 basis points, with the runoff being in the 180 basis point range. Rob Wildhack then asked why operational deposits are down as a percentage of the mix, and Eric replied that there are roughly similar movements in operational and non-operational deposits.

Clients are trying to optimize their cash deposits without going too far, and this is expected. Operational deposits are expected to stay in the 75% range in order to cover daily, hourly, and minute-by-minute transactional flows. Clients want more yield, but the discussion of client profitability has reached a point where it is unlikely to increase.

Eric Aboaf discusses the conversations that the company is having with clients to try and move deposits. They have around $200 billion in deposits, with $50 billion focused on re-pricing and engaging in balance of trade discussions. Of this $50 billion, $25 billion has already been re-priced, with another $15 billion underway. They expect the third quarter to be the peak of these conversations and negotiations.

This paragraph discusses how the pricing of deposits, rates, and other services are handled by a committee and then ultimately approved by the C-suite. It also explains how the company has been able to shift client cash into areas such as asset management and repo business to create a stable source of NII income. Finally, the paragraph touches on how the company has been focusing on fee pricing and elevating the decisions to a higher level, as well as including a full share of wallet analysis.

Eric Aboaf discusses the difficulty of gauging the trajectory of total deposits in the context of quantitative tightening (QT) treasury issuance. He states that they are more focused on the non-interest-bearing deposits, which are likely to have a $5 billion outflow in the coming quarter, which is less than the outflow in the second quarter. He also mentions the importance of having conversations with clients at the highest levels to understand the impact of pricing and fees.

Eric Aboaf discusses the expected downtick in deposits for the trust banks, and explains that often clients will move thin margin deposits to a treasury. He also mentions the potential impact of updated capital rules on the business, and expresses that they are awaiting further details from the regulators.

Ron discussed the potential impacts of new rules on different parts of the business, such as an operational capital charge, a reduction on the lending book, and a potential positive effect on the sec finance business. He believes that the new rules will give the business an opportunity to grow in certain areas and deploy capital more actively.

Ronald P. O'Hanley explains that there is no one answer for pricing elements when it comes to back office business, such as custody fund accounting and associated deposits. He emphasizes the importance of having a holistic conversation between both parties to discuss the fee challenges that have occurred in the past few years and how the assumed deposit level, FX level, and other factors may have changed.

Eric discussed the potential for NII outflow as a headwind and the need to mitigate it, but also noted the opportunities it presents. He highlighted the need to ensure that follow-on services are implemented as quickly as possible to increase revenue per asset. He also mentioned expense levers that are more tactical in nature.

Ronald P. O'Hanley and Eric Aboaf both discuss the need to continue to reduce costs and reengineer the cost base over the last several years. They have addressed the lower-hanging fruit, but there is still more to do. They have been able to invest more in the businesses due to the cost savings and they plan to continue to report on this progress. Additionally, they have discussed tactical things that can be done to reduce costs and pay for performance when sales are larger or lighter.

Ron and Eric have put in place a hiring freeze to contain staffing costs and reallocate staff to new and growing areas. This is part of their effort to reduce costs, and they are taking a disciplined approach to hiring. The call then concluded with no further questions.

This summary was generated with AI and may contain some inaccuracies.