The operator welcomes listeners to State Street Corporation's Third Quarter 2023 Earnings Conference Call and Webcast and introduces the Global Head of Investors Relation. The CEO and CFO will speak and take questions. Non-GAAP measures and forward-looking statements will be discussed.

Ron O'Hanley, CEO of State Street, began by acknowledging the recent terrorist attack in Israel and expressing solidarity with the affected people. He then discussed the mixed global financial market performance in the third quarter, attributing it to softening economic data, central bank rate hikes, and concerns about an economic hard landing. Despite these factors, currency market volatility remained low. O'Hanley then highlighted the company's third quarter financial results, including a notable item of a loss on sale from an investment portfolio repositioning. Excluding this item, earnings per share grew year-over-year due to common share repurchases and an increase in total fee revenue.

The benefit of share repurchases and improvement in fee revenue offset lower NII and market headwinds. The company is pleased with their transformation and productivity initiatives, which have helped contain expense growth while allowing for continued investment. The company has seen growth in total AUC/A and new asset servicing wins, with the highest level of quarterly new servicing fees in over two years. The company has also seen growth in their Alpha business, with two new mandate wins and a focus on strategic areas for driving opportunities and gaining market share. The company is also executing a plan to improve core back-office custody sales performance and has seen momentum in this area.

In the third quarter, State Street entered into an agreement with Vontobel to expand their existing relationship by providing back-office services. This demonstrates the value of their Alpha proposition and confirms their strategic rationale for growth. Their front office software and data business also performed well, with a 12% increase in annual recurring revenue. Global Advisors saw a record $41 billion in net cash inflows and gained market share in an expanding market. However, outflows in the institutional business and risk-off market sentiment in their ETF business partially offset this growth.

In the third quarter, State Street's ETF franchise saw modest net outflows, but their US low-cost SPDR ETF franchise continued to perform well with $7 billion in net inflows. They also reduced prices on 10 low-cost SPDR portfolio ETFs to attract more investors. Additionally, their foreign exchange business was recognized as the industry leader in four categories by Euromoney Magazine. State Street's balance sheet, liquidity, and capital positions remain strong, allowing them to return $1.2 billion of capital to shareholders in the third quarter. They plan to continue common share repurchases in the fourth quarter. Despite market challenges, State Street is focused on driving stronger business momentum and improving fee growth.

In the third quarter, the company outlined a plan to accelerate sales and revenue growth while improving expense discipline. They have a track record of improving efficiency and have reduced expenses. They are also streamlining operations in India and consolidating joint ventures to achieve productivity savings. In the third quarter, EPS was $1.25, down from the previous year due to a loss on sale, but excluding that, it was up to $1.93. Fee revenue grew by 3% due to growth in investment services and management fees.

In the third quarter, the company's performance helped offset industry-wide challenges in its Global Markets business and lower Net Interest Income. They also focused on managing costs and saw a 12% increase in period-end AUC/A compared to the previous year, driven by higher equity market levels and net new business. However, long-term flows in the asset management industry have been muted due to risk-off sentiment. The company's cash franchise performed well, generating a record $41 billion in net inflows. Servicing fees were up 1% year-on-year, mainly due to higher equity markets and net new business, but were partially offset by lower client activity and pricing headwinds.

In the quarter, total servicing fees decreased by 2% due to lower client activity and a previously disclosed client transition, but were partially offset by higher average equity markets. This has been a trend over the past year, with lower levels of client activity resulting in a 2-3% headwind on servicing fees. Middle office services saw good growth, with a 3% increase year-over-year and a 1% increase sequentially, driven by net new business. The company also won $149 billion in new AUC/A and onboarded $250 billion in AUC/A in the quarter, with $91 million in new annual servicing fee revenue wins. The company has expanded its disclosure to indicate that a healthy level of annual servicing sales is in the $300 million range, and currently has $2.3 trillion of assets and $255 million of servicing fee revenue to be installed.

In the third quarter, management fees at the company were up 1% year-on-year and 4% quarter-on-quarter due to higher equity market levels and record cash net inflows. The investment management franchise remains strong and saw positive net inflows and market share gains in the low-cost suite of products. FX trading services revenue was down 2% year-on-year but up 3% quarter-on-quarter due to lower volatility and spreads, with industry volatility down across both developed and emerging markets.

In the third quarter, securities finance revenues were down 6% year-on-year due to lower specials activity and agency balances. Front office software and data revenue increased 2% year-on-year, but was down 20% sequentially due to lower on-premise renewals. NII decreased 5% year-on-year and 10% sequentially, primarily due to a mix-shift in deposits and lower interest rates.

The decline in NII performance was due to lower deposit balances and a shift in the deposit mix, but was partially offset by higher interest rates and a portfolio repositioning. Non-interest-bearing deposits decreased less than expected, but client repricing will impact the fourth quarter. Average deposits declined 4% in the third quarter, with higher betas for US dollar deposits compared to foreign currency deposits. An investment portfolio repositioning exercise was executed last month, which is expected to drive NII towards the higher end of the previously disclosed range next year. Third-quarter expenses increased 4% year-on-year, but were down 1% sequentially due to expense management and strategic investments. Compensation and employee benefits increased 4% year-on-year, but headcount was reduced and incentive compensation was lowered in line with year-to-date performance.

In the third quarter, State Street Corporation saw a 3% increase in information systems and communications expenses, a 6% increase in transaction processing costs, and a 4% increase in occupancy and other expenses. Despite these increases, the company maintained strong capital levels, with a CET1 ratio of 11% and an LCR of 109%. They returned $1.2 billion to shareholders through share repurchases and dividends. The company remains focused on improving sales and maintaining expense discipline while investing in the business.

In the fourth quarter, the company expects interest rates, global equity markets, and bond markets to remain flat. Overall fee revenue is expected to be flat to slightly up compared to the previous year, with strong sales momentum and modest declines in market businesses. Software and processing fees are expected to increase, while NII is projected to be in the middle of the previously mentioned range. Expenses are expected to remain relatively flat, and the adjusted effective tax rate is expected to be around 22%.

The speaker, Ron, is confident in the company's ability to achieve positive fee-operating leverage in 2024, despite potential revenue uncertainties. This is based on their cost management strategies and investments in sales effectiveness, as seen in their results in Q3 and their developing pipeline.

The speaker, Eric, explains that the company believes they can achieve positive fee operating leverage based on a reasonable market forecast. He also mentions the new disclosure on the backlog and revenue backlog, and explains that about $255 million of backlog will be converted into service and fee revenues over the course of 2024 and 2025. He also mentions the importance of new sales and retention activities in maintaining momentum. The implementation of the backlog in terms of revenues and AUC/A is expected to be different, with 5-10% coming through in the fourth quarter, 50-60% in 2022, and the rest in 2025.

The speaker discusses the factors that will impact the bank's net interest income (NII) in the fourth quarter and into next year. They mention the rotation of non-interest-bearing deposits, the flattening out of this trend in the first quarter of next year, and the visibility into repricing for large clients. They also note that it is difficult to make precise predictions about these factors.

The company has executed on some of its plans and expects to see more progress in the third quarter and fourth quarter. They anticipate a stabilization of NII due to factors such as repricing, catch-up, and a positive trajectory from the investment portfolio. The company has also implemented initiatives to control expenses and is seeing some progress, such as bringing a JV in India in-house.

The company is implementing changes to their operating model in order to reduce costs and eliminate redundancies. They are also looking at ways to combine and streamline work processes. These changes have been in progress for some time and will start to show results in the next year. The company is also managing their human resources by reallocating talent and investing in new products and regulatory requirements. These changes are seen as a way to keep costs in check while still making necessary investments.

Eric Aboaf discusses the expectations for the fourth quarter, including the typical seasonality in deposits and the stabilization of non-interest-bearing deposits. He notes that while there may be a slight uptick in deposits, the bank has analyzed their client base and is managing their deposits carefully.

The company has seen a decrease in trends for their largest and most sophisticated clients, but smaller ones have remained steady. The company will update their guide based on this and seasonality, but they are cautious due to ongoing changes in balances and pricing. The company is currently going through a strategic planning process for 2024 and will provide more information on expense growth in January. They are carefully managing their spending and developing contingency plans.

Ronald P. O’Hanley discusses the growth of private markets and how the industry is expected to continue increasing in the next few years. He also mentions that many of the large multi-asset managers are seeing growth in their private market business. However, this business is currently being serviced in expensive locations and is not a good experience for investors. As a result, there is a need for better standards and more efficient servicing in this area.

The demand for private market services is high, and the company is investing a lot in technology to meet this demand. Private investors and asset owners are also interested in this area. The company expects to see significant growth in this sector, and it may have a competitive edge due to its early involvement in offshore outsourcing and hedge fund outsourcing.

The company is one of the early traditional asset servicers and offers a full front to back solution that includes data. The industry has been seeing stable fee repricings, with a 2% headwind level. New business in privates has higher fee rates than the average, with the last few quarters of AUC/A wins and fees wins showing this trend.

The speaker discusses how their company, Alpha, has been successful in bringing more value to clients across different areas, including fees on the front office, middle and back office, and alternatives and privates. They also mention that the servicing fee rate over average AUC/A has come down due to natural thinning in the fee rate when equity markets are up. The speaker confirms that the $91 million over $149 billion is the appropriate way to calculate the fee rate, which comes out to 6 basis points.

The speaker is responding to a question about the sustainability of the differential in servicing fee revenue for the Private Markets sector. They clarify that the analysis presented may not be entirely accurate due to the inclusion of existing AUC/A business in the fee wins. They suggest looking at the revenue wins against the base of servicing fees to get a better understanding of the growth dynamic.

The speaker suggests that doing a little bit of AUC/A wins versus the AUC/A base can give a better indication of momentum. They also discuss the differences in deposit betas between the US and non-US markets, and mention that there are structural differences that can affect deposit betas. They expect deposit betas to continue to increase in the US, but may not increase as much in the non-US markets.

The speaker discusses the importance of capital management and how it is based on various factors such as the economic environment, earnings momentum, and the strength of the balance sheet. They mention that they plan to compete up to $4.5 billion in buybacks for the year but will also consider macro uncertainties and potential excess capital in their decision-making for next year.

The company is in a strong financial position with high liquidity and a high-quality lending book. They aim to maintain a healthy buffer above the minimum capital requirement of 8%, with a target range of 10% to 11%. They plan to continue returning capital to shareholders, taking into account market conditions and uncertainties. The company expects a healthy buyback in the fourth quarter and has plenty of authorization for it. They also plan to optimize RWA and use earnings and the AFS portfolio to increase capital.

Ebrahim Poonawala asks Eric Aboaf about the duration of the securities book and whether they plan to add duration in the future. Aboaf responds that they are considering all factors, such as the yield curve, interest rates, and portfolio repositioning, in determining the duration of the portfolio. He also mentions that they actively discuss this at ALCO and consider both economic and risk management factors. Steven Chubak from Wolfe Research also asks a question.

Eric Aboaf, speaking to Steven Chubak, provides details on the level of gross revenue wins needed to offset natural attrition in the business. He mentions that in the past, the benchmark for AUC/A wins was $1.5 trillion a year, and for servicing fees, the goal for 2023 is $300 million with a target of $350 million to $400 million for next year. This can be compared to the $5 billion in servicing fees for the year. Aboaf also mentions other initiatives in place to increase sales capacity and product features that will contribute to servicing fee revenue growth on a net basis.

The speaker discusses attrition and retention rates, as well as fee headwinds, in relation to the company's growth strategy. They emphasize the importance of each lever and their efforts to achieve good organic growth. They also mention their capital management plans and suggest using the middle of the range for the third quarter as a benchmark for the rest of the year.

The speaker discusses the asset management business and its performance in the past quarter. They mention that there were market share gains in the money fund flows and that they have a strong distribution and investment capabilities in this area. They also touch on the pressure on equity flows and the potential for future growth through strategic M&A opportunities.

The company has seen growth in their money market business due to external factors and investment performance. Their DC investment business has also been growing due to product innovation, such as incorporating annuity products into target date funds. The company plans to continue expanding in the retail and intermediary space, as well as exploring opportunities in blending public and private markets. The team is actively developing new products and is committed to growing this area of the business.

The speaker discusses the growth and potential of the Front to Back solutions and Alpha programs, noting that the journey has been a long one and required significant investment and development. They mention that there has been traction and excitement around these programs, but it may take a few years to see the full impact on financial results. Many early clients have been development partners, helping to shape the overall program. This year has been particularly significant for these programs.

The company is pleased with the progress of its program, which has attracted a significant number of clients and has the potential to bring in new ones. The financials for the current year have been affected by both positive and negative factors, but the company remains confident in its ability to generate revenue growth.

The company has seen a positive 2 percentage point increase in traditional and private servicing fee sales, and they are working to make this more apparent through their disclosure. They are about 30% through the exit of a large client and expect to see the bulk of the impact next year with a tail into 2025. The company expects to achieve positive fee operating leverage through their program, including Alpha, which will result in accelerating revenue growth.

The company's revenue growth is driven by a combination of their Alpha program and their efforts to strengthen sales and revenue capabilities. They are confident in their ability to generate revenue growth. The recent example of Vontobel illustrates the strength of their Alpha program. The company expects to face fewer headwinds in their budgeting process for the upcoming year compared to the previous year.

The company has had to deal with two formal merit increases this year and a larger than usual one in the spring of 2023, leading to a headwind in terms of wages. They are also facing inflationary activity in non-personnel spend and are working on ways to offset this through technology and partnerships. The interviewer asks about the company's experience with the pandemic and its impact on the industry.

The current interest rate environment is significantly different from the one after the financial crisis, with rates potentially staying at 4-5% for an extended period of time. This change may affect the strategies and approaches used by businesses, including the ability to add duration and the value of cash in the ecosystem. With higher rates, cash becomes more valuable and can be used to deepen relationships with clients.

In the future, the company plans to expand its product offerings to include cash integration and management for its clients. This is becoming a more important topic for senior executives and can strengthen relationships and drive business growth. The CEO and other executives discussed this during a conference call.

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