The speaker welcomes listeners to State Street Corporation's Second Quarter 2024 Earnings Conference Call and Webcast. The call is being recorded and can only be broadcast on the State Street website with written authorization. The CEO and CFO will present the company's earnings, which can be downloaded from the Investor Relations section of the website. The presentation will include non-GAAP measures and forward-looking statements. The CEO then begins the call.

The speaker begins by acknowledging the recent assassination attempt on former President Trump and condemns the violence. They express relief that the former President was not seriously harmed and extend condolences to all those impacted. They then discuss the company's financial results for the second quarter, highlighting positive growth and expense discipline. The company also took steps to simplify their operating model and successfully assisted clients during the transition to T+1 settlement. The financial market context in the second quarter was mixed.

In the second quarter, global equity markets continued to rise, but gains were limited to a few names. Fixed income markets struggled due to geopolitical risks and expectations of a more gradual rate cut cycle. Despite this, the company remained focused on its strategic goals and saw growth in management fees, FX trading, and NII. Expenses were tightly managed, and investments were made in the business. The company also made progress in key areas and saw fee revenue growth, particularly in asset services with a significant number of wins in the APAC region.

State Street has recently won a large new client for their services, which is a testament to the attractiveness of their client value proposition, Alpha. This win will help deepen existing client relationships and drive future growth. The company has also seen strong servicing fee revenue wins in the past four quarters and is confident in their ability to achieve their sales goals. Global Advisors saw an increase in management fees and AUM, despite some net outflows driven by client rebalancing. They also made progress in strategic focus areas, such as expanding market share in low-cost equity ETFs and announcing a strategic investment in Envestnet to enhance their access to wealth advisory and high-net-worth distribution channels.

In the second quarter, State Street's NII performance was strong due to increased engagement with clients, resulting in higher deposit, loan, and sponsor repo balances. This led to three consecutive quarters of sequential NII and revenue growth and positive total operating leverage. The company's balance sheet remains strong, allowing for over $400 million of capital return in the second quarter and a 10% increase in the quarterly common stock dividend. State Street remains committed to returning excess capital to shareholders this year. Despite making investments in the business and controlling expenses, the company was able to deliver fee and total revenue growth and a return on equity of nearly 12% in the quarter. The company's sharpened revenue strategy also led to another Alpha mandate win, showcasing the advantage it brings to the organization.

The company reported EPS of $2.15 for the quarter, which was slightly lower than the same quarter last year due to a reserve release. Revenue grew by 3%, with higher net interest income and fee revenues supporting modestly positive total operating leverage. Period end AUC/A and AUM reached record levels, largely due to market tailwinds. Servicing fees declined by 2% due to pricing headwinds and lower client activity.

In the second quarter, the company experienced a headwind in year-on-year growth due to a previously disclosed client transition and lower client activity. However, they anticipate a pickup in installations in the coming quarters. Servicing fees were up 1% due to higher market levels and client activity, and the company generated significant revenue wins in the past four quarters. Management fees were up 11% year-on-year, primarily due to higher market levels and net inflows, but were offset by the impact of a strategic ETF repricing initiative. The company is pleased with the steady growth in their investment management business and saw a healthy pre-tax margin of 32% in the second quarter.

In the second quarter, State Street saw an increase in client activity and FX trading revenue, as well as higher balances in securities finance. However, U.S. Specials activity was low, leading to a decline in securities finance revenue. Software and processing fees also saw growth, driven by strong client engagement with CRD. The company expects software to be a significant revenue driver in the future, with the potential to reach $1 billion in annual revenue in the next 5 years. Additionally, State Street reported a new Alpha mandate win and 2 mandates going live in the quarter, bringing the total number of live mandates to 23.

In the second quarter, NII was stronger than expected, increasing by 6% year-on-year and 3% sequentially due to higher investment portfolio yields and loan growth. There was also an increase in noninterest bearing deposits and interest bearing balances, as well as improvements in the sponsored repo business. Average deposits increased by 7% year-on-year and 1% quarter-on-quarter. Expenses were contained, with a less than 3% increase year-on-year, thanks to cost-saving measures such as consolidating two operations joint ventures and streamlining organizational processes. Headcount was also reduced by 5% year-on-year.

The company's actions have helped decrease compensation benefit costs and strengthen their ability to reinvest in their business. Their capital levels remain strong and above regulatory minimums. They have returned over $700 million to shareholders in the first half of the year and plan to increase their quarterly dividend and accelerate buybacks in the second half. The full year payout ratio is expected to be in line with their medium term targets.

The company is pleased with their second quarter and first half results, which show their ability to execute their strategy and drive business momentum. The full year outlook has improved, but is still subject to variability due to the uncertain economic and political environment. The company expects total fee revenue to be up 4-5% and NII to be slightly up year-over-year. Expenses are also expected to be higher, but the company will still deliver positive fee and total operating leverage for the full year. The call is then handed back to the operator for questions.

Glenn Schorr asks about recent institutional lead outflows at Global Advisors and whether they are a result of rebalancing. Ron O'Hanley confirms that the majority of the outflows were due to client rebalancing and expects it to be a one-time event. Schorr also asks about potential consolidation opportunities in the servicing platform, to which O'Hanley responds that they have a strong market position and are focused on organic growth rather than M&A.

Eric Aboaf, the CFO of State Street Corporation, discussed the company's focus on building organically and returning capital to shareholders at a reasonable pace. He also mentioned that M&A is not a strategy, but it can help implement their strategy if it is superior to returning capital to shareholders. The company had a strong second quarter in terms of net interest income (NII) and expects it to be slightly up for the year. However, there is still uncertainty in the environment and the company is actively engaging with clients on both sides of the balance sheet to support their growth. Long-term rates and deposits played a significant role in the strong second quarter results.

The speaker is pleased with the increase in deposits across all levels, which is a testament to their engagement with clients. They expect some headwinds and tailwinds in the third and fourth quarter, with short-term rates trending down and a rotation from noninterest bearing to interest bearing deposits. However, they are seeing an increase in long-term lending and are tactically adjusting their investment portfolio. This may result in some erosion in NII in the next few quarters, but they anticipate an inflection point and bottoming out soon. The speaker believes that core fees growth will improve from here.

The speaker explains that the core servicing fees are driven by retention, onboarding, and sales. Retention levels are higher than expected, and onboarding is expected to increase at an accelerating rate. Sales are also on track for an increased target, with a focus on traditional back office fees. The deconversion process, which has been ongoing for some time, is reaching its bottom.

The speaker discusses the impact of the ECB's rate cut on euro deposits and the company's portfolio. They expect a slow reversal of the industry environment and feel confident in the company's balance sheet being insulated from interest rate changes.

The bank has a slight sensitivity to interest rate changes, with a potential impact of $5 million per quarter on a $2.5 billion base. The euro is a good example of this, as the bank has seen a similar beta in the first rate decrease as it did in the last rate increase. The bank feels confident in its pricing and has built strong relationships with its clients. In terms of repo, the bank believes the recent strength is sustainable based on current market conditions.

Eric Aboaf, the CFO of State Street Corporation, addressed the company's NII story in response to a question from analyst Brennan Hawken. Aboaf explained that the NII, or net interest income, is primarily driven by deposit funding and lending, with only 10% coming from repo. While repo NII was slightly better than expected in the second quarter due to market dislocations, it is not expected to be a major driver going forward. Aboaf stated that the main factors affecting NII will be deposits, loans, and the mix of long and short rates. He also mentioned that the HTM book is currently weighing down asset yields.

Eric Aboaf, speaking on the pace of maturity on the HTM book, says that predicting an inflection or turn in NII is difficult. They expect to see stabilization and then a gradual increase in the next few quarters. The investment portfolio is turning over by $3-4 billion a quarter, which will bring a sustained tailwind with a spread differential of 250 basis points. However, the biggest factor currently affecting NII is the deposit mix and pricing levels of noninterest bearing deposits. Once deposits stabilize, the natural benefits of the investment portfolio and loan growth will come into play.

The bank's lending to clients has resulted in additional servicing business and a net positive impact on NII. The rate environment and Fed balance sheet actions have telegraphed deposit levels over the past 2 years, and the bank expects modest interest rate cuts to have minimal impact on deposits. The main driver for deposit growth is sales, particularly in the custodial activity which brings in deposit balances. The bank aims to increase servicing fee sales to $350 million to $400 million this year, with a focus on custodial activity.

The speaker discusses the company's sales and growth strategy, stating that they expect to see an increase in deposits and fee growth as sales continue to accelerate. They have a goal of $350 million to $400 million in sales for the year and are confident in their ability to reach this due to historical trends and current sales contracts.

In this paragraph, Ron O'Hanley and Betsy Graseck discuss the company's pipeline and its target of $350 million to $400 million. O'Hanley clarifies that the target includes things that are in contract but not yet onboarded. Graseck asks about the company's buyback plans and O'Hanley explains that they plan to increase buybacks and have plenty of room to do so, with a regulatory minimum of 5 and a current SLR of 6.3. Eric Aboaf adds that they expect buybacks to accelerate in the third and fourth quarters and that their most important constraint is the CET1 ratio.

The speaker believes that the company can continue to operate at a good pace and accelerate buybacks, with the right level of preferred equity. They have a range for Tier 1 leverage and can adjust the preferred equity stack as needed. The pace of buybacks will depend on market conditions, but the speaker expects a solid increase. The increase can be thought of in dollar terms or as a curve. The speaker believes there is enough information for investors to make informed decisions.

During a conference call, Betsy Graseck thanked Eric Aboaf for a conceptual chart and asked a question. Mike Mayo then asked a question about the NII declines, management fees, and client deconversion. Eric Aboaf clarified that the NII and noninterest bearing deposit declines should be resolved in the next few quarters, while the client deconversion will still have some impact next year. He also mentioned continued pricing pressure, which has been an ongoing issue for the company.

Eric Aboaf and Ron O'Hanley discuss pricing pressure in the market and how it affects their clients. They expect pricing headwinds to be in line with previous years and are not seeing anything out of the ordinary. The asset management segment is more affected by this, but the business is constantly changing and firms are responding by offering new products such as ETFs and collective trusts.

The speaker is discussing how the wealth management industry is changing and how the company is adapting to these changes. They mention that many companies are focusing on their cost base and technology, which works in their favor as they offer a comprehensive solution. The speaker also mentions their strong relationship with clients and how they support them in both revenue and cost areas. In response to a question about NII guidance, the speaker explains that the slight decline in U.S interest bearing deposit costs is due to normal volatility and not a result of their pricing actions. They also mention that they have seen healthy levels of deposits in various currencies.

In the paragraph, Ron O'Hanley and Eric Aboaf discuss the low volatility of foreign exchange activity and attribute it to the strength of the dollar and its dominance as a global currency. They also mention the lack of substitution for the dollar and its stabilizing effect on the market.

The speaker discusses recent trends in the market, including clients putting more cash into equities and bonds, resulting in natural and transitional flows rather than speculation in currency markets. They also mention slower-than-expected onboarding of clients in the first half of the year, which is attributed to large clients who are also development partners.

The delay in onboarding clients has been caused by both internal issues within institutions and a slowdown in private markets. The company is still bringing on clients but is not yet generating significant revenue from them due to the delay in fund capital being drawn. The call has ended.

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