The paragraph is the introductory portion of State Street Corporation's Third Quarter 2024 Earnings Conference Call. The operator announces that the call is being broadcasted live on State Street's website and recorded for replay. It emphasizes that rebroadcasting or distribution without authorization is prohibited. Elizabeth Lynn, Global Head of Investor Relations, introduces the event and states that the CEO, Ron O'Hanley, and CFO, Eric Aboaf, will discuss the company's earnings. The presentation, including non-GAAP measures and forward-looking statements, is available on the company's website. Caution is advised regarding forward-looking statements, which may differ from actual results, influenced by various factors including those found in SEC filings. Ron O'Hanley then begins his remarks.

In the third quarter, State Street demonstrated strong financial performance and business momentum, achieving record-high quarterly EPS. The company reported robust fee and revenue growth, positive operating leverage, and increased capital returns, resulting in strong earnings growth both year-over-year and sequentially. Despite a volatile operating environment due to concerns like a potential U.S. recession, tech valuation issues, and geopolitical tensions, State Street benefited from favorable market conditions following dovish shifts by central banks. The company remains focused on executing its strategic priorities to maintain this positive trajectory.

In the third quarter, the company's EPS increased to $2.26 from $1.25 a year ago, with notable items excluded, reflecting a 17% year-over-year earnings growth and a record quarterly EPS. The ROE was strong at 12%, and both fee and total revenue grew by 7% and 9%, respectively, driving margin expansion. The Investment Services business saw a 3% increase in servicing fees, with significant sales momentum. Despite rising revenue-related costs, expenses were controlled, rising by 6% annually but only 3% year-to-date excluding notable items. The company achieved $466 billion in new AUC/A wins and $84 million in new servicing fee revenue, showcasing the effectiveness of its strategy and the strength of State Street Alpha.

In the third quarter, State Street's Alpha offered a strong competitive advantage, securing significant new mandates and strengthening client relationships. The company announced two new Alpha mandates, with Alpha contributing prominently to the vast majority of its asset wins. State Street's comprehensive front-to-back solutions attracted a significant mandate from a large global asset manager. Global Advisors experienced notable growth, with record cash and ETF net flows, and an increase of $100 billion in total net flows, reaching $4.7 trillion in assets under management. The company improved its market share in several key areas and introduced 20 new ETFs, including those focused on digital assets. Additionally, State Street formed a partnership with Apollo Global Management to increase access to private markets. Stronger client activity in FX trading and securities finance also boosted revenues.

The paragraph highlights State Street's achievements in the 2024 FX Awards by Euromoney Magazine, particularly being named the world's Best FX Bank for Client Service and Research. The company's strong year-over-year net interest income (NII) performance and solid balance sheet allowed for significant capital returns, including share repurchases. Looking ahead, State Street plans to continue returning excess capital to shareholders, conditions permitting. Additionally, it announces that Eric Aboaf will be leaving the company for a new opportunity outside of banking, with a formal search for his successor underway. Eric will assist with the transition through mid-February 2025. Expressing gratitude for his time at State Street, Eric remains optimistic about the company's future.

In the third quarter, the company reported a record EPS of $2.26, with a robust 17% year-on-year growth excluding notable items, driven by fee growth, higher net interest income, and capital returns. The firm demonstrated strong margins and returns, with a pre-tax margin of nearly 28.5% and a return on equity of 12%. Assets under custody and management reached record levels due to market tailwinds and strong client flows. While external indicators for the Markets businesses were mixed, client volumes and balances in FX trading and securities finance showed growth. Additionally, servicing fees rose 3% year-on-year, influenced by higher market levels and new business amidst pricing challenges and client transitions.

The paragraph discusses the company's financial performance and strategic developments. The client transition and lower client activity negatively impacted year-on-year growth, but the company gained $84 million in revenue from back-office mandates, achieving $330 million in servicing fee revenue over the past year. Management fees grew by 10% due to higher market levels and strong quarterly net flows, especially in cash and ETF products. The Investment Management business showed robust growth with a 30% pre-tax margin. The company is enhancing Global Advisors' capabilities in digital assets, private markets, and innovative fixed income solutions. Additionally, the Markets businesses experienced growth, with FX trading revenue rising 15% due to increased client volumes, particularly in emerging markets.

The paragraph details the company's financial performance, highlighting a 13% year-on-year increase in securities finance revenues due to higher agency lending balances and share gains. Software and processing fees grew by 11%, driven by front-office software and data revenues, with third-quarter revenues up 12%. The software business is on track to potentially reach $1 billion in revenue in five years. Net interest income (NII) increased by 16% year-on-year to $723 million, despite sequentially lower growth due to deposit rotation and lower short-end rates. Investment security yields and lending activities partially offset these effects, with strategic repositioning in the investment portfolio expected to benefit NII over the next two years.

The paragraph discusses the financial performance and strategic initiatives of the company. Average deposits have grown both year-on-year and quarter-on-quarter, and there is an anticipation of maintaining similar levels with some deposit rotations. Third-quarter expenses increased by 6% year-on-year due to higher performance-based compensation and investments in technology and infrastructure. Despite this, year-to-date expenses rose only 3% when excluding significant items, thanks to $125 million in annual savings and a target of achieving $500 million in savings through productivity improvements. The company is also benefiting from organizational simplification, process improvements, and automation, leading to a 4% year-on-year reduction in headcount. Additionally, their capital, leverage, and liquidity are strong, with a CET1 ratio increase to 11.6% driven by earnings and favorable rates.

In the third quarter, the company exceeded its capital return goals, repurchasing $450 million in common shares, leading to a total capital return of over $670 million to shareholders, equating to nearly a 100% payout ratio. Looking ahead to Q4, the company plans for further significant capital returns, anticipating a full-year payout ratio of 80%-90% for 2024. While pleased with its Q3 results and overall performance, the company acknowledges the potential for variability due to economic and political factors. Assumptions include flat global equity markets and FX market volatility for the rest of the year, with the rate outlook aligning with the current forward curve.

The paragraph discusses the financial outlook and performance of a company. It highlights that the company expects total fee revenue to be slightly above the initially projected 4% to 5% increase, with net interest income (NII) also surpassing previous expectations by growing in the same range. Due to these improved revenue prospects, expenses are anticipated to rise by about 3.5%, but the company still aims to achieve positive fee and total operating leverage for the year. Heading into 2024, the company expects 3% to 4% fee revenue growth, although NII is seen as a potential challenge. Nevertheless, with effective strategy execution and a solid balance sheet, the company foresees outperforming initial expectations with higher fee revenue growth and a comfortable increase in NII. The paragraph concludes with optimism for a strong end to 2024 and future confidence.

In the paragraph, Eric Aboaf explains that the $80 million loss recorded in the quarter is expected to be recovered over the next five quarters, resulting in a positive outcome for the company. He details that the company has restructured a portion of its $100 billion investment portfolio, focusing on selling lower coupon securities, particularly in the treasury, international sovereign, and supranational space. The repositioning, involving $4-5 billion in securities, is described as modest yet beneficial, aiding in portfolio management and net interest income (NII) growth. Glenn Schorr acknowledges this as a positive development and inquires about a hybrid product with Apollo, specifically regarding the decision to allocate 15% to private credit and its potential for differentiated performance and scalability.

In the paragraph, Ron O'Hanley and Eric Aboaf discuss several topics during an investor call. O'Hanley mentions that their company is in a quiet period with the SEC, limiting what they can disclose, but he highlights their focus on democratizing access to sophisticated financial structures. Brennan Hawken from UBS Financial asks about succession plans in light of Eric's new role, to which O'Hanley responds that succession planning is an ongoing board discussion. Hawken also inquires about the impact of the repo market on their net interest income (NII) outlook, and Aboaf explains that repo is one of the collateralized products they offer to clients, contributing to their financial strategies.

The paragraph discusses the increased repo activity in the market and its impact on the company's net interest income (NII), attributing a 1% increase in NII this quarter to this heightened activity. The speaker explains that more cash and borrowers are present, leading to greater market activity where the company assists clients on both sides of transactions. The conversation then transitions to Alex Blostein from Goldman Sachs, who asks about the durability of State Street's recent profitability improvements amidst a CFO search, questioning whether these improvements are sustainable or dependent on current initiatives. Ron O'Hanley responds, highlighting transparency in the company's strategies regarding revenue and expenses.

The paragraph outlines the strategies and progress of a company across its various business sectors. In Investment Services, emphasis is on enhancing service quality and implementing new sales and client service actions to drive growth. The GA segment focuses on expanding appeal beyond the institutional core, particularly through product innovation in retail with low-priced ETFs and forming new partnerships. The Markets business is aiming to distinguish itself through innovation and overlaps with Investment Services. Productivity and transformation have been priorities since 2019, evolving from addressing low-hanging fruit to fundamentally transforming the operating model through advanced technology use.

The paragraph discusses the company's strategic focus and transition during a CFO change. The company aims to keep its current strategy intact, with ongoing investment and performance targets for revenue growth and pre-tax margin. The search for a new CFO has started, with high confidence in maintaining stability during this transition. Long-term incentives are tied to the achievement of these targets. Additionally, financial elements like net interest income (NII) and the company's balance sheet positioning are addressed, highlighting the early status of planning for 2025's financial performance.

The paragraph discusses the company's financial operations and expectations, particularly regarding net interest income (NII). They don't have new information to share about the next year but expect a modest level of deposit rotation to continue as a headwind. They mention the variability in benefits from their investment portfolio depending on the bonds and note fluctuations in lending activity and repurchase agreements. While they anticipate NII stabilization and growth in upcoming quarters, the exact timing is uncertain. They encourage looking at their performance over longer periods to understand their operating zone, which they consider favorable for their margins. Betsy Graseck from Morgan Stanley then expresses her farewells to Eric, who is leaving, and questions the future NII trajectory in a slower rate cut environment.

In the paragraph, Eric Aboaf discusses the impact of interest rate changes on State Street's net interest income (NII), noting a slight asset sensitivity and indicating that although falling rates have a minor effect on NII, the firm is positioned for stabilization and growth through client activities. Ron O'Hanley addresses State Street's activities in Latin America, emphasizing a moderate expansion focus on servicing as investment markets develop, which aligns with the company's broader growth strategy.

The paragraph outlines the company's focus on expanding its presence in core markets like the U.S., EMEA, and APAC, highlighting significant growth in EMEA and APAC. Although the U.S. growth rate has returned to traditional levels, emerging markets present opportunities for introducing advanced technologies despite requiring modest investments. The long-term plan involves establishing a foothold for future growth. In response to a question from Brian Bedell of Deutsche Bank, Eric Aboaf discusses the company's strategy to allocate more of their $300 billion balance sheet, including $120 billion in risk-weighted assets, towards areas like lending to support clients.

The paragraph outlines the company's strategic focus on relationship-driven lending, emphasizing its role in supporting private markets and asset management clients through various lending activities. It highlights the growth potential in capital call financing, trading activities in foreign exchange (FX), and securities financing, including agency lending and prime services. By using their balance sheet to support clients, the company strengthens relationships, which in turn leads to increased servicing and asset management activities. This approach not only offers good returns but also deepens client relationships, resulting in growth in net interest income (NII) and fees.

In the conversation, Brian Bedell asks Eric Aboaf about the fee revenue associated with new wins, particularly with the Alpha platform and private market initiatives. Eric responds that it's a mix of both accretive fee rates and flexibility with pricing involving deposits. He mentions $330 million in servicing fee wins over the past year and aims for $350 million to $400 million in fees, acknowledging the variability in mandates. Deposits play a crucial part in the relationships, with clients understanding the balance between different financial levers. The discussions often lead to increased collaboration with clients, allowing the company to meet more of their needs. Brian appreciates Eric's detailed answers. The operator then guides the call to Jim Mitchell from Seaport Global Securities for the next question, focusing on deposit behavior post-rate cuts.

In the article, Eric Aboaf discusses the impact of recent rate cuts on deposits, noting there hasn't been a significant change as deposits have been steadily increasing by 1 to 1.5 points per quarter. He attributes the stable deposit levels to the abundance of cash in the system and investor caution due to political and economic uncertainties. Additionally, Eric addresses the servicing fees backlog in asset servicing, which is expected to continue to grow and then stabilize. He anticipates that between half and three-quarters of the backlog will be installed over the next year, with about half of the servicing fee backlog expected to be realized in the fourth quarter and the following year.

The paragraph discusses a company's strategy of continually installing revenue from its backlog onto the balance sheet and profit and loss (P&L) account while simultaneously acquiring new business. Some new business is implemented within varying timeframes over the year. In a conversation with Gerard Cassidy from RBC, Ron O'Hanley notes that during the quarter, the company had two significant Alpha wins contributing roughly $380 billion out of $460 billion in assets under custody/administration. These wins involved both U.S. and international clients, with one being a major global player. The company was able to expand its service relationship with these clients, particularly moving custody services from a competitor to themselves.

The paragraph discusses the benefits of custody services, highlighting opportunities for deeper client relationships and a competitive advantage due to the business's "sticky" nature, likening it to enterprise outsourcing. Gerard Cassidy thanks for these insights and asks about the company's acquisition strategy, given its strong capital position. Ron O'Hanley responds that mergers and acquisitions (M&A) are not a core strategy but a means to accelerate existing strategies, with the company currently seeing promise in its organic growth plans, despite the setback with the Brown Brothers transaction.

The paragraph discusses a past acquisition of Charles River, which was strategically important for creating the Alpha front-to-back platform, but recognized as dilutive and potentially disappointing to shareholders. The company emphasizes its commitment to responsible capital management and prefers organic growth, though it remains open to acquisitions if they significantly accelerate or efficiently realize their strategy. The conversation then transitions to closing remarks from Ron O'Hanley, noting that Eric will remain with the company through mid-February, and the call concludes.

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