State Street Corporation earnings

Management highlights

### Overall Financial Performance - Q2 2026 marked the 10th consecutive quarter of positive operating leverage (excluding notable items), reflecting disciplined execution and broad-based business momentum. Adjusted year-over-year earnings growth was 44%, driven by record quarterly fee revenue and record NII. Pre-tax margin expanded 470 basis points year-over-year to 34%, and Return on Tangible Common Equity (ROTC) increased over 6 percentage points to ~26%. - Capital position remained robust: Common Equity Tier 1 (CET1) ratio was 10.8% and Tier 1 leverage ratio was 5.3% (broadly stable quarter-over-quarter). $631 million was returned to shareholders in Q2 ($400 million in share repurchases, $231 million in dividends), for a 62% payout ratio. A 10% increase to the quarterly common dividend (to $0.92 per share) was announced, starting Q3 2026. ### Strategic Progress & Operational Milestones - **Digital assets**: Announced plans to launch tokenized fund servicing capability by the end of 2026 (subject to regulatory approval). A leading European asset manager selected State Street to service an upcoming tokenized money market fund. State Street Investment Management launched an on-chain tokenized money market fund and a stablecoin reserves money market fund. - **One State Street integrated growth**: A State Street Alpha client entered a strategic partnership with State Street Investment Management to launch a suite of co-branded active ETFs. SPYAM (State Street's low-cost S&P 500 ETF) was selected as the exclusive default ETF for U.S. Treasury-sponsored child investment accounts, expanding the firm's presence in the U.S. wealth market. - **Medium-term strategic pillars**: 1) Accelerate growth in core leading franchises via disciplined investment and deepened client engagement; 2) Prioritize three cross-firm strategic growth adjacencies: alternatives, digital assets, and wealth services, aligned with fast-growing industry revenue pools; 3) Enable growth via technology and AI-enabled operating model transformation, simplifying operations and improving productivity. - **Transformation initiatives**: The firm is reorganizing into an integrated product platform structure with cross-functional agile teams, embedding AI into core processes. The agenda includes technology simplification, cloud migration, legacy application reduction, and enterprise-wide AI scaling. The program is targeted to deliver $1 billion in run-rate transformation benefits by 2029, 75% from expense productivity and 25% from incremental revenue.

Guidance

- **2026 Full-year Guidance (upward revision from prior outlook):** - Revenue growth guidance raised to 12-13% (previously 7-9%), driven by continued organic growth in servicing and management fees, and healthy client activity in markets. - NII growth guidance raised to 14-15% (previously 8-10%), primarily driven by stronger-than-expected average deposit balances. Net interest margin is expected to remain in the 110-115 basis point range. - Expense growth guidance raised to ~8% (previously 5-6%), reflecting higher revenue-related costs and continued strategic investment. - Expected ~500 basis points of positive operating leverage for full-year 2026, implying a pre-tax margin of ~32%. Effective tax rate is expected to be ~22%, and total payout ratio is targeted at ~80% (subject to board approval). - Guidance assumes global equity markets remain flat from end-Q2 2026 through year-end, Fed/BOE rates on hold, and one additional ECB rate hike in 2026. - **Medium-term Guidance (new targets announced):** - New medium-term (3-5 year) targets: expand pre-tax margin to 35% over the cycle, and increase ROTC to the mid-20s. The $1 billion transformation benefit target will be achieved by 2029 (earlier end of the 3-5 year window). - Expected 100-150 basis points of annual positive operating leverage over the medium term, which implies reaching the 35% pre-tax margin target at the early end of the 3-5 year window. - NII is expected to grow low-to-mid single digits over the medium term, with net interest margin reaching the upper end of the 110-115 basis point range. - Capital allocation framework: CET1 ratio targeted at ~11%, Tier 1 leverage ratio targeted at 5.25-5.75%, and total payout ratio remains targeted at ~80% of earnings, with priorities of growing the common dividend, investing in organic growth, and repurchasing shares. - Management expects positive operating leverage in every year of the medium-term outlook, with no back-end loading of benefits.

Segment performance

1. Investment Servicing: Servicing fees were $1.5 billion in Q2 2026, up 13% year-over-year. Assets Under Custody and Administration (AUCA) reached a record $57.9 trillion, up 18% year-over-year. Servicing fee sales totaled $87 million in the quarter. This segment contributes 37.5% of total company revenue. 2. Investment Management: Management fees were $772 million in Q2 2026, up 29% year-over-year. Assets Under Management (AUM) hit a record $6.3 trillion, up 23% year-over-year, with $114 billion in net inflows (fifth consecutive quarter of positive organic growth). This segment contributes 19.3% of total company revenue. 3. Markets: FX Trading Services revenue was $494 million in Q2 2026, up 27% year-over-year (excluding prior-year notable items), driven by record client volumes, with particular strength in Asia Pacific. Securities finance revenue increased 19% year-over-year on higher client lending balances. This segment contributes ~12.4% of total company revenue. 4. Software Services: Total software services revenue declined 14% year-over-year (excluding prior-year notable items) due to elevated on-premises renewal activity in the prior year. Underlying performance was strong: core software and data revenue grew 10% year-over-year, annual recurring revenue increased ~14% year-over-year, and revenue backlog grew 6% year-over-year. This segment contributes ~8% of total company revenue. 5. Net Interest Income (NII): NII was $860 million in Q2 2026, up 18% year-over-year, with net interest margin expanding 17 basis points to 113 basis points. Total company revenue was a record $4 billion, up 17% year-over-year.

Risks & headwinds

- Actual results may differ materially from forward-looking statements due to macroeconomic and market conditions, including changes in interest rates, equity market levels, and global market volatility, which can impact fee revenue, NII, and asset-based balances. - Digital asset and tokenization initiatives face regulatory uncertainty, cross-border regulatory alignment risks, and slower-than-expected industry adoption, which could delay revenue contributions from this strategic priority. - Operating model and AI transformation execution risks: internal reorganization, legacy system migration, and AI integration into core workflows may face implementation delays or unanticipated costs that could impact near-term margins and achievement of medium-term targets. - Pricing pressure risk: while current pricing dynamics are stable, long-term productivity gains from AI could lead to client pressure to share efficiency benefits via lower pricing, which could impact margin expansion. - Capital and leverage constraint risk: stronger-than-expected deposit growth may increase leverage requirements, requiring higher capital buffers that could limit share repurchase capacity or change capital allocation priorities.

Analyst Q&A

• Q: The $250 million in incremental transformation revenue is split between strategic initiatives. Where does this revenue come from, and what is the current and target firm-wide organic fee growth? /

  A: The $250 million in incremental revenue comes from the three cross-firm strategic initiatives: alternatives, digital assets, and wealth services, delivered via the One State Street approach. Alternatives is the largest contributor due to its more mature development stage. Over the medium term, the firm expects 100-150 basis points of annual positive operating leverage, with NII growing low-to-mid single digits driven by low single-digit balance sheet growth and NIM moving to the upper end of the 110-115 basis point range. The baseline 2026 pre-tax margin of ~32% will grow to the 35% medium-term target on this trajectory.

• Q: Why should investors believe this major operating model and technology transformation will succeed when similar past initiatives failed to deliver expected results? What metrics can outsiders track to monitor progress? /

  A: State Street now has a proven foundation of 10 consecutive quarters of positive operating leverage, consistent organic revenue growth, and a productivity-focused culture, with headcount declining even as strategic investments increase. Over 50% of the current management team is new to their roles in the last three years, and has already delivered consistent sequential improvement. Tangible progress can be monitored via net headcount trends, product development cycle times, client service quality metrics, cloud migration progress, and the share of total investment spend allocated to growth initiatives, all of which will improve as transformation progresses.

• Q: What is State Street's approach to digital assets, and why haven't you joined recent industry stablecoin and tokenized deposit networks? Is too much attention being paid to digital assets given their small current revenue contribution? /

  A: State Street is focused on building infrastructure for its core client base of global institutional investors, enabling the transition between traditional and digital finance rather than pursuing every emerging payment network initiative. The firm is prioritizing client-aligned use cases including tokenized money market funds, which fit its existing custody and investment management strengths. Digital assets are a medium-to-long term build, with regulatory alignment and industry ecosystem development still progressing, but there is meaningful ongoing adoption under the surface, and the firm is well positioned to capture growth as the market develops.

• Q: Will the $1 billion transformation require major upfront incremental spending beyond the firm's annual investment budget? /

  A: All recurring transformation spending is already embedded in the current expense guidance and medium-term targets. There will be approximately $500 million in one-time severance-related costs (the vast majority of total one-time costs) associated with headcount restructuring, which management expects to deliver a strong ROI with a fast earn-back. After reinvesting productivity savings into strategic growth initiatives, net headcount is still expected to decline low single digits annually, consistent with recent trends.

• Q: How does AI factor into the medium-term margin targets, and could AI deliver larger productivity gains than currently embedded in targets? /

  A: AI benefits are already fully embedded in the $750 million in projected productivity savings and $250 million in projected revenue gains. AI plays three key roles: it powers efficiency gains in the new operating model via hybrid human-agentic cross-functional teams; it delivers a 30-40% improvement in software developer productivity, enabling faster product launches and more innovation; and it improves enterprise-wide knowledge worker productivity via AI co-pilots for routine tasks. Any incremental gains from faster-than-expected AI advancement would only accelerate achievement of medium-term targets and create additional upside.