STATE STREET CORP Q3 FY2024 earnings call

• Third Quarter Performance: The third quarter results showcased accelerating financial performance and robust business momentum, with quarterly EPS reaching an all-time high. - Investment Services: Generated strong AUC/A wins of $466 billion in 3Q, and recorded $84 million in new servicing fee revenue wins, the highest for the year. This was bolstered by the power of State Street Alpha, which contributed to retaining and winning new business. - Global Advisors: Experienced positive net flows in cash, ETF, and institutional businesses, including record quarterly flows in cash and strong ETF flows. Also expanded market share in key product areas and geographies. - Markets Businesses: Saw higher volumes in FX trading services and securities finance. State Street was recognized as a leader in four categories by Euromoney Magazine, highlighting the value of its Markets franchise. - Software and Processing Fees: Demonstrated strong growth, with front-office software revenues up 12% and software-enabled and professional services revenues up 21%. - Cost Management: Continued to achieve productivity savings, with approximately $125 million of year-on-year savings in the third quarter, on track to reach the $500 million target for the year. This was driven by operating model transformation and other savings initiatives.

In the third quarter, State Street achieved a record EPS of $2.26, compared to $1.25 in the year-ago period. Excluding notable items, earnings grew 17% year-over-year. Servicing fees increased 3% year-on-year, with new servicing fee revenue wins of $84 million in the quarter, the highest for the year. Management fees saw a 10% year-on-year increase, primarily driven by higher average market levels and record quarterly net flows. In the Markets businesses, FX trading revenue rose 15% year-on-year, and securities finance revenues grew 13% year-on-year. Software and processing fees were up 11% year-on-year, with front-office software revenues increasing 12% and software-enabled and professional services revenues surging 21%. NII climbed 16% year-on-year to $723 million, but was 2% lower sequentially due to deposit rotation. Expenses grew 6% year-on-year in the third quarter, yet only 3% year-to-date when excluding notable items. In terms of revenue contribution, various segments like Investment Services, Markets, and Software & Processing each played distinct roles in driving overall financial performance.

• Fee Revenue: Now expects total fee revenue to be at or slightly above the high end of the originally projected 4% to 5% growth range. - NII: Full-year NII is expected to be in the 4% to 5% growth range, better than prior expectations. - Expenses: Anticipates expenses to be up in the range of 3.5% this year due to higher revenue-related costs, but still expects both positive fee and positive total operating leverage for the full year. - Outlook Adjustment: Has revised initial expectations upwards, now expecting notably better performance than started the year with higher fee revenue growth and NII comfortably up year-over-year.

• Market Volatility: The operating environment in the third quarter was dynamic, with global equity and fixed income markets experiencing significant movements and risk-off events, which could impact results. - Economic and Political Factors: Changes in the economic and political environment, such as fears of a U.S. recession, geopolitical tensions, and central bank actions, can materially affect actual results compared to forward-looking statements. - Execution Risks: Uncertainty around the successful execution of strategic priorities, client engagement efforts, and the integration of new initiatives like product innovation and market share expansion.

Q: Glenn Schorr inquired about the management actions taken regarding the NII and the five-quarter payback, as well as details on the restructured and offloaded securities in the book.

A: Eric Aboaf stated that the $80 million loss booked in the quarter would reverse out within the next five quarters, and the repositioning involved securities in the treasury, international sovereign, and supra space, with relatively modest $4 billion to $5 billion of securities adjusted on a $100 billion book.

Q: Brennan Hawken asked about succession and repo.

A: Ron O'Hanley mentioned that succession is an ongoing discussion at the Board, and Eric Aboaf talked about repo activity being constructive as it helps support clients and is part of the broad range of services offered.

Q: Alex Blostein questioned the durability of profitability improvements and the NII outlook for 2025.

A: Ron O'Hanley stated that the strategy is clear and well-defined, with no expectation of a new CFO signaling a change in strategy. Eric Aboaf added that medium-term targets are deeply embedded, and they expect NII to stabilize and grow from the current level.

Q: Betsy Graseck asked about NII in a slower rate cut environment and State Street's presence in Mexico.

A: Eric Aboaf said the company is well-positioned to absorb central bank actions, and Ron O'Hanley mentioned that State Street is building out its capabilities in Latin America at a moderate pace as part of its growth strategy.

Q: Brian Bedell asked about balance sheet areas and fee revenue wins related to Alpha products.

A: Eric Aboaf discussed that balance sheet deployment is in lending, FX trading, and securities financing to support clients, and fee revenue wins from Alpha products are a mix of fee rate accretive and related to deposit relationships.

Q: Jim Mitchell asked about deposit behavior and the servicing fees backlog.

A: Eric Aboaf said deposits are expected to remain around current levels, and the servicing fee backlog is expected to have about half of the revenue come through in the fourth quarter and all of next year.

Q: Gerard Cassidy asked about the breakdown of new business wins and acquisition appetite.

A: Ron O'Hanley explained that new business wins from existing clients include deepening relationships, and the company views M&A as a way to implement strategy with a high bar, focusing on accelerating strategy or realizing it more efficiently.