State Street Corporation Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Financial Performance: Reported EPS $2.17, excluding notable items, fee revenue increased 12% and total revenue increased 9% year-over-year. Delivered positive fee and total operating leverage, pretax margin nearly 30%, and 19% return on tangible common equity (ROTCE) excluding notable items.
• Business Momentum: Investment Services secured over $1 trillion in new AUC/A asset servicing wins and $145 million in servicing fee revenue wins. Asset management rebranding to State Street Investment Management marked AUM exceeding $5 trillion. Markets business saw significant growth in FX trading and securities finance revenues.
• Balance Sheet: Strong financial position enabled over $500 million in capital return in Q2, with intention to increase quarterly common stock dividend by 11% following Federal Reserve stress test results.
• Operational Efficiency: Generated over $150 million in year-over-year savings during the quarter, with $250 million year-to-date towards $500 million full-year target. Repositioning charge of $100 million related to operating model transformation to drive further efficiency.

Segment Performance

• Investment Services: Servicing fees increased 5% year-over-year, supported by higher average market levels, net new business, improved client activity, and currency translation. Secured over $1 trillion in new AUC/A asset servicing wins and generated $145 million of related new servicing fee revenue wins, including 2 new State Street Alpha mandates. AUC/A reached a record $49 trillion, up 11% year-over-year.
• Asset Management: AUM reached over $5 trillion, increasing 17% year-over-year, driven by higher period-end market levels and positive net inflows ($82 billion quarterly net inflows). State Street Investment Management rebranded, with U.S. ETFs leading the industry in trading volume, surpassing $4.6 trillion in total volume for the quarter.
• Markets: FX trading revenue increased 27% year-over-year, securities finance revenues rose to the highest level since 2019, supported by record quarterly FX volumes and client flows during volatile market conditions.

Guidance

• 2025 total fee revenue growth expected in the 5% to 7% range, an improvement from prior 3% to 5% outlook.
• Full year net interest income (NII) expected to be roughly flat to last year's record performance, with potential variability from global monetary policy and deposit mix changes.
• Full year expense growth now expected to be roughly 3% to 4%, up from prior 2% to 3% outlook, reflecting revenue-related costs and currency translation impact.
• Continue to expect positive fee and total operating leverage this year.

Risks

• Market volatility driven by geopolitical and economic uncertainty, which could impact financial performance and business momentum.
• Regulatory changes and their potential effects on the company's operations and profitability.

Question and Answer

• Q: Ken Usdin asked about fees and fee operating leverage.

A: Ron O’Hanley responded on sales pace, servicing fees target, and organic revenue growth, noting accelerated sales pace and progress towards servicing fee targets.

• Q: Glenn Schorr asked about NII.

A: Mark Keating explained NII guide, deposit levels, loan growth, and interest rate impacts, stating NII expected to be flat to record year despite headwinds from interest rates.

• Q: Glenn Schorr asked about M&A thoughts.

A: Ron O’Hanley stated consistent M&A view with focus on organic growth but viewing M&A as complement to strategy if it makes sense for shareholders.

• Q: James Mitchell asked about asset management net inflows and regulation.

A: Ron O’Hanley and Mark Keating responded on organic growth in asset management and regulatory views, including Tier 1 leverage ratio considerations.

• Q: Alexander Blostein asked about sales momentum and redemptions.

A: Ron O’Hanley and Mark Keating discussed retention rates, client wins, and historical sales growth trends, emphasizing service quality and global footprint.

• Q: Alex Blostein followed up on NII and operating leverage.

A: Mark Keating talked about NII drivers and future considerations, including deposit levels and investment portfolio impacts.

• Q: Michael Mayo asked about volatility and core business momentum.

A: Ron O’Hanley and Mark Keating discussed volatility impact and business momentum, noting continued strength in core businesses despite market conditions.

• Q: Betsy Graseck asked about University of California super app.

A: Ron O’Hanley explained the initiative as an experiment to develop innovative wealth offerings consistent with democratizing investing.

• Q: Ebrahim Poonawala asked about capital payout and deposits.

A: Mark Keating discussed capital return targets and deposit levels, highlighting deposit moderation and custody's role in generating deposits.

• Q: Brian Bedell asked about market return assumptions and tokenization.

A: Mark Keating and Ron O’Hanley responded on market return assumptions and tokenization outlook, noting expected acceleration in tokenization with regulatory developments.

• Q: Gerard Cassidy asked about revenue sensitivity to market moves and rebranding success.

A: Mark Keating and Ron O’Hanley answered on revenue sensitivity and rebranding impact, discussing market influence on revenues and the concept of one State Street strategy