State Street Corporation Q3 FY2025 earnings call

Key Points

• Strong third quarter financial results: EPS of $2.78, up 23% year over year; total revenue up 9%; pretax margin 31%; return on tangible common equity 21%.
• Seventh consecutive quarter of positive total operating leverage excluding notable items.
• Product innovation: Launched 39 new products in Q3, including expansions in select sectors and new alternatives exposures; strategic partnerships like with Apex Fintech Solutions to expand wealth services.
• Dividend increase: Quarterly per share common stock dividend raised 11% to $0.84 in Q3; returned nearly $1.5 billion in capital to shareholders year to date.
• Balance sheet strength: Solid financial position enabled capital returns to shareholders.

Investment Services

• Servicing fees increased 7% year over year, with AUCA reaching a record $51.7 trillion.
• Management fees rose 16% year over year to a quarterly record of $612 million, with AUM at a record $5.4 trillion, supported by net inflows and higher market levels.
• Markets: Securities Finance and FX Trading Services saw strong year-over-year revenue growth; FX volumes were up double-digit, and securities finance revenues were driven by balance growth.
• Software and Processing: Front office software and data revenue increased 14% year over year, with annual recurring revenue up ~13% to ~$400 million.
• Net Interest Income: Down 1% year over year, impacted by lower short-end rates and deposit mix shift, but partially offset by reinvestment of securities portfolio cash flows at higher yields.

Revenue Contribution %

• Servicing fees contribute significantly to total revenue, with AUCA growth driving related revenues. Management fees are up due to AUM growth. Markets and software/processing also contribute to overall revenue.

Forward-Looking Statements

• Expect 2025 total fee revenue growth in the 8.5 to 9% range, an improvement from prior outlook.
• NII expected to be down slightly relative to last year's record performance.
• Full-year expense growth now expected to be ~4.5%, up from prior outlook, driven by investments in technology and strategic initiatives.
• Target a total payout ratio approximately 80% for 2025, balancing capital return to shareholders and strategic investments.
• NII and net interest margin expected to improve in the fourth quarter relative to the third quarter, supported by tailwinds like deposit stabilization and reinvestment of securities portfolio cash flows.

Q: How are you thinking about balance sheet management and operating dynamics?

A: John Woods mentioned looking at balance sheet optimization opportunities, focusing on productivity, and strategic initiatives. Deposit levels and mix are improving, with tailwinds for NII and net interest margin in the fourth quarter.

Q: Related to NII improving in the fourth quarter, what's the driver?

A: John Woods noted it's due to factors like stable balance sheet size, improved deposit mix, reinvestment of securities portfolio cash flows at higher yields, and terminated interest rate risk management hedges running off.

Q: Thoughts on State Street's stock underperformance and shareholder value?

A: John Woods highlighted fee-based tailwinds, innovation, strategic overlap of businesses, stability and visibility of net interest margin, and expense optimization as areas to drive shareholder value.

Q: Update on fee wins and installation cycle?

A: Backlog at $400 million, with half expected to be installed by year-end and remainder by 2026; installation cycle is on track with attractive mix of back office and private market opportunities.

Q: Expense flexibility and operating leverage for next year?

A: John Woods stated there are discretionary levers to pull, with markets and NII acting as shock absorbers; expense growth can be flexed based on revenue environment to maintain positive operating leverage.

Q: Exposure to NDFIs and BDCs?

A: John Woods said loan portfolio is small, concentrated in private credit and private market space, with high-quality, diversified exposure and no significant deterioration in credit seen to date.

Q: Charles River and fixed income clients?

A: Ron O'Hanley mentioned significant development effort in Charles River, with backlog including clients for fixed income side, and growth in all segments continuing strong.

Q: Reinvestment rates and deposit beta?

A: John Woods discussed deposit levels, mix improvement, and reinvestment of securities portfolio cash flows, with tailwinds supporting net interest margin and NII in the fourth quarter and beyond.