Thank you for coming to our 21st Annual Global Financial Services Conference. Kind of kicking off the company presentations, very pleased to have State Street, a company that you all know that kind of plays, you know, globally, throughout the financial services industry. So I'm very pleased to have them kick off the agenda this morning. Lou Maiuri, President and Chief Financial Officer, and Eric Aboaf, Vice Chairman and Chief Financial Officer. Lou's going to kick it, start us off with a presentation, and then we'll open it up to questions. So thank you.
Great. Good morning, everyone, and thank you, Jason, for having us here today. As President and Chief Operating Officer and Head of Investment Services for State Street, I'm responsible for our products, space, sales and client management, State Street Alpha, Charles River Development, operations and technology, all of which form our investment services business. In today's presentation, I'll basically talk about five areas of which our strategy that will enhance our drive and our revenue growth for shareholders. Before I get started, today's discussion will contain some forward-looking statements. Actual results may differ materially from those statements due to any number of important factors, including the risk factors in our Form 10-K and other SEC filings. Our forward-looking statements speak only as of today, and we may want not update them even if our views change. Let me turn to slide three.
So I'm not going to spend much time on this first slide, but to set the stage for what I'm going to cover today. As many of you are aware, investment services is State Street's largest business. Alongside our asset management and global markets business, we aim to help provide better outcomes to the world investors and the people they serve. In 2022, investment services, including its associated net interest income, represented 65% of State Street's total revenue, servicing $37 trillion of AUCA or 10% of the world's assets at year-end. Its revenues are composed of offerings that span across the investment servicing value chain, and these include back and middle-office servicing fees, front office, commercial, software, and data servicing fees, as well as net interest income from investing clients' deposits.
Now, moving to slide four, I'll briefly speak to some of the key trends and opportunities in our industry to share where we see growth potential. Now, as one of the world's largest asset services, we are witness to a number of global trends, including the continual growth of private markets, driven by the need for higher investment returns, a shift towards lower-cost investment vehicles, an increase in the volume and complexity of investment data, and our clients' need for greater outsourcing solutions to drive improved efficiency for their own growth. We believe we are well-positioned to capitalize on private markets growth, given our capabilities in this area and the extension of our alpha front-to-back offering to the segment, the first in the industry.
We've been market leaders in the ETF domain for years due to our expertise, global technology platform, and interoperability and margin with market participants. We are now leveraging our experience to do the same in collective investment trusts and separately managed accounts. In addition, we believe that the data layer underlying our Alpha platform is the best solution for our clients to connect their front, middle, and back-office operations, reducing friction, connected, fragmented systems, and interact with third-party providers. And finally, our positioning as an enterprise outsourcer with the scale and level of efficiencies we create allows us to be the preferred partner for our clients. Now, many of these industry trends here on slide five, we're focusing to enhance our strategy, which we expect will allow us to capitalize on the opportunities and further grow the company. So let me just cover these quickly.
First, driving revenue growth in our core investment services. two, capturing the private markets growth in the industry. three, continual growth and value-driven by our Alpha offering. four, continued focus on strategic shifts for deposit pricing and volume management. And lastly, our continued commitment to improve productivity and create efficiencies. Now, on Slide 6 here, you can see investment services, recent performance, and opportunities, both from a product and regional industry growth lens. There are a number of areas where we delivered above-market growth, but also areas where we need to better to drive to grow, where we strive for, and we've underperformed. Back office is our most mature market, representing our largest revenue pool and growing at low single digits.
While we underperformed over the past two years, as onboarding took longer than expected for some of our Alpha implementations, as well as weaker sales in North America, you will hear as I move on in this discussion, plans we believe will increase North American market share and a slight pivot in our Alpha commercial strategy. Now, turning to private markets, which has experienced the highest growth, we outperformed given our leading capabilities in this market. It's our expectation that we will continue to outpace industry growth projections as a result. Middle office, we underperformed the market primarily due to impact of weaker fixed income markets on asset values and subdued client activity. Given projected stabilization in market levels, coupled with already contracted business, we're expecting to see revenue growth in this area.
Similar to private markets, front office continues to be a bright spot for us as its strong growth in revenues is expected to continue over the next few years. Lastly, from a regional perspective, while we grew in North America, which is our largest revenue pool by region, we did not grow as fast as the market. As such, we are intervening and intend to replicate the success we've achieved in international regions in North America. Our expectation is the rate of growth in the industry will increase in the next three years, driven by higher levels of outsourcing. I'd like next to focus on what we're going to do to further grow our core investment services at a faster pace. Spend a little time on this slide. Slide seven outlines how we plan to reinvigorate our growth.
Now, following the impact of COVID-19 pandemic in 2020, servicing fee sales increased, notably averaging $250 million annually over the subsequent two years. During this period, the composition of our sales shifted, driven by the evolving demands of our clients towards alternatives and middle-office solutions. While both are relevant growth areas for our servicing business, we need to improve back-office custody sales, as it is our largest revenue pool. Installs more quickly, has significant scale, and drives high-margin ancillary revenues... Our first focus area consists of improving sales capacity. We are targeting an increase in our servicing fee sales to $300 million this year, and are aiming to reach $350 million-$400 million in 2024. A level we estimate would allow us to achieve a 2%-3% organic servicing fee rate upon installation.
To support this growth, we are focusing on the size and the effectiveness of the sales team. We've started to hire high quality and experienced salespeople in targeted regions and products where we see the biggest opportunities. And to improve team effectiveness, we're taking a few actions. We've restructured our sales and relationship management teams, appointed new management to our global clients division, and our primary client segments. We created a team dedicated to just identifying and prospecting new clients to increase our client base and grow additional market share, and segmenting this from our traditional commercial activities to better focus our teams on expected outcomes. We strengthened the sales support function, implemented new workflow tools, centralized administration, and an analytics task. This is all in service to freeing up salespeople so they can really focus on the capacity and the commercial activity.
Another key focus area is the realignment of incentives and accountability. We've adopted best practices from international regions, installing a new head of global North America sales and client management. Importantly, we are changing the compensation structure for relationship managers to reward net servicing fee sales to better promote behaviors aimed at incremental revenue growth. We expect that this combination of the new incentives and the renewed regional accountability will ultimately deliver a 20%+ year-over-year sales growth in North America for 2024. The third area of focus is to accelerate revenue installation. We are focused on prioritizing and standardizing offering construct to achieve faster onboarding. We're also changing the way our sales teams operate to accelerate faster time to market with revenue products, like back office when negotiating a deal. Finally, it's imperative to manage revenue retention. Client losses must be kept to a minimum.
In the last year, we've improved our service levels and continued deepening our client relationships. We saw this reflected in the metrics that we use to track client satisfaction and expect an improved revenue retention rate, excluding a previously disclosed client transition of 97% for 2023, versus the historical 96% measured as an average in the past four years. As such, we expect to maintain the improved level of retention in 2024 as well. On slide 8, I'd like to focus on two smaller but fast-growing business areas, private markets and Alpha. Private markets is a growth engine for our back-office business. State Street has been an established leader in the space, and our growth has exceeded the overall market in 2022. We saw exceptional levels of demand for our offering as we doubled sales.
For a little while, our capacity couldn't keep up with the demand, so we had to invest more in servicing talent, and these actions are now in place as we deploy new technology to build scale and capabilities, and augmented our expertise through targeted hirings, all of which helped improve capacity to match the business growth we are seeing today. We're seeing the results of these efforts, with year-over-year growth expected to exceed 15% this year and next. We also expect a multi-year development plan to result in a consolidation of our leading platform position, enabling us to define the standards for the industry. Next, Alpha is a key differentiator for us in the marketplace. Meeting clients' needs for solutions that integrate and harmonize an increasing amount of data volume and connecting systems.
We have successfully deepened client relationships, and Alpha has enabled us to retain key back-office clients and is starting to support expansion through key back-office relationships. In recent years, we've developed the platform, and we are now pivoting our sales strategy to sequence back-office products first, with the intent to accelerate servicing fee growth. We'll also continue to develop our capabilities, starting with our latest release, that will expand our fixed income functionality, and we expect to win about six to eight mandates in 2024. Now, in addition to pivoting our sales strategy for Alpha, we are laser-focused on accelerating onboarding to expedite revenue realization. Based on what we've learned from our initial set of Alpha mandates, the next generation of mandates should be installed quicker as we've begun to streamline various integration components, and in some cases, further build on capacity.
Now, this should all result in a reduction of approximately two to three months in the average onboarding timeliness, providing clients do not ask us to slow down their implementations. Turning to slide 9, we are focused on better client deposit management to achieve improved client profitability. The last few years have been volatile, with dramatic policy actions by global central banks. State Street benefited from large inflows of deposits during the COVID-19 pandemic. But along with industry peers, has since experienced both pricing and deposit level impacts from dramatically higher global interest rates and quantitative tightening. As we look ahead, we are enhancing our deposit pricing governance to better incentivize clients to maintain deposits with us in a higher rate environment. We have established an executive review committee to drive these objectives and govern our balance sheet and NII objectives.
And while we have always had processes to efficiently utilize our balance sheet, we will further integrate balance sheet management into our client relationships. We already integrate deposit discussions into sales negotiations. However, we will further address balance sheet usage considerations such as clients' transaction volumes, deposit rates, overdraft pricing as part of the client's overall product profitability. We believe these actions should enable us to optimize deposit pricing, as well as see total average deposits stabilize at around $200 billion-$210 billion in 2024. Turning to Slide 10, and I want to finish today's discussion by focusing on productivity and simplification, which are key for us to achieve positive fee operating leverage in 2024.
Across operations and technology, we continue to make progress through three key pillars: operating model simplification, process automation, and resource optimization, in order to create efficiencies and opportunities to reduce expenses while maintaining service levels and resiliency. Let me dive a little deeper into each of the focus areas. On simplifying our operating model, we have consolidated core operation functions while rationalizing 35% of our legacy applications. Additionally, we recently announced an agreement to assume ownership of a joint venture with Atos Group, which will bring additional scale and opportunity to better integrate certain operational processes. Looking ahead, we will further simplify our operating model due to more efficient organizational design and modernization of technology, which we expect to reduce our legacy applications by another 5% and the number of data centers by 20%. Now, process automation is key for us to create the scale to grow.
We've increased our adoption of artificial intelligence and other technology tools, reducing the number of manual transactions we process down by 20% to date from 2021, and an estimated 80% reduction in total by 2024. As well as an estimated 60%-65% of manually matched reconciliation items in total by 2024 from 2022, which will all lead to more streamlined processing. Our resource optimization is the final pillar of our transformation program. Our hiring and investments are dedicated to high growth areas, and we're optimizing and redeploying resources, optimizing third-party spend, creating scale through insourcing, and deploying workload balancing technology. We expect that these productivity actions, as well as the revenue-generating plans I outlined earlier, will drive positive fee operating leverage for us in 2024.
We'll update you on our progress in these critical areas of work as we continue to execute. And with that, I'm going to turn it back to Jason for some Q&A. Thank you.
Awesome, Lou. Appreciate that. A lot in there. Some that you dove into detail, some that you kind of glossed over. So I want to maybe key back to a couple of things. I guess on, on slide nine, I guess the first thing that jumped out to me when you talked about managing NII, it said, including recent portfolio repositioning. Maybe that's more for Eric. But can you maybe just expand on, expand upon that?
Sure, Jason. You know, we've covered a lot of ground, right? We're very focused on our organic growth, our revenue objectives. So Lou covered a lot of that just now. We can dive in. In parallel with that, right, we continue to actively manage our balance sheet. Some of it is around client deposits and how we manage client deposits, client pricing, and the other is how we manage the asset side of the portfolio, which is our lending activity and our securities portfolio. This quarter, we decided to reposition the portfolio. We sold about $4 billion of bonds across U.S. and some of the other developed markets.
We did that because we saw higher levels of prevailing rates that are actually MBS spreads in a couple of markets, and then, we're able to move around the duration position a bit, that will put us in an attractive position. What we've done, the impact is that we've crystallized a $300 million loss for the quarter. Now, that's already been through capital, right? Because it was sitting in AOCI, so there's no impact on capital. And in fact, the trade is actually slightly capital accretive because we're taking out a few higher RWA securities.
And then what it'll do is it'll give us a payback on that, on that as we reinvest those bonds at higher rates, you know, more than 300 basis points higher than what they've been sitting at. And that'll give us a payback within about three years, which will, I think be economically constructive. But it's... In our minds, it's a way to think about, you know, how do we want to position for rates? Where are we? What are the current levels? And this is a good time to make that kind of change.
I think the other thing on that slide that jumped out to me was kind of expecting deposits to stabilize in the $200 billion-$210 billion area. I think that's roughly 10% below at the midpoint where we were in the second quarter. I guess maybe what gives you confidence in that outlook? Clearly, deposits, I think particularly non-interest bearing, have kind of underperformed expectations so far this year. You know, kind of what maybe just give us more color around that.
Why don't I start a little bit on the non-interest-bearing deposits, and I think then, we may cover a little bit of the broader deposit landscape. Non-interest-bearing deposits have been one of those, deposit areas that's actually seen very large fluctuations, right? A couple of years back, we were in the $30 billion range. They peaked at $50 billion, and they've been coming down consistently over the last, you know, three, four quarters in particular. You know, we had estimated this quarter to see $5 billion of net interest during a deposit decline. We're in the $4 billion-$5 billion range, so kind of in line with our expectation. That's a bit lower than the $7 billion decline that we saw from the first quarter to the second quarter.
And what we're starting to see is some burnout in non-interest-bearing deposits. You know, the largest clients with the most at stake have largely moved a lot of their non-interest-bearing deposits into interest-bearing. Some of the smaller ones, there's a little more movement there to go. So we're starting to see some burnout. I think we've been at a place where it'll begin to stabilize, probably in the fourth quarter, certainly into the first quarter of next year. But this is all about, you know, how do we how are we responsive to clients in the right way? At the same time, if clients for many reasons prefer to have non-interest-bearing deposits from American, you know, those are small.
The clients don't want to deal with the tax consequences of those accounts by having interest-bearing, and so they've been in this kind of a different category for many years. You know, that'll stay with us as well, I think, as we level off.
... Yeah, the only thing I'd add is I sort of mentioned this, but I'll put more texture on it, that I talked about this enhanced oversight committee. It's really about agility. It's a very competitive environment out there. We're having conversations with our clients holistically. You know, we look at profitability. We always have done that, but given the recent changes, this is more of a quick intervention. So we have three or four executives that get to make decisions every single day. Corporates, we spend a lot of money with corporates, and we're looking for the balance of trade deals. So where we're getting services from large corporate providers, we're looking to see a balance of trade with deposits sitting on the balance sheet.
And again, we're looking at overdraft usage, deposit rates, client profitability, and having this whole holistic conversation. So we've activated that several months ago, and it's getting traction, so we feel good about it, so.
I guess, yes, Lou, you kind of mentioned expectations, I guess 2%-3% kind of organic growth next year. I guess, you know, the kind of wins we hear about each earnings call are kind of big numbers. Like, how much, I guess, if 2-3 is kind of 40s from step one, and then just how do we think about, you know, what kind of gives you confidence in your ability to actually start to grow in line, to outgrow the market after, you know, lagging some of the results?
Yeah.
in major segments last few years?
Yeah. So let me go through that again. So I think, you know, the thing to think about, and I'll just do this in order. You know, we have $200 million of revenue sitting to be installed, and about $120 million of that is, think of that as back office alternatives. And the way to think about, the revenue realization, the back office side of products, and again, that's more than custody, it's accounting administration, generally takes 0-12 months to install. So a faster time to realization. Your middle front office are a little harder, but much more stickier, and those take 12-36 months.
So I mentioned up there that we want to get that mix of back, front, and middle office, if you will, in the sales pipeline balanced out so that we can start to realize it. We're also in our Alpha proposition, which is a very differentiating proposition to clients, ensuring that we get the back office custody in those mandates, and they come first so we can see that revenue realization. Of course, back office, like I said, generates a lot of ancillary revenues, deposits. It feeds Eric's business in global markets. It helps our GA business, so it really is built in for scale and a velocity with all through State Street.
We've had nice progression of sales, so if you could have the slide in front of you, it showed you that in 2019 and 2020, we had about mid-100s in back office servicing fee bookings. We then upped that in 2021 to 2022 to about $250 million. This year, we're targeting $300 million and tracking pretty well. And so, you know, we feel very confident the market's there. We've had to make some adjustments. As I said, we've hired better people, put some different management in and changed incentives to get that. So the addressable market is there, it's just our execution was uneven. You saw that in Europe and Latam, and it was very, very good performance.
We announced some very large custody deals in Australia this year, so it's really applying the same techniques that we've used elsewhere in here. Private market side is growing at 15%. We're pretty excited about that. And, like I said, at one point, demand was outpacing supply, and so we just had to train up people and get it to the market. So that's been very good. Alpha continues to grow. And then the other thing I'd say is, you know, anything we're selling this quarter, next quarter, first quarter of 2024 and second quarter, there's also a realization in there. So if you're getting back office mandates, we can install those sometimes as quickly as 36 months. So when you add all that up there, we feel pretty good.
And then if you add Charles River's performance and SSGA's performance, and you add global markets performance, we feel very comfortable that we can get into that range of growth that we're seeking, so.
Got it. I guess, Eric, you opened the door up to this, but you mentioned average non-interest-bearing deposits running down $4 billion-$5 billion for the third quarter. I think you talked about $5 billion on the earnings call, so that's a touch better. Why don't we kind of run through kind of what you're seeing for the third quarter so far?
Sure. So let me, let me update, and I think you'll see this is largely in line with our expectations. We expect third quarter fee revenue outlook to be in line with our prior outlook range of up 4% year-on-year, and down 1.5% sequentially, with some puts and takes on some of the line item geography. Quarter-on-quarter, we expect servicing fees to come in at the better end of the prior range of down 1%-2%, as average quarter-to-date equity market levels have been a bit better than expected. As a reminder, the sequential decline is obviously due to the previously announced client transition.
Management fees is expected to be up 2%-3%, which is also better than our prior guide, driven by stronger quarter-to-date organic growth and better average quarter-to-date equity market levels. Front office software and data is expected to be down more than our prior guide, of down 7% quarter-on-quarter, as the timing of some of the previously expected go-lives and on-premise renewals is being pushed out to the fourth quarter. Turning to NII, due to the management of the client deposits and our expectation that some deposit pricing changes will be coming in in fourth quarter rather than in third quarter, as well as a slight benefit from the portfolio repositioning I mentioned earlier. We now expect third quarter NII to be comfortably at the better end of the prior range of down 12%-18% quarter-on-quarter.
Lastly, on expenses ex-notables, we expect third quarter to be slightly higher than our prior guide and come in relatively flat quarter-over-quarter. The uptick reflects higher revenue-related expenses associated with the improvement in the management fees, and some broker costs associated with our repo volumes. You know, we continue to be highly focused on funding expenses, and our, you know, previously announced hiring freeze is in full force, with only limited exceptions for sales and several other requirements. And then finally, just to note that while it'll be a notable and not part of our guide, you know, we do expect that FDIC special assessment to come through, but probably in the fourth quarter, not the third quarter at this point.
And then I got you. Anything on tax rate or buyback?
... No, tax rate is roughly in line with what we had previously guided to. Buyback is on track. If you recall, we had an authorization of $4.5 billion for the year. We did another $1 billion this quarter, which we're pleased to have returned for shareholders in the form of buybacks. You know, we continue to expect, you know, a wholesome buyback in the fourth quarter as well.
Okay. As maybe a couple things to follow up on is, one, with respect to net interest income, you talked about, potential deposit pricing actions coming through the fourth quarter. Can you just expand upon that?
Yeah. If you recall, we had guided that third quarter would have NII of 18%, in fourth quarter, down 2%-6% from there. And what was coming through is pricing changes, really in the back book, the deposit back book. Some of those that were expected in third quarter, right, are actually going to come through in fourth quarter. So what we'll see is a more level decline between the two quarters in terms of NII. I think as we look forward, though, we're starting to think of fourth quarter as likely the trough in NII. Part of that is that deposits are, and non-interest-bearing deposits in particular, starting to burn through and stabilize.
And, you know, we expect that to probably be the turning point. Want to be careful of that. And then, you know, we did guide to quarterly NII into next year, right in the $560 million-$600 million range. And now, based on some of our portfolio actions, you know, we're likely to be at the upper end of that, that range, and, you know, knock on wood, see some, some stability, in the NII line.
You answered a bunch of my follow-up questions in that. Just maybe just one more, though. So, not to pinpoint you, but if, if 3Q is down the better end of that 12%-18%, on the 4Q down 2%-6% of NII, do you want to maybe give us something more tangible to think about that?
You know, we'll have a better sense in a month's time when we do fourth quarter earnings. But for the better end now for third quarter, likely to be at the worst end in fourth quarter. But you kind of, you know, get a roughly a straight line through those. You could also take the, I guess the third and the fourth quarter declines divide by two and give you something of that range. And then I think we're starting to see some leveling off at that point and some uptick, you know, into the first quarter. But yeah, let us get through the next couple weeks.
What we really want to do is see how deposit levels come in from the deposit-raising actions that Lou described in our kind of pricing management have the effects we'd like, and then we'll know more. It's one of the hardest lines to predict, but I know one of the more appealing ones to ask them.
And then I guess on expenses, you know, it sounds like a tough quarter in the third quarter, you know, but Lou, I think, did a good job. It was Slide 10, just kind of talking about how you're thinking about the expense base. It sounds like there's a, you know, a lot of opportunity still, despite the fact you've done a lot, you've kind of, signed up for positive operating leverage for next year. But as you kind of approach the 2024, you know, budgeting season, you talk about needing to hire more salespeople in the U.S. You know, how should we kind of think about, kind of the absolute kind of growth rate of expenses?
I think the context I'd give you is to kind of go back over the last few years, Jason. You know, we went through a couple of years in 2019, 2020, 2021, where we really kept expenses were either down or flat or up, you know, one or two percentage points. I think you saw during this kind of the second part of the COVID era, is we had very dramatic inflationary increases in wage rates and in some of our vendor costs. You know, our expenses for us and actually for the whole industry, you know, we're north of 4%. We're 5% year-on-year in certain quarters, 5.5%.
So you're building a quarterly growth rate in expenses of 1%-2% almost, you know, which is very different than the business that we had tried to, to configure for several years. You know, you've seen us as Lou described, you know, continue down the path of process and, optimization, automation, improvements. And, you know, as we, as we've sort of done our planning for next year, you know, we're kind of going back to where, where we were. You know, how do we, how do we, manage our expenses to be, you know, flattish for a couple of quarters? That's what we're expecting for third quarter. We're probably going to expect flattish into the fourth quarter as well. And so that, that to us, creates a better trajectory into next year.
I'm sure we'll have some merit increases. We need to continue to reinvest in some of the businesses. You know, privates we need to install. If they're going to grow at 10%-15% a year on top line, right, we're going to actually be adding staff there. But at the same time, you know, we want to kind of configure the organization. So, you know, we have some natural attrition. Let's take advantage of that. If we've got some additions needed from a staffing standpoint in privates, can we reallocate work from other areas? So I don't know. I don't want to get ahead of our 2024 planning. We're doing that right now with our strategic planning work. We'll do our budgeting starting in October.
but I think there's an intense focus on how do we actually slow the expense growth rate that we've seen over the last year? And then how do we configure it within, you know, a fee operating leverage range. And so a lot of intensity and focus on managing expenses and just becoming, finding ways to be, to be disciplined, you know, quarter after quarter after quarter.
Great. And then can we get the first ARS question? So what-- I meant to do this in the beginning, but in my excitement to get the conference going, I forgot. For each company, we're going to put up this question, and actually the second question also, and just get your take. There's clickers in front of you that you respond. We do these every year at a particular data set. So you can read it. You know, what's your current position on State Street? And you can kind of read the answers there. I guess, Lou, as you're responding, you know, on the second quarter earnings call, you know, I thought it was interesting, Ron kind of characterized the results as below potential, you know, declared there was a need to demonstrate, you know, fee growth every quarter.
Sounds like Q2 will also kind of be below potential on the fee side. You've kind of talked about some of the actions you're taking to kind of get back to potential. But kind of how would you define full potential, and, you know, what are the key drivers to get there, and, you know, when do you think-
Yeah
State Street can get there?
Yeah, I think that what we had covered on that slide, where I spent a little bit more time, was that, you know, increasing the sales effectiveness is one of those. So I always think of this as really simple. You need to obtain more, retain more, you need to realize more, right? So on the obtain more, we talked a lot about how we're improving the sales capacity, unlocking those capabilities there. On the retain more, it comes down to service quality, first and foremost. We've done a great job over the last 12 months, 18 months, improving service quality. We see that in our NPS scores, and so that allows us not only to retain, but also to grow our share of wallet with clients, and that's part of it.
Sounds like a simple thing, but it's a very complicated, nuanced business that we're in. We talked about the alpha mandates and the realization that just isn't trying harder. We've invested in the products, and I want to add something to Eric's point, is that all that productivity that we just talked about, we're taking those dividends and reinvesting it, right? So we have a platform and alpha that needs constant technology enhancements and functionality, and so that's helping us to improve service levels as well as speed up onboarding. Private markets is a great growth opportunity, but it needs scale, and we're investing in that also, so those dividends are helping us there. So, yeah, we really feel that those are the components, get our North American sales team...
And we're really built, if you think about State Street's history, a product that is built for this region. So the fact that we've underperformed is not a product issue, it's really an execution issue, which we're highly focused on and feel very comfortable. The market's still there. Our customers are. When I think about institutional asset owners and asset managers, they're still under a lot of pressure. They're under fee pressure, they're under growth pressure. They're looking to rent more scale, rent more capabilities and skills. They're going into different product sets. Traditionals are leaning into private markets. Some traditional asset managers are dipping into the wealth channel to see can we go downmarket for separately managed accounts. And those are scale games, and so that's where we can actually play a role to help them.
The addressable market is there, the opportunity is there. It's really those factors I gave you around execution. You know, obtain more, retain more, and realize more is what we're focused on, so.
Well, why don't we put up the next AR? This, we're going to ask for everyone. But you know, what impact do you expect on RWAs from the recent Basel III endgame proposals relative to QQ? So it's going to be, obviously, we get different answers for different business models. When I think about, you know, the State Street business model, you know, not a ton of, you know, credit risk or market risk mainly relative to other GSIBs. Obviously, the introduction of operating risk in operational risk into kind of standardized RWAs could have an impact. Maybe just talk about, you know, maybe if you want to slide the size it, but just what are the potential kind of implications of the recent proposal? You know, it looks like the up 10%-15% is the more buy-side consensus.
I don't know if you want to answer the view there. Thoughts appreciated.
Yeah, Jason, I think the, you know, the survey is actually a good indication of what we're looking at. You know, as you said, you know, there'll be some headwinds and tailwinds for us in the Basel III Endgame rules. And, in truth, they haven't really been finalized yet. There's specifics that matter for us as a trust and custody bank. You know, operational risk will be the big addition. Credit risk will come down some of the drag on securities finance, right? Where we indemnified for treasuries, right? Which never made a lot of sense, you know, we'll see a positive offset.
There's still a little bit of work to be done in the nuances, you know, how does lending to regulated public mutual funds come through in the risk-weighted asset calculation? So there are some areas that are important to us, which is what's going to move us up and down the, you know, the board here. But this is in the range. And in truth, you know, as we step back, there's an implementation period that goes on for a number of years. We are highly capital generative, so we can continue our dividend, our, you know, a good amount of buyback and still, you know, accrete over time for Basel, the Basel III endgame. But in our minds, this isn't something that we've got to do tomorrow, right?
This is something that, you know, first, we've got to get our feedback to the Fed on. We've got to work with some of the industry associations, try to make sure that the proposal's as logical as it could be for the industry, right? Because we're working as the industry with the regulators. And then we'll, you know, we'll work into it, over several years and take it from there.
Got it. Maybe we'll go to the next ARS question. Is what do you think is the biggest headwinds for Basel III? I have to read through those. I guess maybe while, while they're answering, maybe just one of them is acquisitions. But how do you think about acquisitions kind of post-BBH? I saw Softgen maybe looking to do something, you know, it's, how did that play?
Yeah, I mean, we're incredibly focused on organic growth, right? We've done, you know, one material acquisition, you know, five years ago. We do, you know, little bolt-ons here and there. But we're primarily focused on organic growth. I think as Ron has said, that, you know, acquisitions are not a strategy. They're a way to occasionally, and I say occasionally, supplement what we do to either build scale or add a product capability, participate in a new market. So, you know, we'll always take a look. You know, we did one in the alpha area and data services around with a small company called Mercatus, to try to add some capability for private markets for our alpha offering.
We did the CF Global acquisition, which we announced, which is on track to close at the end of the year, which is small, but it's for outsourced trading, right? It can bring in another, you know, $35 million-$45 million of revenues a year. And that really serves our client base. Think about the small and mid-sized asset managers who shouldn't be running trading desks around the world, but where we can provide that offering. So, I mean, those are the, those are the ones that we're primarily, you know, doing a little bit here, a little bit there. But by and large, it's around how do you continue to grow the organic franchise, and occasionally, you know, we'll act.
But, we're pretty focused on organic growth, buybacks, and then, you know, going forward from there.
In the final minute, maybe you could address the number one response in terms of, you know, pricing pressures. You know, a few years ago, it was outsized, kind of fears that this may be stabilized more recently. Let me just talk to you in terms of just what you're seeing in the current landscape.
I think there's, as we've declared earlier, that's usually around 2% headwinds for us in pricing pressures. So everything I've talked about today, increasing our sales production, we believe, you know, that's roughly, if you do the math, 8% of bookings, if you will, to offset some of the headwinds that we've seen. And I think, you know, the second quarter, we saw it perform a little bit better. We think it'll normalize in the third quarter, but it's pretty much in line with what we expect, and that's why we've just got to produce more and more to deal with that offsetting. I think on the revenue retention part, you know, that's something we can control by service quality and cross-selling and things like that.
But, yeah, I think that one is right in line with what we've always said, 2% generally is the headwind.
Perfect. With that, please join me in thanking Lou and Eric for their time today.