Good afternoon, everybody. Thank you for joining us. We'll get started with our next session. I'd like to welcome Ron O'Hanley, State Street Chairman and CEO, Eric Aboaf, Vice Chair and CFO. State Street is one of the largest global asset servicing and asset management firms, with over $46 trillion in assets under custody and administration and over $4.7 trillion in assets under management. Over the course of 2024, State Street saw stabilizing fee growth with positive sales momentum, a meaningful improvement in NII, positive operating leverage, and a robust pace of share repurchase. So, clearly, all very welcome signs for investors in the stock. We'll spend some time today discussing the progress State Street is making against a number of these key initiatives. So, thank you both for being here, and we'll talk a little bit about 2025 as well. But good to see you both.
So, let's start with a bit of a kind of high-level priorities question, Ron. I'll start with you onto 2025. We've seen clearly another eventful year for financials and markets, and hopefully ending on a good note here. But looking back, what do you view as kind of key achievements for 2024? And more importantly, what are some of the key strategic priorities for State Street into next year?
Sure. And Alex, first of all, thanks for having us here, and thanks all of you for being here today. We're quite pleased with the progress in 2024. Year-to-date performance through the third quarter, we've got over 100 basis points of positive total operating leverage. We've got ROTCE at 18%, and we expect a strong finish to the year. But that didn't just happen, and maybe we can talk about how it got there. I would credit it to our being in a position to be able to capitalize on what's been a reasonably constructive environment over the last year. And what do I mean by that? We've talked to you before about our strategy, and there's a few elements to it. First is around the operating model. What really defines how we do in our business, particularly the core servicing businesses, is service quality.
What is the experience of our clients? And we've invested heavily in our operating model with the objective of improving service quality, which is a combination of faster speeds, lower errors, improved client experience, but it also has the benefit of lowering costs too. And the operating model has been very important because if you think about where the business has moved to, it's moved to being focused on back office, custody, and fund administration to also being about enterprise outsourcing, where we're taking on the activities of big fund managers, big asset owners, private equity firms. And you need to be able to scale that. You need a service model that's not only scalable, but delivers that kind of client experience that I was talking about.
So, over the course of this year, thanks to work that we started really going back to the early 2020s around transformation and how we were going to think about our technology and operating model, we've got better service, better client outcomes, and more efficiency. Second part of why we've been able to achieve what we're achieving in 2024 really is around the selling and client service model. We talked to you about this, I think going back to 2022, some of the changes we made there. We started putting out sales targets in terms of what we're going to do, and we're achieving those. I mean, the business momentum, we said we would do $350-$400 million in new business revenues in the core investment servicing business. Right now, the trailing 12 months is $330 million.
Fourth quarter is usually a fairly strong quarter, so we definitely have that $350-$400 in sight. On Alpha, and I assume we'll talk more about Alpha, but we've got five new mandates year to date, including our second in private markets. And then Global Advisors, which we don't talk about as much as we do the rest of the business, but it's just having an incredibly strong year. We had record flows in the third quarter of $100 billion in assets, record cash flows, and positive flows across each one of the businesses. Money market funds continue to be strong for us. We're expanding share there. SPDR is expanding share in the low cost, which low cost segment is really, really important because that's where the retail investor is, and that's where the sticky assets are. So, we launched that product later than most.
We launched it kind of the 2018, 2019, but we've expanded share every year and continue to grow there. We're expanding share in EMEA as the ETF becomes really the product of choice there. Third element of how we've been able to achieve the performance really is around innovation and product strategy. Global Advisors, 80 new products this year. We've launched ETF-as-a-Service , which is centered in Global Advisors, but it leverages the servicing strength that we have elsewhere, and it's enabling others that want to get into the business to be able to provide them a kind of ETF in the box. Global Markets continues to innovate in terms of its channel expansion, and we've then therefore been able to continue to grow there. Then finally, in Charles River, we have taken the core Charles River platform, and we're expanding that into wealth now.
Such that about 20, almost 25% of the Charles River revenues are wealth-related, which is an important additional business for us, so, as we think about the second part of your question was, what does this mean for 2025, and I would say we're going to build on that strategy. ETFs continue to be the vehicle of choice, and between what we're doing from a servicing perspective and then what we're doing from a sponsorship perspective, we're taking advantage of that. The complexity that our servicing clients are facing continues to grow, and because it's continuing to grow, their costs are growing up, their technology needs are growing. That enables us to provide them with more services. That induces them to want to be thinking about more outsourcing, so, we see these kinds of trends out there. Certainly, some of them are headwinds.
Like the shift from mutual funds to ETFs is a headwind for the entire servicing industry. But when you're the largest ETF servicer and the most innovative, we're able to take advantage of that. On the revenue side, we'll continue to do what we've done in terms of the core selling model, but doubling down in the strategic areas we've talked to you about before. One is private markets. Private markets continue to grow, both for us on both the asset management and the servicing side. This is a market that is very stubbornly an insourced business. But as the world becomes more complex for these private market players, that also is inducing, even amongst the largest players, a trend towards more outsourcing. And then finally, we're a business that's about scale in everything that we do. And you achieve scale by focusing on your operating model.
So, we've talked to you for years now about how we're transforming that, and we continue to do that, and we continue to work towards standardization, simplification, and trying to get scale out of everything we do. So, in some respects, what we expect to see in 2025 is more of the same, with a little more emphasis on what I alluded to earlier on wealth.
Great. Well, thank you. That's a great overview, and it's a nice setup for all the things we'll talk about over the next half hour or so. So, why don't we start with your largest business, the servicing business? It is probably the number one question you get from investors in terms of turning the business around, starting to maybe see some growth there. No doubt there are some structural headwinds in the business. There are some cyclical ones as well. And then State Street also had some idiosyncratic issues to deal with, like the BlackRock deconsolidation, et cetera. So, as you think about everything you just highlighted in terms of what you have in place, is that enough to outrun some of the structural challenges that the end customer base is facing?
Maybe you can just remind us again, what do you think is a reasonable organic base for your growth, Alpha, in the servicing business over time?
Yeah. So, maybe I'll start with that because I think that's important context here. Because as we changed over the sales and service model and we started putting out these sales targets, if you think about what we've got out there now, $350-$400, that's 2-3 percentage points of growth right there. If you do that, and that's before any kind of tailwind in terms of market growth or any other kinds of fees that we might derive from all that. So, the important thing that we had to get right is let's make sure that we're maintaining, if not slightly growing, our share. Secondly is this focus on some of these higher margin and growth areas. And the two that I would focus on, one is private markets, which I alluded to, and then finally software.
And in both those cases, we believe we have visibility four or five years out to create billion-dollar businesses out of each of those. Private markets is about halfway there already. And if you think about the structural kinds of things that are going on there, which are just advantageous to a servicer like us. You look at software. I mean, if you go back four or five years ago in the early days of Charles River, I mean, it was just a little bit of a rounding error. Now it's 6% of our revenues. And again, we see visibility in terms of the growth of that to be another billion-dollar business in four to five years. So, those things, which are important companions to the core services business, we think position us now for a future that's got lots of growth characteristics.
It's not that those headwinds in the core business aren't there, but the kinds of things that I've talked about more than offset those kinds of headwinds.
I gotcha. I gotcha. Let's spend a couple of minutes on private markets. It's an important area for the firm, but it really is an important area for financial services. It's one of the fastest growing parts of the market, as you pointed out. You have a couple of targets on that. So, about $500 million of revenues today. You hope to double that. So, you're getting that to a billion call over the next five years or so. What gives you guys the right to win in that space? What does the competitive landscape there look like relative to more traditional business?
Yeah. So, the historic business, historically that business has been kind of a traditional GP/LP business. Lots of it was insourced, and you had some bank and non-bank competitors. Because oftentimes what the private equity firm or private credit firm was buying was some software, maybe some software and services, but they were doing a lot of it inside. As that business has moved away from the traditional, let's raise a fund and let's get LPs in at $50 million, $100 million each, as you have all these either semi-liquid kinds of products or just all these structures where you've got a much larger number of underlying investors, that's just become much more complex. And that is not an insourced business. That feels a lot like a retail business. It's got elements of transfer agency.
So, that movement and the democratization that's going on, and has been underway for a while but continues from a servicing perspective, is actually very attractive for us because it will push this from being a largely insourced to, I think in the very near future, a mostly outsourced kinds of business. Secondly, the complexity that these firms are facing is pretty significant. It's a little bit like if you go back to the long-only equity business 40, 50 years ago, right? It was you had equity firms, you had fixed income firms, and everybody did their own thing. Operationally, these were pretty simple. I mean, if you think about now, particularly the largest ones, they're private credit, private equity. They've got all sorts of different fund structures. They've got direct investments. They've got side pocket kinds of things.
Operationally, these are very complex and we think will be of benefit to a servicer like us. The other challenge is for the non-bank or the smaller boutique providers, their ability to enter what's really more of a service as opposed to a software is relatively, that's a high bar to get. Remember, people talk about software and services together. Succeeding at each of them are actually quite different. Software, we know what that's about. You create the software, you figure out ways to scale, you figure out ways to have regular releases, you get the subscription model in there. Services is about how do you take something on, set some standards, doing it in a way that's scalable so that you're able to put your own margin on something that somebody has outsourced to you and wants to get done at a lower cost.
So, that fundamental there we think is actually quite attractive. And the growth prospects, again, because it's largely an outsourced business, excuse me, largely an insourced business moving to outsource, we think is actually quite attractive.
Got it. Okay. You mentioned Alpha is an important component of the growth story for you guys, and you've given a lot of KPIs around it, so we do appreciate that. So, I guess following the onboarding of some of the larger asset managers, I'm curious to hear sort of what are some of the key lessons learned about the process? What are some of the specific improvements are you planning to do to sort of enhance the onboarding experience for end clients? And maybe talk to us a little bit about the pipeline of both the clients and the revenues that are likely to be installed here over the next kind of 12 to 18 months.
Yeah. So, you've asked a lot there, so let me unpack it. First of all, I think at the end of the third quarter, we talked about 23 onboarded. It's now 25 as of today. So, 25 onboarded. A couple of things that we've learned. Onboarding itself needs to have standards, and it needs to be done in a scaled kind of way. Some of our earliest onboardings were development partners. They're the ones that have gotten a lot of the news, and they were intentionally chosen. And well, we selected each other, but they were intentionally chosen because we wanted very large, very complex development partners because if you got it right for them, you were going to get it right for everybody else. But it's forced us to push our own envelope from a developmental perspective.
I'm going to push the development partners aside because they were chosen for that. What we've learned elsewhere is that there's really lessons learned for us and lessons learned that we basically have to impose on our clients. For us, it's about having highly repeatable processes and to, as much as possible, not stray from those. And those processes also include what you're going to onboard first and not first. Early on, we were a little bit probably too relaxed about the order in which we would take things. Right now, we take the back office first. And we do that for a number of reasons. But the primary one being is it's a very, very rapid way to bring revenues on. And when you're moving a back office from whether it's client A or client C, they kind of all look the same.
So, it just doesn't take as much time as it is taking the operation of client A, standardizing it away such that we can bring it on. So, that's the important lesson there. The other point, though, is it's almost qualifying our clients in the sense of, here's what you need to do to actually go through this. Because when a client's going through this, it's not just about, hey, go do this for us, State Street. They're making, we're usually part of a fundamental transformation they're doing themselves. And while we do, I just told you, we've done 25 of these, they're going to do one in their career. And they're doing it right now. And they probably haven't done one before. So, there's a lot more training that we have to do.
Just talking about this with one of our clients this morning about actually, before we even get started with them, taking them off-site, taking their people off-site and really helping them on learning how to do large, complex project and program management. So, those would be some of the lessons learned that I would describe there. In terms of the pipeline and the outlook, I mean, it's as good as ever. We're probably a little bit more discriminating for the reasons that I just described and making sure that not only are we ready, but is the client ready to do what we're talking about, what they're talking about here.
Right. It's a little more pacing, I guess, on the pipeline where you're ultimately taking on. Okay. Okay. Let's shift gears. Let's talk about Global Advisors. You mentioned a couple of really interesting stats in terms of the progress that they're making, whether it's the low-cost ETFs with retail. I wanted to take a slightly different direction and talk about some of the innovation you guys are doing in that channel, particularly with respect to alternatives. The Apollo partnership grabbed a lot of headlines, I think a few weeks ago. There was also an announcement about you guys partnering with Bridgewater. I guess comment on both of those. Why do those kind of make sense, especially the Apollo one and private credit? But also, what else are you sort of thinking about as the next leg of growth within particularly the ETF franchise and SSGA?
Yeah. Well, let me preface this. We're still in the quiet period with the SEC, so my comments will probably be unsatisfying to everybody here, but if you think about what's going on, I go back to what I said earlier about the democratization of alternatives, which sounds highly principled, and it is, but it's also about these firms trying to grow and be competitive and try to reach more and more clients out there, and if you think about how to do that, the traditional GP/LP structure just doesn't work, so you've got to be thinking about whether they're liquid kinds of things or semi-liquid kinds of things. We've seen lots of growth and lots of different kinds of vehicles out there that are semi-liquid, BDCs, some of these interval funds and things like that.
Obviously, the Holy Grail is an ETF because that is at the other extreme of being liquid and tradable and all that. And what we think, what we're working on in that regard is how do you think about bringing public markets and private markets together with a better outcome than either one would be on its own? That better outcome being described is not just in return, but in terms of liquidity characteristics. So, that's the kinds of things that we're thinking about there with both Apollo and Bridgewater. And we think there's a lot of demand for this because I talked about the ETF being the vehicle of choice. One of the reasons why it's so attractive, even in markets where there's not the same kind of tax advantages that there is in the U.S., is that it enables the advisor.
The advisor can act as a sort of portfolio manager, but within lots and lots of boundaries. Because the actual product itself is defined, the RIA or the independent, whoever's the one doing there, they're not actually doing the fund management. What they're doing is a form of asset allocation or portfolio construction, but with high-quality liquid building blocks that are enabling them to achieve what they need to achieve. So, that's what we're trying to do with this, and we see lots of runway on this in the near future. The other thing it does is obviously lots of long-only managers are interested in participating in privates. Going out and buying these firms is actually really hard. Going out and starting one is probably even harder.
But it goes back to if we're able to, in effect, lend a distribution platform here and get paid for that, we're able to participate in it and to participate in it with really high-quality partners like Apollo and Bridgewater.
Great. Okay. That makes sense. Okay. Let's shift gears a bit away from some of the strategic topics, talk about some of the financial dynamics. Starting with the fourth quarter update, we're kind of approaching middle of the month, kind of later innings of the quarter. Lots of moving pieces since the earnings call in October clearly. So, the U.S. equity markets are much stronger than non-U.S., less so. There's the dollar dynamic, right? U.S. dollar got a bit stronger, which tends to be a bit of a headwind to a part of your business on the top line. Currency markets have been generally pretty volatile, so that's probably a good thing. So, unpack this for us and let's kind of walk through what it means for fees and NII and expenses relative to the guidance you talked about on the last quarter's call.
Yeah. So, we expect, as you can probably tell from my enthusiasm, we expect an even stronger finish than when we spoke to you at third quarter earnings. We now expect full year revenue growth for both fees and NII to be comfortably towards the very top end of our 5%-6% range. And we expect 200 basis points of both fee and total operating leverage, excluding any notable items that will be out there. So, again, we still got a few weeks to go, but obviously that's a stronger finish than what we thought we were going to achieve when we spoke to you all in October. But we're feeling quite good about the year.
Great. Any key drivers behind that? So, either on NIIs at the size of the balance sheet, deposit dynamics. I know the repo markets have been sort of active as well, so maybe that's contributing. And same thing on fees, maybe a breakdown like servicing versus trading, any other color?
Yeah. I mean, it'll look a lot like in terms of what you saw in the third quarter in terms of the relative contributors there. Obviously, I talked to you a little bit about sales performance. We've talked about onboarding. So, all those things are actually contributing to all this. You've got a little bit of a market tailwind there. And because of what I've just talked to you about NII, obviously we're feeling quite good about deposits.
Yeah. Well, that's great. So, maybe with that, let's talk about next year to some extent as well. I know this is not typically the time when you give out guidance for the following year. You usually do it on the fourth quarter earnings call, but maybe you can give us a couple of building blocks at least to start thinking about next year. So, with respect to 2025 NII, how are you thinking about the trajectory of deposits? The rate curve obviously is maybe a little bit healthier than it was a few months ago. Slightly fewer rate cuts, at least in the U.S. But any early thoughts into 2025 NII and how we should be thinking about it? Maybe that goes, Eric.
Yeah, Alex, it's still a little early. We need to get through fourth quarter. I'd say we have similar tailwinds and headwinds that we're navigating through quarter to quarter. The tailwinds are the recouponing of the investment portfolio, right? Largely fixed rates. That helps us. Loan growth's been in the double-digit range, so that helps us as well. And then the headwind side, we have a little bit of asset sensitivity, in particular in some of our non-dollar positions. So, as rates float down, and I use that word gently because we don't really know the exact pace, we'll have a little bit of a headwind there. And then deposits, we're still just getting to that asymptote and that stabilization point on non-interest bearing that we're looking for.
And so, the guide is in line with where we were back in October that it's, I think I'd said the next few quarters, we'll see a stabilization, 4 Q, 1 Q, 2 Q, somewhere in there. It's hard to call it exactly. And I think once we understand, once we see, I think we know what to look for. Yeah, as the quarters play out, we'll have a good sense for what the full year will be because by then it'll kind of, we'll get to that stabilization. I think there's some open topics still, right? Equity markets up is actually a modest tailwind because with custodial assets come some custodial deposits. We'll see if that keeps going or not. A lot of talk about quantitative tightening coming to a close, but we don't know when.
So, there's some open topics that we're just kind of being observant about, I should say. So, a little early to tell, but I think we're same kind of guidance that we've given in the past, but with a good finish to the year as Ron noted, which is nice.
Yeah. Well, higher jumping off point always helps, so we'll take it. So, let's shift gears and talk about expenses a little bit. It's one of the kind of achievement points, Ron, that you highlighted in your earlier comments today, and clearly nice finish to the year with the 200 basis points of operating leverage as you just highlighted. Can we talk a little bit about how you think about sort of durability of the progress you made there? So, as you look out into 2025, I know early days still, but how are you thinking about sustaining this degree of operating leverage and expense control? And especially with Eric moving on and the new CFO search is underway, does that play a role into how the expense trajectory for the firm could evolve?
Yeah. So, let me first talk about how we think about putting together an operating plan and a budget because the focus over the last couple of years is building business momentum and top-line revenue growth. Early on, it was really about getting the expense base under control, and we spent a lot of time on that. More recently, it's been around building that kind of sustained revenue growth. And I talked about some of the things that we put in place there across the services business, GA, and global markets. So, we start with that. On the expense side, we have an ongoing, we're in our fifth year now of an ongoing transformation program. Early on, it was about the things you'd expect us to as the low-hanging fruit. Given the nature of our business, I mean, we're an enterprise outsourcer.
We have to be thinking about our operating model. We have to be thinking about how do we do things faster, less errors, higher quality outcomes for the client, and that will end up in almost all cases driving lower expenses, so we continue to focus on that, and when I say focus on that, there's different ways that you go about it. Early on, it was, did we have the work in the right place in the world, right? Are we doing the right things in the right places? I mean, do you really want to be doing things on Sixth Avenue in New York when you might be able to do them in Hyderabad? Those kinds of things. More recently, it's been about the operations and tech stack and how do we think about continuing to substitute technology for operations, technology for people.
This isn't like in a traditional manufacturing where you're taking out a bunch of people and all of a sudden you've got a bunch of robots in there. This is about how you think about taking elements of the job and automating those. That journey, that is a long way to go. I mean, everybody talks about AI now. I would say that certainly the kind of AI where we've gotten the benefits from is all about kind of last-generation machine learning, which all of us, I think, have gotten lots of benefit from and see even more. This next generation will provide us even more to that. The way we think about that, so how does that translate into the budget? What do we need to do to achieve the top-line growth? Then let's spend a little less than that, have that positive operating leverage.
Now, sometimes the environment isn't constructive for that. You get years like we've got in 2022, for example, and you're not able to achieve that. So then you've got to be thinking about, well, where am I, from a discretionary basis, how can I take expenses down? But our goal in any given year is to be able to continue to take down business-as-usual expenses and to reinvest part of that back into the business, whether it's creating more scale, creating more innovation, opening new markets, etc. And how that's translated into, I mean, if you look at this year, notwithstanding the positive operating leverage that I just described to you, we will be investing $1 billion into the business across the board in terms of technology, in terms of new capabilities, in terms of more automation in the business.
So, now, would that make sense if we had a less constructive environment? Probably not, right? We want to return more of that. Without having that top line to be able to enable that, we'd probably want to return more of that. But it's building in that flexibility so that you can actually be building for the future, but creating that positive operating leverage so that you're generating the kind of capital return that we want to for our shareholders.
I got it. Well, speaking of capital return, let's hit on that in the last couple of minutes here. So, on the last call, you talked about Q4 repurchases surpassing third quarter level of $450 million, I think you guys did. What are your latest expectations? And again, more importantly, as you kind of think a little bit further out into 2025, how much of a benefit do you guys think you can get from pull to par, any kind of other dynamics as we start to pencil out our capital return expectations for next year?
Yeah. Alex, it's Eric. Let me take that. Capital return has been proportional to the growth of the business this year. If you think about it, we've consistently raised our expectations for revenue growth up through today. And similarly, first quarter was $100 million capital return buyback, second quarter $200 million, third quarter $450 million. So, nice step upwards. And we said and continue to feel comfortable delivering somewhat higher than that for the fourth quarter. And that's really been based on the broad-based business momentum, which brings higher revenues across many, if not all of our businesses, and then more EBIT and more earnings that we can return to shareholders while we continue to deploy a little more capital on lending and supporting our clients in the markets businesses.
And so that'll put us comfortably in that 80%-90% capital return range that we talked about throughout the year for 2024. I think as we think forward, it's a little bit of how Ron described constructing the budget, right? We think about putting some capital to work to support our clients, but our medium-term target is to return 80% or more of earnings back to shareholders. Pull to par will help a little bit. It's maybe $30-$40 million a quarter. So, it's not enormous, but that we'd like to plow back. We have to deploy a little bit of capital to support growth. But we generally approach the year as how do we deliver on medium-term targets of capital return. And we see an ability to comfortably do that next year just like we did this year.
All right. We have less than a minute left, so I try to squeeze this one quickly. I did want to hit on acquisitions. I think you talked about on the last call as well, but just flesh out for us a little bit. Where are acquisitions on your priority list? Are there any really notable gaps in your offering that you guys are trying to fill in still and organically?
Yeah. I mean, we've been pretty consistent on this. We think of M&A as complementary to our organic strategy. So, if there's an acquisition opportunity that provides adequate returns to our shareholders and actually advances or complements our strategy in some way, we'll evaluate it. That's a pretty high bar, and a lot's already been done. So, we're in the places that we want to be, but if there's a tuck-in opportunity, we're certainly going to look at it. Where we have been fairly active is in modest-sized minority investments, in some cases even in relatively new-stage companies where they're providing technology that we can deploy. In some cases, we end up, we didn't really want the technology, and we end up selling it, and there's a little bit of return there.
But in most cases, we're able to look at it and say, you know, this is something that we want to have some kind of control over to use it in our stack. And so that's a more typical thing that we're doing. But it's, again, we'll always be looking, but there's a pretty high bar here for us to do something.
Got it. Okay. Well, we're out of time. Before we wrap up, Eric, this is your last time presenting as CFO of State Street at our conference after many, many years. So, I just want to thank you for all your support over the years. We'll miss talking to you at least in this capacity. Maybe you'll be here next year or so in your new role. But thank you. Best of luck, Ron. Thank you for doing the conference again. Always appreciate to have State Street here.
Thanks, Alex.
Great. Thank you.