Okay, terrific. I have to read a disclosure, a disclaimer first. Just to remind our audience that today's discussion may contain some forward-looking statements and that State Street's actual results may differ materially from those statements due to a variety of important factors, including risk factors in State Street's Form 10-K and other SEC filings. State Street's forward-looking statements speak only as of today and may not be updated, even if views change. With that behind us, I want to look forward and say thank you so much to Ron O'Hanley, Chairman and Chief Executive Officer of State Street.
Thank you so much [guess]
Thank you so much, Ron, for joining us today. Mark Keating, Interim Chief Financial Officer. Mark, thanks so much for joining us this morning.
Thank you, Betsy.
All right. There is so much to talk about, Ron, but I did want to kick it off with some strategy questions and where you see the biggest opportunities for growth in asset servicing and asset management.
First of all, Betsy, thanks for hosting this, and thank you all for being here. From a strategic perspective, we are very encouraged by the marketplace where it stands now. I'll start with our largest business, which is investment servicing. If you think about, even as recently as five, six years ago, when we would have had this discussion, we'd be talking a lot about custody, fund accounting, and the traditional kinds of back office things, which are still very important, drives a lot of core revenue. We have spent time thinking about how, in executing against, how do we actually expand the total ball, total addressable marketplace? You know, where have we done that?
Alpha has been the big strategic move we made, starting with the acquisition of Charles River, but then building out this front-to-back offering, which is driving not only a lot of new revenue, but it's driving a lot of back office revenue. When we talk about our sales results, we actually talk about that. While Alpha is a big component, a very large percentage of that is also associated back office. Secondly, with the growth and the increased complexity in privates, all sorts of alternatives, that complexity has created opportunities for us. Just like we are in the core services business, we've become an enterprise outsourcer. We're now becoming that in privates, not just with the private firms, but actually large asset owners that invest in privates. Thirdly, software. You know, we don't even, again, five, six years ago, software was minuscule on this.
You know, it's now a significant single-digit number approaching, we've talked about we have a $1 billion goal over the next several years, and we're well on the way there. If you think about those last two in terms of revenue growth, they're growing at a multiple of our core revenue growth. Software was 10% last year, privates was 15% last year, and we talk about those same kind of things. Investment management, we are at our core, in our roots, we're an institutional manager, and we've spent a lot of time expanding from that. Today, if you think about, we're just about $4.7 trillion in assets under management. About $1.2 trillion of that is actually related to wealth. These products and services have found their way into wealth portfolios.
Again, thinking about how do we participate in where the revenue, where revenue is growing. Finally, in markets, we always think about markets as a very important companion to our servicing business, and it is. I mean, that's where the fact that we are the servicer gives us the right to participate and compete there. We've invested a lot, as you know, in various form, in various channels. We can meet our clients basically in any way they want to trade in terms of how they think about foreign exchange or how they think about securities financing. Certainly, volatility drives a lot of those volumes. We're also continuing to expand our share within those client base, and we remain today in foreign exchange the largest real money trader of foreign exchange.
We feel very good from a strategic perspective, but what I would maybe end this question on is, the big change over this time has been becoming more of an enterprise outsourcer. The second big change is we're much more integrated now across State Street in terms of how we deliver one State Street to our client base.
Okay. And as I think about some of the other areas maybe you did not discuss, but digital, digital strategy. I know for a decade plus, you have been very heavily invested in digital tokenization efforts. And maybe you could speak to where that is going and how does this stablecoin, element that is coming through right now fit into that?
Yeah. Digital is a big topic. We could spend all the time on this, but let me, kind of, we think about it in two ways. The core of digital is the digitalization of transactions. And, that, like a lot of things, it, there's a, I think everybody sees the promise, but the time it's taking to convert everything, for example, to blockchain contracts and those kinds of things, it's taking time, but it's happening. There is lots of interest in digitization of assets and those kinds of things. And we are fully prepared for that and ready to go. Crypto and currency and stablecoin, again, that's gone through its ebbs and flows. It seems like with the current administration, there is a lot of support for that. And I, we think that you'll see more there.
For us, the way we think about it is we need to go where our clients are. You know, where do our clients want to invest? If our clients are an investment manager, you know, or operating as a sponsor, how do we support them in their activities? As you know, the regulatory environment has been unclear on this. It is starting to emerge. You have got an SEC now that is trying to provide some clarity on all this. The bank regulators probably have a little bit more than they need to do. We need to see where this whole Genius Act comes out. I would anticipate that we would continue to grow in that space too in support of our clients.
Okay. Great. Maybe we could just spend a few minutes on the current environment and what you've experienced year to date with the extreme volatility we had earlier this year. Did that shake out some incremental, new client inquiries? I'm wondering your point on the servicing front to back across a variety of different asset classes, including private. How's the outlook there?
Yeah. You go through these periods and you do two things. One, you buckle in yourself and prepare for what you need to do for your own firm, but you also have to be very mindful of your clients and how you're gonna support them through this. As you know, I mean, it feels pretty good now. We were just talking about this before we started. Did not feel it was highly, highly uncertain at the beginning part of this quarter. What we have found with clients is that in these kinds of instances, this idea of being the essential partner really comes to the fore, right? They want to understand if we're gonna be there as it relates to either financing. The more important thing is on transaction volumes.
There were just enormous volumes, record volumes that the industry had never seen, through this time period. The obvious ones would have been around asset servicing volumes and how you thought about all sorts of transactions then. Even in areas like ETFs, I mean, ETF volumes went to record highs during the first part of April. We are largely an institutional ETF provider. We had a couple of days where our volumes were higher than the collective volumes of BlackRock and Vanguard combined. That just reflected that we have a higher share of institutional than those two firms. My point being is that what your clients look for is how are you standing up during those kinds of things. Zero NAV failures during that time.
There were no restated NAVs or anything like that, which again is very important and reaffirms the importance, or reaffirms their choice in choosing us because ultimately, particularly when you think about investment services, everybody talks about it being, you know, well, it's price competitive, you know, it's commoditized. It's markets like that that show it's not commoditized at all, right? It's, have we seen the kind of service, have we delivered the kind of service quality that our clients expect? We expect good things coming out of this period.
Congratulations on that with that historic volatility and coming through whistle clean.
Mm-hmm.
You're, you are in a transformation process, right? Could you help us understand how far along that journey you feel you are? And given that you experienced that high vol without any issues, how much more work is there to do on transformation?
Yeah. So, how far along are you? I'm not sure you're ever done. I mean, in the sense that transformation's somewhat like a garden, and you continue to look for opportunities to make it better. If you think about our experience, I'll just go over the last three years. We've viewed transformation as a way to improve quality, increase, you know, lower cycle times. We've used it as an opportunity to not just reduce costs, but make the operating model better with a high degree of focus on quality. Over the last three years, and now I'm giving you kind of an estimated number that we've already talked about for 2025, it's $1.3 billion.
Mm-hmm.
In expenses that we've taken out. And these are recurring expenses, much of which we've put back into the business in the form of investments. Some of those around resilience, but a lot of those around capabilities in the areas that I've just talked about, right, in terms of privates, software. We haven't talked much about wealth services, but some in there. I would describe that transformation as some of it early on was the low-hanging fruit. A lot of it since then has been around how do we engineer and re-engineer what we're doing and apply technology to it. The technology we've applied, I would describe at this point, at least in the years prior, it's the last generation of AI, a lot of machine learning.
For example, today, in the striking of a NAV, which is one of the more important things that our clients expect of us, that is largely done by machine and machine reference. AI and generative AI provide a whole new level of opportunity. When you talk about how far along you are, I think in terms of running our business based on the technology that was available a year or two ago, we're right there. In terms of the promise that we see out of AI, it's actually quite high. We talk about a next-gen transformation for us. Where will that be? A lot of it will start with our operating models and how we actually get stuff done in the firm. Here I'm talking about those day-to-day operations, which is a big part of what we deliver to our clients.
I mean, there's a reason why we call our operations function global delivery because that's what we're delivering to our clients. Enormous opportunity to use agentics, to use, to use prompt engineering actually to accelerate what we do. If you start out with the objective of we're going to increase quality, we're gonna reduce cycle times, costs will come out of that. If you think about, we've talked about this in the past, but last year headcount was down 4,000 people. A lot of that was in places where these are, I wouldn't call them commoditized role, but they're entry-level roles where we've been able to take that work out and replace it by machine. We see much more promise of the, on that. If you ask me for a percentage, how far along are we? I don't know, 60-70%.
I also expect that the technology is actually going to create new opportunities. We've rolled out AI broadly. This transformation will be a con, this kind of next-gen transformation we're anticipating will be this combination of these top-down areas that we're going to look at. When you arm your employees with this technology, it's amazing the things that you, that they are coming up with that you look at and you say, "Wow, this is actually quite good. Makes sense for this little sub-function here, but it's something that we can expand on broadly.
AI's rolled out to the firm.
Mm-hmm.
and there's more that can be done with it. Are you anticipating an impact on the expense ratio in the next several years?
Yes. Yes. And, you know, we'll have more to say about that as the year goes on. But again, we spent a lot of last year as it relates to Gen AI, one, testing it, testing it on ourselves. I mean, the big difference between this form of technology and any prior form of technology is with these large language models, the danger of client data leaking out. So we spent, which I suspect a lot of my colleagues did in the industry, getting that risk framework right while we were in effect, practicing on ourselves. We now feel confident where we are and do believe that it will not only, again, improve quality, reduce cycle times, but take out a lot of costs and just enable us to scale the business better.
It'll enable us to, as you know, we're a large player in middle office.
Right.
Middle office is a complicated business when you're working with the kind of client base that we have, very sophisticated asset managers and asset owners. You end up being able to standardize a lot more than you thought you could before because AI provides in effect a level of standardization.
Do you see AI driving incremental expense ratio improvements or step function?
Well I believe over time it will drive step function, but it'll probably come in the form of increments.
Okay.
I mean, we should, as you can tell, I'm enthusiastic about this, but I'm also a realist, right? I mean, I'm old enough to remember the advent of the internet here. Remember, we all thought that the internet was gonna change everything. 1999 came, we ran into a wall, and everybody said, "Well, it didn't change anything." Five years later, it had changed everything. I suspect you'll see that same kind of a, it's kind of a zigzag, but improvement in terms of business results with AI.
Okay. Great. Looking forward to hearing all about that. And as we pull back to 2025, the expense ratio guide for this year is, or I should say the expense guide for this year is plus 2-3%.
Mm-hmm.
Right? And that's still intact?
Correct. Yeah.
Right? Okay. If revenue growth were to disappoint for whatever reason, given, you know, it, where is there flex in your expense stack to deliver the positive operating leverage that you would like to?
Yeah. I'll start on that, Mark. You should come in behind me. As I said in answering your prior question, Betsy, you know, we've got $500 million of CAU expense reduction baked into this plan, and we're executing against that. We feel good about that. A lot of that is going into other investments. There's a couple levers we have. One, we can accelerate some of our expense reduction. We can also take a pause on some of the investments, take a pause on some of the hiring that's associated with that. We feel like we have plenty of levers in order to deliver on our commitments around operating leverage.
Great. Excellent.
Yeah. No, I agree. I think the, on the investment side, again, all of our investments are important to us, but we really know which ones are the kind of critical strategic investments. And we have a ability to phase and, and replan things if we need to.
Okay. Just ticking through the rest of the guidance that you have, wanted to get an update if there are any on net interest income for the full year.
Sure. I mean, I can, why don't I just give you kind of an update overall on that?
Sure. That'd be fantastic.
Great. Okay. Yeah, as we're sitting here today, I think we're very pleased with the way that the year has been playing out from a core, you know, business performance point of view. We're very confident in our overall guide that we gave, you know, at the beginning of the year. I just remind folks that's on an ex-Notables basis. If you think about it, it's, you know, our fee revenue growth, and we're confident in that 3-5% range. NII, we still expect to be relatively flat year over year. Remember, that's two years of record NII coming out of the last two years. We're still within a range of up or down, you know, plus or minus low single digits. Expenses, you mentioned, you know, we're targeting 2-3% of growth for the year.
I would, you know, highlight that that can be somewhat lumpy, kind of sequential, quarter to quarter. I'd just keep that in mind, but 2-3% is intact. I think most importantly, we are targeting and confident with a full year, positive fee operating leverage and positive total operating leverage. Again, with the caveats I've given in January and April around NII not becoming a material headwind. But so far, you know, so good from that point of view. Certainly, it's been a, the macro environment has been very dynamic, to say the least, over the last five months, whether it's interest rate changes, market volatility, market levels, weakening dollar.
If you stand back from all of that and kind of where we've come back to at the end of, you know, almost to the end of the second quarter, broadly speaking, that kind of environment's like relatively intact for us in terms of how we look at the year. The most important thing is that our core business momentum remains very much intact. That's very encouraging as we head into the middle of the year. We're gonna continue to monitor things, and we'll be looking forward to updating anything in July when we do the second quarter earnings.
On the balance of everything in terms of how we look at our business, we're on track, you know, including the $350-$400 million servicing sales target that we talk about, which really kind of helps power forward the organization into the future.
With the volatility that we had earlier in the quarter, across a variety of asset classes, including foreign exchange, should we expect a bit of a pop of a, you know, positive QQ result in trading revenue?
Yeah. Yeah. Sure. Let me, maybe I could take that opportunity to talk a little bit about how the second quarter is beginning to shape up. Again, there's still a few weeks left, and I'll kind of talk on an ex-Notables basis. Again, we've been very encouraged with the underlying business, and I'll talk a little bit about foreign exchange. You know, we're, you know, gonna be delivering positive fee operating leverage. We expect to deliver positive total operating leverage as well. We expect total revenue to be up both sequentially and year over year. We expect expenses will be up year over year. Expenses will be down slightly, kind of sequentially. We are, like, looking at our servicing and our management fee, like fee revenue business, we expect to be up, you know, nicely on a year-over-year basis.
and it's very encouraging, including, as I mentioned back in April, I had highlighted I expected us to have a pretty, you know, very solid second quarter when it came to our servicing fee sales. So we expect to deliver that as well, you know, with only a few weeks left to go in the quarter. you know, in terms of, foreign exchange, I mean, certainly, as you'd expect with a lot of, of market volatility, early in the quarter, especially, we benefited from some of that. not just volatility over the last few years, we've also been building market share amongst our clients. So even, you know, taking the volatility, we expect that to continue kind of, higher as well over time. so that's kind of the core of the quarter from a revenue and expense point of view.
I would also maybe take the opportunity on a couple of housekeeping items for the quarter to kind of highlight. We expect to be booking additional provision expense for the quarter of roughly $20 million over a sequential quarter. That's reflective of an evolving macro environment, but also a small number of loans in our commercial real estate portfolio. Also, we expect to book a few notable items in the quarter, primarily those that are around our ongoing operational model transformation that Ron's been talking about. That will actually start to drive additional expense reductions, mostly starting in 2026. If you stand back from all that, you know, in general, like, we're very positive about how we're seeing the year play out, notwithstanding the volatility and the uncertainty we've seen.
Our core, you know, business in terms of sales and transformation and productivity, we're very focused on delivering on our full year guide, positive fee operating leverage and total operating leverage. You know, what we're focused on is delivering another good year in 2025 on top of a good year in 2024, but even more so making sure when we talk about our sales targets and our transformation and our productivity that we're setting ourselves up to keep it rolling into 2026.
Excellent. Thank you for that update, Mark. Ron, back to you. I'm just interested in understanding how you're thinking about medium-term outlook, medium-term targets. In the past, you've spoken to EPS growth of 10-15%, ROE of 12-15%, and that's on the base of a revenue growth of 4-5% year-on-year growth. Are these still the right targets for investors to reference?
I mean, we think they are. I mean, if we think about, again, taking apart a little bit of what Mark just said in terms of those numbers, and what that means is, we've grown our servicing fee sales steadily since 2020, but really on an accelerated basis, 2023, 2024. As Mark has signaled, it's looking positive for 2025. That then does a couple things. One, it gets at the, how do you think about fee revenue growth? More importantly, it's driving, with the kind of scale that we have, it's accreting to margin and accreting to ROE. Yes, we think those are the right ways to reference the business, and we're confident in those.
Okay. And some of the levers to get you into that midpoint of that ROE of 12-15% is the operating leverage we discussed earlier?
Yeah. I mean, we're a fairly straightforward business if you think about it, largely driven on the revenue line by fee revenues. And we've, last year and as we're talking about this year, we're seeing across the board fee revenue growth. So it's not isolated in one area where other areas aren't, right? We're seeing this across the board, positive fee revenue growth. You then marry that to the kind of expense management and the promise that we see about being able to continue to do that, with some of the things that I talked about earlier. That's all accretive to both margin and ROE.
Okay. Great. Maybe we could talk a little bit about capital and excess capital and capital utilization. First off, we do have a new supervision head at the Fed, Michelle Bowman, who's outlined some ideas for changes to capital rule set. Could you help us understand what you're hoping for in that regard?
I think, certainly what all of the banks, particularly the large banks, will be hoping for is some kind of clarity and stability around what are the rules. I think you're going to see that from Mickie. I think that she's been quite clear, very early on, that she wants to see a kind of a stable capital regime. As importantly, she's a former bank supervisor, and I think she wants to see supervision in the rulemaking process. One, remain separate. Supervision is not rulemaking and vice versa. But two, to become more steady and more predictable. I think that you're going to see clarity pretty early on in areas like the role of the stress test, what the capital regime will be. I think there's probably a debate on where Basel III endgame can come out.
I think where what I would like to see is let's just put it to bed, because you, it's been out there for a long time. We operate in, not just State Street, but all of us operate in international markets. We would like to see that put to bed. I think, with the kind of frameworks that Governor Bowman is implying, I think that will be a fairly good result. I think this idea of just certainty, and taking a lot of the uncertainty around all these things, capital regulation and supervision will be very welcome.
The way we calculate it, you have about $4 billion of excess capital. Is that, do you need the certainty to unlock that excess capital?
I mean, you always think about capital and capital buffers, really in reference to the environment that you're in. And there's been enough uncertainty in the environment. I don't mean just regulatory uncertainty. I mean, just look at the period that we went through. You and I were talking about this. Beginning of April certainly didn't feel like what the middle of June feels like.
Right.
In that kind of uncertainty, yeah, we are cautious and we do carry more capital. You know, we'll look at this as the, as let's see how the environment plays out. Let's see how the regulatory environment plays out. We'll look at this. We acknowledge that we're carrying significant buffers.
You have also indicated the 80% payout ratio this year on buybacks.
Mm-hmm.
Right? So you are going to be delivering back some to investors.
Oh, yeah. No. And we're, we're committed to that. We've been committed to that now for a couple of years in terms of the 80% total capital return, dividends and share buybacks. Last year was 87%, so, and that's assuming that we keep the capital levels where, where they are. You know, take that for what it is, significant capital return even with those capital buffers.
Right.
I just might add on top of that that, and we've talked before about the patterning of it. I mean, you know, what we did in the first quarter, we expected to have a significant step up in the second quarter, and that's what you'll be seeing.
Yeah. That's a good point. We, again, call us overly cautious, but we typically return capital at an accelerating rate through the year.
Okay.
That is the pattern we're following.
Anything on M&A in terms of products at geography, customer-facing technologies? Just thinking about it, is there anything that we should be thinking about as to how you could utilize the excess capital inorganically?
Yeah. I mean, we've been quite consistent about this. We don't view M&A as a strategy. We view M&A as a way to execute our strategy or, in some cases, propel our strategy. Most of the M&A that we've done recently has been, you know, fairly small in the sense that a lot of it is around technology investments, building capabilities or taking positions in firms that either we want to learn from the technology, we want to adopt the technology. In those cases where they're wanting to come to us because they want us to deploy it, we structure the deal so that as they grow, we grow or our position in the firm grows.
We see a lot of opportunity there in terms of some of these fintechs and enabling the kind of wealth services that we're trying to do and to accelerate the build-out of our platforms in that space. We'll continue to do these relatively small and modest things. In the asset management space, to the extent to which we can tactically build a position or bring in a capability, we'll do that. You shouldn't expect to see large sweeping kinds of stuff from us.
Okay.
Because we like what we've done. I mean, we made a very significant investment, back in 2018, with Charles River. We've used that not just to accelerate the growth of Charles River, but to build a very important capability for us. We are still reaping the benefits of that and investing in that. We wouldn't anticipate something like that.
Is that front-to-back technology offering and capability set at 100%, or is there more to do too?
There's still more to do, but I would, you know, on that percentage, I can be a bit more certain. I would call it at 85-90%. There's more that we're building out and delivering this year in fixed income. There was a big build-out last year. That is working quite well. The other thing that we've built out around that is what we call the Alpha Data Platform. Again, this is interesting when you think about a strategic move. When we talked about this back in the 2019 timeframe, we talked about front-to-back with, you know, front being Charles River trading, pre-trade and post-trade analytics, our middle office, which is basically the outsourcing of back office from investment managers and asset owners, and finally the traditional back office.
The interesting product that's emerged from this that is getting a lot of take-up in the industry is the Alpha Data Platform because in our partnership with Snowflake, we now have the ability to create data platforms for our clients. We've done this to date mostly in conjunction with some of these front-to-back things, but we now have clients coming to us that this is the reason why they're first talking to us. Is help us manage our data. That's only gonna become more complicated for these firms as their own underlying complexity grows. Or in the case of an asset owner, as they go from being asset allocators, hiring a lot of external managers to actually managing some of that themselves, the need to actually manage their data and provide security around their data has gotten quite a bit greater.
That part we have built out, and we're really pleased with that.
Are these new-to-the-firm clients?
Some of them are, yeah.
Okay.
Yeah. Yeah.
Excellent.
Yeah.
On investment management, is there any product breadth, expansion that you're thinking about?
Yeah. Over the last several years, we've very much stepped up the number of product launches. Some of that has been the market's afforded new opportunities, particularly around active ETFs. We have continued to build out our ETF presence, outside the U.S., in fixed income. We've also built up a lot of wealth products. Again, our legacy and history was around institutions. We were early on in the ETF business, and these were institutional buyers. We have continuously gained share over the last three years in wealth. Today, wealth represents about $1.2 trillion of our assets under management. We would expect to continue to see that grow.
And the other area that we will expect to see more, in that area, some of the innovation, you're aware of this, what we've done with Apollo, what we've done with Bridgewater in terms of this idea of democratizing access to alternatives. The other area is retirement. Everybody's talking about this. We have about $1.6 trillion in retirement-related assets. It's about half and half DB versus DC. So we're a very large DC player. And this idea of bringing alternatives, and affording the illiquidity premium to retirement investors is something that's been out there for a long time. The regulatory framework hasn't been there. You've got, I think, a much more thoughtful Department of Labor in place now that's thinking not just about expenses, but what's the after-expense return to the investor.
I think you'll see a lot more product innovation there. We feel like we're at the lead on that.
Excellent. So in conclusion, how's 2025 shaping up for State Street?
Again, you and I talked about this, notwithstanding what we've seen in terms of some of the volatility. We came into the year with a lot of momentum, and we feel like we're riding that momentum. Mark made a very important point that I would underscore. Much of what we do in any given year is about laying the foundation for next year. We get a execute on what we said we were gonna do, but you're laying the foundation for next year with sales continuing at the pace that we've been talking about, servicing fee sales in the, you know, $350 million-$400 million range. We've committed to that target. That gets installed for the next year. When you start to think about the transformation, we're delivering on what we said we were going to for this year.
You'll see that in the quarters and in the remaining quarters for the year. More importantly, we're laying and doing more transformation for the years on. We feel very good about what we've accomplished strategically, but we feel even better about what we're setting in place for 2026 and beyond.
Excellent. Thank you so much for joining us this morning, Ron and Mark.
Thank you.
Appreciate it.
Thanks.