Morning, and welcome to State Street Corporation's third quarter 2026 earnings conference call and webcast. Today's call will be hosted by Elizabeth Lynn, Head of Investor Relations at State Street. We ask that you please hold all questions until the completion of the formal remarks, at which time you will be given instructions for the question- and- answer session. Today's discussion is being broadcasted live on State Street's website at investors.statestreet.com. This conference call is also being recorded for replay. State Street's conference call is copyrighted and all rights are reserved. This call may not be recorded for or rebroadcast for distribution in part or in whole without the expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street website. Now, I would like to hand the call over to Elizabeth Lynn.
Good morning, and thank you all for joining us. On our call today, our CEO, Ron O'Hanley, will speak first. Then John Woods, our CFO, will take you through our third quarter 2026 earnings presentation, which is available for download in the investor relations section of our website, investors.statestreet.com. Afterward, we will be happy to take questions. Before we get started, I would like to remind you that today's presentation will include results presented on a basis that excludes or adjusts one or more items from GAAP. Reconciliations of these Non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the earnings release addendum. In addition, today's call will contain forward-looking statements.
Actual results may differ materially from those statements due to a variety of important factors, such as those referenced in our discussion today and in our SEC filings, including the risk factor section in our Form 10-K. Our forward-looking statements speak only as of today, and we disclaim any obligation to update them, even if our views should change. With that, let me turn it over to Ron.
Thank you, Liz, and good morning, everyone. I want to begin with some context. The world's investors today face a dynamic, complex, and interconnected environment requiring them to manage a wide range of risk and opportunities. Fiscal and sovereign debt pressures, credit, geopolitics, inflation uncertainty, the accelerating opportunities and risks of AI, and advanced cyber threats all require investors to manage through a broad range of forces that are reshaping markets, operating models, and the broader financial system. At times like these, clients are seeking trusted and essential partners, not just service providers. Our ability to combine the strengths and quality of asset servicing, investment management, and markets as one State Street allows us to effectively help clients navigate change, manage risk, and pursue their objectives with greater confidence, creating better outcomes for the people they serve.
We believe this environment reinforces the importance of the role we play, the value of the relationships we have built with many of the world's leading investors, and the strength of the One State Street model. Amid this rapidly evolving backdrop, our positive momentum carried into the third quarter, during which we delivered another period of strong financial and business performance, as highlighted on slide two. Driven by clear strategic priorities, State Street's results again demonstrated the earnings power of our franchise and the momentum we continue to build across the firm. We generated our 11th consecutive quarter of positive year-over-year operating leverage, excluding notable items, reflecting both the strength of our operating model and our continued focus on disciplined execution. Earnings per share of $3.69 increased 33% year-over-year, supported by double-digit growth in fee revenue, NII, and total revenue.
I am particularly pleased by the momentum we are seeing in our core businesses. During the quarter, we generated record quarterly servicing and management fees and delivered record FX client volumes, demonstrating our ability to capture client activity and benefit from the scale and breadth of our platform. Combined with a pre-tax margin of 35% and a return on tangible common equity of 25%, these results reflect both the strength of our franchise today and the investments we are making to position State Street for long-term growth. July marked an important milestone for State Street as we introduced new medium-term financial targets and outlined the strategic growth initiatives and transformation agenda that we believe will drive our next phase of growth. As I look across our franchise, I see a company executing with discipline, investing for future growth, and increasingly operating as One State Street.
That combination is strengthening our platform, enhancing how we serve clients, and positioning us to deliver sustainable growth and long-term value for shareholders. Our integrated global franchises across investment services, investment management, and markets provide a powerful foundation for continued growth. Importantly, many of our most attractive opportunities lie within businesses where we already have established leadership positions and meaningful scale. When combined with the breadth of our platform, the depth of our client relationships, and the increasing connectivity across our franchise, we believe this positions us uniquely well to serve clients end to end, deepen engagement, and drive sustainable growth over time. Within investment services, we continue to leverage the scale and capabilities of our franchise, generating record quarterly servicing fee revenue, while assets under custody administration reached a record $59 trillion at quarter end.
These results were supported by strong year-over-year organic growth and reflect the value we deliver to clients and our ability to continue growing alongside them as an essential strategic partner. Also during the quarter, we announced an initial agreement to acquire Santander CACEIS' Latin American Securities Services business, which is expected to close in 2027, subject to regulatory approvals and closing conditions. The transaction will create a leading asset servicing platform across Brazil, Mexico, and Colombia, adding scale, local expertise, and expanded capabilities, including custody and fund administration in some of the region's most important and fastest-growing institutional markets. Within investment management, the quality of our platform, our continued innovation, our global distribution capabilities, and the trust clients placed in our franchise continue to drive strong results.
In Q3, State Street Investment Management launched 38 new client solutions, delivered record quarterly management fee income, and ended the quarter with a record $6.3 trillion of assets under management. We had record ETF flows in the quarter, and Q3 also marked our sixth consecutive quarter of organic net inflows. In markets, we generated record FX client volumes supported by strong activity across both EMEA and APAC. These results reflect the benefits of investments in our capabilities and strong product mix and demonstrate our ability to support clients when opportunities emerge across markets and geographies. Importantly, they also underscore the relevance of our client franchise. We were pleased to see that recognized through five awards at Euromoney's 2026 FX Awards, including the world's best FX bank for real money clients.
Next, let me spend a few moments on the progress we are making across our three strategic growth initiatives, which focus on segments of the market undergoing some of the most significant shifts across our industry today. Alternatives is changing where capital is being invested while also expanding the universe of investable assets for the world's investors. Digital assets is shaping how assets will transact, move, and be serviced in the future. Wealth is transforming how individuals and advisors access investment opportunities and channels, navigate increasingly complex markets, and build long-term financial outcomes. While each opportunity is distinct, all three build on and leverage capabilities we already possess across our franchise, are extensions of our core franchises, and are strengthened by our One State Street approach.
Together, these initiatives align us with some of the most attractive long-term growth opportunities in financial services while deepening our strategic relevance to clients. Increasingly, clients are seeking integrated solutions. Our ability to bring capabilities together through our One State Street model is an important differentiator. While still early in digital assets and wealth, we are encouraged by the client engagement, commercial traction, and momentum we are beginning to see. In alternatives, we continue to build on our leadership position in one of the most significant secular growth and opportunities in our industry. Alternative servicing fees grew at a double-digit rate year-over-year in the third quarter, reflecting solid growth across private markets and strong client activity. More broadly, the alternatives ecosystem is evolving.
As investment strategies expand and operating models become more complex, clients increasingly need partners that can help them operate and apply technology to that complexity while improving transparency, efficiency, and access for investors. This plays directly to our strengths. Whether helping clients scale their businesses, enhance the investor experience, or develop new market infrastructure, we are working alongside them to support the continued evolution of private markets. A recent example is our work with Apollo to support the expansion of daily pricing across private credit strategies, helping advance the transparency and infrastructure needed to bring private markets closer to the experience investors have long expected in public markets.
By leveraging the breadth of our platform, the depth of our client relationships, and expertise developed over decades of serving alternative investors, we believe we are well-positioned to benefit from the continued growth of alternatives while creating value across multiple parts of our franchise. In digital assets, we are positioning the firm and our clients for the evolving market structure and investment ecosystems by building on the tech-led capabilities that have long differentiated our firm, including our client relationships, global reach, and deep expertise across financial markets. As tokenization and digital technologies continue to gain traction, we are investing thoughtfully and working closely with clients to help shape the future of market infrastructure.
We remain on track to deliver a tokenized fund servicing capability by year-end, subject to regulatory approval, and our investment management business is expected to be an early adopter of the platform, providing another strong example of our One State Street approach in action. We are also continuing to bring investment products on-chain. In Q3, an example of how we were helping bridge traditional finance and digital markets was the State Street Galaxy on-chain liquidity sweep fund, which is now available on the Stellar network, expanding access to a tokenized cash management solution designed to support 24/7 liquidity. In wealth, the recent launch of our wealth services offering is resonating with clients, and we continue to build a strong pipeline of opportunities in partnership with Apex Fintech Solutions.
During the third quarter, we secured a servicing mandate from one of the largest RIAs in the United States, an important validation of both the market opportunity and our value proposition. Just as importantly, the win demonstrates the power of our One State Street approach. This client was already a user of Charles River's front office wealth platform, highlighting our ability to deepen relationships, connect capabilities across the firm, and create value beyond any single product or business. By targeting growth on wealth, we are expanding our reach into one of the largest and fastest-growing pools of investor assets globally. We continue to see a compelling long-term opportunity as investor assets grow and distribution models evolve. As advisors and investors increasingly seek integrated technology-enabled solutions, we believe our combination of investment in software capabilities, wealth servicing expertise, and strategic partnerships positions us well to meet those needs.
Beyond our strategic growth initiatives, we continue to make progress against our technology and AI-enabled transformation agenda. Transformation is a strategic enabler of both growth and productivity. Building on our ongoing transformation program, AI is helping us simplify processes, improve and accelerate execution and technology development, strengthen resilience, and allocate resources more effectively across the franchise. Over time, we expect these efforts to enhance the client experience, improve performance, reduce costs, and create additional capacity to invest in our most attractive growth opportunities. Ultimately, transformation is about building a simpler, faster and more scalable State Street. One that is better positioned to deliver for clients, support our strategic priorities, and create long-term value for shareholders. Turning to slide three and in closing, our third quarter results reflected the strength of our franchise, the benefits of our diversified business mix, and the consistency of our execution.
We delivered strong financial performance, generated continued positive operating leverage, achieved records across multiple businesses, and made further progress against both our strategic growth initiatives and transformation agenda. Quarter after quarter, our results continue to validate that our strategy is working and delivering consistent, durable improvement in financial performance. Excluding notable items, the third quarter marked our 11th consecutive quarter of positive year-over-year operating leverage. Year to date and excluding notable items, our pre-tax margin has expanded by 4 percentage points to 33%, and ROTCE achieved 24%, while earnings were up 39% compared to the prior year period. Taken together, these results demonstrate the earnings power of our franchise, the value of our One State Street approach, and the momentum we are building across the company underpinned by our key strategic pillars.
We enter the final quarter of the year with strong momentum, a clear strategy, and a confidence in our ability to deliver against our medium-term targets while continuing to create long-term value for shareholders. With that, I'll turn it over to John to walk through the quarter in more detail.
Thank you, Ron, and good morning, everyone. Picking up on slide four, we delivered strong financial performance in the third quarter, including robust year-over-year EPS growth of 33% to $3.69. Revenue growth remained broad-based, with continued strength across our core franchises driving total revenue of $4 billion, up 13% year-over-year. Fee revenue increased 11% year-over-year, highlighted by record servicing and management fees supported by ongoing organic growth and sustained momentum across markets, partially offset by lower other fee revenue. Other fee revenue was lower due to an approximately $30 million year-over-year impact, primarily from market-related gains on strategic investments in the year-ago quarter. Excluding this impact, total fee revenue increased 12% year-over-year. Net interest income increased 21% year-over-year, driven primarily by net interest margin expansion.
Expenses increased 8% year-over-year to $2.6 billion, reflecting higher revenue-related costs and continued investment in strategic growth initiatives. Taken together, we generated approximately 530 basis points of positive operating leverage in the quarter, marking our 11th consecutive quarter of positive operating leverage, excluding notable items. Pre-tax margin expanded 350 basis points year-over-year to 35%, while ROTCE increased more than 4 percentage points to 25%. Turning to servicing fees on slide five, client activity, flows, and net new business continued to support organic growth in the third quarter. Servicing fees were approximately $1.5 billion, up 10% year-over-year, driven by approximately 7% organic growth, as well as the benefit of higher average market levels. AUC/A ended the quarter at a record $59.2 trillion, up 15% year-over-year, reflecting higher period-end market levels, net new business, and client flows.
Servicing fee sales totaled $68 million in the third quarter, reflecting demand across both our core franchise and strategic growth areas. The majority of quarterly wins came from traditional back office servicing mandates, while alternatives continued to contribute to sales activity, and we saw early traction in wealth services. Turning to slide six, State Street Investment Management continued to generate strong long-term asset gathering momentum in the third quarter, supporting organic revenue growth and positive net inflows. Management fees were $797 million, up 20% year-over-year, reflecting approximately 8% organic growth and higher average market levels. Assets under management ended the quarter at a record $6.3 trillion, up 16% year-over-year, supported by higher market levels and positive net flows. As Ron noted, we delivered our sixth consecutive quarter of positive organic AUM growth with net inflows of $7 billion.
While total net inflows were moderated by the redeployment of client cash balances, long-term demand remained strong across the platform. Long-term asset gathering generated $69 billion of net inflows in the third quarter, following $79 billion in the prior quarter. Performance was led by our index franchise, particularly ETFs, with strong flows in the U.S. and EMEA, and demand across equity, fixed income, and our low-cost product offerings. ETF AUM reached a record $2.3 trillion at quarter end, underscoring the continued strength of the State Street ETF franchise. Innovation remained a key area of focus, with 38 new products and solutions launched during the quarter, including 13 ETFs. Notably, we partnered with UC Investments to launch an Endowment Strategy ETF backed by a $2.5 billion seed investment, the largest U.S.-listed ETF launch on record.
Turning to slide seven, our markets franchise delivered healthy year-over-year revenue growth in the third quarter as it continued to benefit from the strength, scale, and diversification of our global client franchise. FX trading services revenue increased 17% year-over-year to $427 million. While FX volatility moderated relative to the prior year, client volumes still reached a new quarterly record, increasing over 30% year-over-year, supported by strength across EMEA and Asia Pacific. Securities finance revenue increased 9% year-over-year to $151 million, supported by continued growth in both agency lending and prime services. Agency lending benefited from higher assets on loan, while prime services continued to generate strong client balance growth.
Turning to slide eight, software services increased 5% year-over-year to $175 million in the third quarter, driven by a 10% increase in software and data revenue, reflecting continued client adoption of the platform and ongoing migration to SaaS solutions. Annual recurring revenue increased 8% year-over-year to $442 million, while new bookings totaled $14 million, driven by both new client wins and expanded relationships with existing clients. The growth in ARR and continued client adoption underscore the progress we are making in advancing our software platform and enhancing the capabilities available to clients. Turning now to slide nine, net interest income of $864 million increased 21% year-over-year in the third quarter, driven primarily by continued net interest margin expansion and supported by growth in the average interest-earning assets as well.
Net interest margin increased 16 basis points to 112 basis points, benefiting from a more favorable funding mix, continued investment portfolio repricing, and the runoff of terminated hedges. Average interest-earning assets of $305 billion increased 3% as growth in deposit balances was partially offset by lower short-term borrowings. Moving to expenses on slide 10. Expenses of $2.6 billion increased 8% year-over-year in the third quarter. Approximately five percentage points of the increase reflected revenue and performance-related expenses, consistent with strong business performance during the quarter. The remaining 3 percentage points were primarily driven by investments in regional expansion and strategic growth initiatives across the franchise. Importantly, productivity savings largely offset underlying run-the-bank cost growth, supporting continued investment in our strategic priorities while maintaining positive operating leverage.
Turning to slide 11, our capital position remained strong at quarter end, supporting our ability to serve clients, invest in our strategic priorities, and pursue opportunities across the franchise. Compared to the prior quarter, our standardized CET1 ratio increased to 11%, driven by lower RWA, while our Tier 1 leverage ratio rose to 5.5%, primarily reflecting the preferred share issuance completed during the quarter. We returned $651 million to shareholders during the quarter, including $400 million of common share repurchases and $251 million in declared common stock dividends, following the 10% increase in our quarterly common stock dividend that became effective in the third quarter. Our total payout ratio was approximately 63% for the quarter and roughly 70% year to date. Turning to slide 12, I'll walk through our updated full year outlook, which excludes notable items.
Our market assumptions reflect global equity markets remaining flat from current levels, and our interest rate expectations remain broadly aligned with forward curves. We expect fee revenue growth of 13%-14%, up from 12%-13% in July, reflecting favorability in servicing fees and healthy client activity in markets. We now expect NII growth of 15%-16%. Compared with 14%-15% in our July outlook, reflecting strong third quarter performance. Expenses are expected to increase by roughly 8%-8.5%, reflecting higher revenue-related costs and continued investment. Taken together, we expect to deliver over 500 basis points of positive operating leverage in 2026. Finally, we expect an effective tax rate of approximately 22% for the full year and a total payout ratio approaching 80%, subject to any changes in market conditions and other factors. With that, operator, we can now open the call for questions.
At this time, we will open the floor for questions. If you would like to ask a question, please press star five on your telephone keypad. You may remove yourself at any time by pressing star five again. Please note you'll be allowed one question and one related follow-up question. Again, that is star five to ask a question. We'll pause just a moment. Our first question will come from Glenn Schorr with Evercore ISI. Your line is open. Please go ahead.
Hello there.
Hi, Glenn.
Hello. I want to ask on the outlook and what that implies for the fourth quarter. I want to focus on just the NII part. Please correct me if I do the math wrong. It feels like it meant the fourth quarter is a little bit below what we, the Street, had for fourth quarter. I am not losing too much sleep over that, but I am curious on what that may or may not imply for fourth quarter because you should be asset sensitive. We do have a higher rate backdrop. You are growing balance sheet. It just felt like it should have been better, and I feel like that is part of the response right now in the market. Just curious if I have all that read correctly.
Yeah. Let me just unpack that a little bit, Glenn. I think I have got a few points that might help illuminate how we are thinking about it. I think first, just to step back for a second. NII trends for the year have been very strong all year long. We are up 21% year-over-year. NIM is up 16 basis points, and we have been growing the balance sheet. Those have been very strong. We have been consistently raising our guide throughout the year, and we did that again today. To the point that you are raising every quarter this year, NII has grown on a sequential quarter basis. I would say that our view is that we would expect that again in the fourth quarter. That probably implies that we would likely deliver NII towards the upper end of that range that we have delivered.
But I think, again, we've been raising that range. I think that's consistent with lots of confidence that we have really strong trends in NII. I think the fourth quarter would be another quarter of NII growth from a sequential perspective, the way we see it at this point.
Okay, cool. I appreciate that perspective. On the getting back into RIA custody, and congrats you win a new deal right out of the box. It's interesting. You had exited, you come back in, already worked, but I view it as pretty intense competition. I'm curious, the big picture on the why enter, and then the back picture part of it that goes into capital is part of the reason why your payout is on the lower side. Is it to fund things like prime services, as you mentioned, but also having balance sheet capacity in RIA land to fund things like tax-aware investing strategies, things like that? Thanks so much.
Sure.
Glenn, it's Ron. Why don't I start with the first part of your question, and then John, you can pick up on the second part of it. Why did we do this? Part of it is just what you, as well as anybody else would know that, or as much as anybody else would know that investing is increasingly going from a large pooled funds to ultimately being able to bring customization down to a very, very low level. You're seeing this dramatic growth really around the world of wealth management. Again, moving away from the standard mutual funds of 20 years ago to all sorts of different products and services. You're also seeing a proliferation of distribution channels, and the continued need for established distributors like RIAs and independents to be competitive.
That coupled with the capabilities that we have in our core custody business, but also the wealth side of Charles River led us to the decision to move into this area. We wanted to do it in a way that was using advanced technology that led to the partnership with Apex that we're quite pleased with in terms of how that's working. As we noted in this particular win, the connectivity of this particular client being already a client of Charles River and being able to extend to the custody and other services side to us is an early validation of the strategy.
But again, when you look at where money is going and the need for wealth managers to have the support of a wealth services provider like us, we see this as a very attractive long-term strategic opportunity, not just in the U.S., but in other wealth markets.
I think the second part of that was related to how we're allocating capital and putting capital to work. I would say that update to our outlook here, where we're basically planning to pay out approaching 80% is a very strong return of capital plan. It implies a ramp of buybacks heading into the fourth quarter off of the $400 million. So pretty significant ramp heading into the fourth quarter. We think that should be very attractive to know that we have the capital strength to continue a very strong buyback program while maintaining strong capital levels. The dollars that we're putting to work that are not being bought back are because we're focused on supporting clients.
The capital that we're investing in organically to support clients and invest over the medium term, we believe is extremely attractive and allows us to generate returns that would exceed what would occur if we were to basically give that capital back. That's just part of our disciplined waterfall of capital allocation, which starts with organic investment and attractive dividend, which we actually grew this quarter, in the third quarter compared to the second. At the end of that, maintaining a very strong buyback, which is ramping into 4Q. So, those are our thoughts related to how it plays into capital levels.
Awesome. Totally helpful. I appreciate it.
Your next question will come from Alex Blostein with Goldman Sachs. Your line is open. Please go ahead.
Hey, good morning, everyone. Thank you for taking the question. I wanted to ask around organic growth in the servicing business. When we look at your guys' sales year to date, I think you're running a little bit north of $200 million of gross new wins in terms of revenues. I think that's below the sort of $350+ million that you talked about in the past or tracking against that. Maybe talk a little bit about where you guys have fallen short this year and how much of that is just timing or something's changed in terms of how much in ultimate wins you guys can bring in on an annual basis. Then taking a broader step back, just a refresher on how you think about organic, like ex-market revenue growth in the servicing franchise would be helpful.
[inaudible], why don't I begin this? Ron. So we feel very good about sales momentum at this point. These are typically fairly large deals. Will some of them spill into the first quarter? Possibly. But we feel good about that range that we've got out there, and we're still striving towards that. When you think about revenue growth, though, sales is only part of it, right? The other parts of it are our retention, and our retention rates continue to be extremely high. Second part of it is pricing, where are pricing levels and how are they maintaining themselves. When we look at all that and we look at where we are, we feel pretty confident about our ability to continue to grow servicing fees.
Yeah. Just picking up on that. Really strong organic delivery here in the third quarter in servicing fees of around 10%. There are a number of factors that go into that. So the sales, maybe just comment on sales and then just wrap it up with other drivers. But you're right to indicate that we're north of $200 million year to date. It's our expectation of sales growth into the fourth quarter rising from levels earlier in the year. It's a pretty typical trend as that tends to be back-end loaded there in the fourth quarter. So we're expecting the fourth year in a row of sales over $300 million. We think that derives that net new business engine that we expect to continue not only through the rest of this year, but out over the medium term from that standpoint.
The other drivers are our attractive client base is one that is growing organically on their own. From that standpoint, that drives flows and client activity as well. When you put all three of those together, we've got expectations for something that even without market levels, would be an extremely attractive growth rate over the medium term, maybe in the mid-single-digit range for servicing fees. That's how we see it all coming together.
Okay. That's helpful. Second question, just on capital and maybe piggybacking on what you referenced in your response to Glenn's question. AOCI, not a whole lot of impact, I guess, this quarter. As you sort of think about on the forward basis, maybe help us refresh on the sensitivity to capital from higher interest rates and to what extent that could impact the buyback expectations. Not just kind of for the fourth quarter, I heard you're obviously on the ramp into Q4, but broadly for 2027 as well.
Yeah. I think just the sensitivity around the numbers. As a reminder, AFS duration is around one year. That's a mixture of fixed float in that book. The fixed book, maybe a little longer duration, possibly coming up to around two years. When you put all that together, the rule of thumb is something around 25 basis points increase in rates would be consistent. Absent optimization would be consistent with approximately 10 basis points of capital levels. We've got a very strong capital level that we've been operating at, and our expectation is to be around that 11% level. If you think about the third quarter, rates rose maybe 75 basis points- 100 basis points over the third quarter. Nevertheless, we delivered a very strong CET1 at 11%, and it's our plan to deliver that buyback approaching 80%, notwithstanding that headwind from rates in 3Q.
Over time, that's the rule of thumb there with respect to every 25 basis points unmitigated and unaddressed would be gross around 10 basis points. We have levers to optimize when and if things like that happen, and we feel confident in the ability to deliver on that pretty significant ramp of buybacks heading into fourth quarter.
Yeah. Thanks for all that.
Your next question will come from Ebrahim Poonawala with Bank of America. Your line is open. Please go ahead.
Hey, good morning.
Morning.
I guess maybe first question, John, for you. As we think about NII dynamics, obviously, I understand you are not talking about 2027 today. But as we think about maybe a few more rate hikes, which I assume would be positive for you, just talk to us the two other sort of mechanical from an asset repricing standpoint, how should we think about asset repricing helping NII over the next 12-18 months? And then what are your expectations around both deposit growth and mix? Thanks.
Yeah. I think just a couple of things. We are asset sensitive, modestly so in the U.S. Primarily a lot of our asset sensitivity is outside the U.S. in the Euro area and the U.K. But nevertheless, rate hikes are a tailwind for the platform across the board. You would basically be thinking about that being a positive going forward. Investment portfolio reinvestment has been a big driver. When you think about our net interest margin being up 16 basis points year-over-year, about 1/3 of that really came from the turnover of the securities portfolio, and that will continue to contribute over the medium term. As I mentioned, we have been endeavoring to stabilize our net interest margin range in that 110 basis points-115 basis points area, up from a year ago where it was in the mid-90s.
Over the medium term, we have articulated the expectation that that net interest margin would rise to the upper end of that range. That in combination with ongoing expectations for interest earning asset growth driven by deposit growth, healthy deposit growth, would give us that low to mid-single digit medium-term outlook for NII, which is really powerful in terms of one of the key building blocks for why we have a lot of confidence in our ability to deliver on the pre-tax margin and ROTCE targets that we laid out last quarter. With respect to deposits, non-interest-bearing levels from a mix standpoint have been very constructive right around the 10% level. We think that is going to be consistent and be a good driver and supporter of growing those levels commensurate with the levels of growth overall in deposits.
We think that mix hangs in there. In a rising rate environment, we are going to be very attentive to deposit betas and repricing to ensure that that asset sensitivity actually flows through across all of the currencies that we manage.
Got it. Thank you. I guess maybe, John, one for you. You have talked about digital assets tokenization for a while now. It comes up with investors in terms of when we think about the build-out there, and we think about State Street, does the value from the new infrastructure offset the risk of losing some of the revenue on the traditional servicing side? Just how do you kind of think about the push and pull there, whether or not this will be net accretive or dilutive when we think about revenue outlook or margins over the medium term?
That's a good question. I think that the way we see it, there will be a fairly long period of traditional finance and digital finance, just to use general terms, operating alongside each other. An important part of our role as an infrastructure provider is to actually enable that on-ramp, off-ramp from traditional to digital and back again. We really don't see certainly in the short term, but even in the medium term, a tremendous risk to revenue. What we do see, though, is you still have a market that needs to work itself out. The CLARITY Act is one example of that. But really when you think about the notion of, for example, atomic settlement and how you think about liquidity and more importantly, how regulators think about liquidity.
The rules of the road and the normalization of that needs to occur. We think there's a lot to be worked out in this. But we're certainly not planning on, or as a base scenario, we're seeing any kind of medium-term revenue loss.
Good. Thank you.
Your next question will come from Mike Mayo with Wells Fargo. Your line is open. Please go ahead.
Hi. The first question is easy, but surprising. Your FX is down 14% quarter-over-quarter. Does that reflect a pullback in cross-border investment by clients, or what's going on there? Do you expect a rebound?
Yeah. I think we mentioned earlier last quarter that we had an extremely strong second quarter, and frankly, 1H overall. The expectation was that we would see some moderation going into the second half. So, the trends there sequentially were expected. I would say if you look at the year-over-year trends, the year-over-year trends of 17% growth in FX trading is something that's pretty attractive. We do expect that that's going to generate some growth off of the third quarter heading into the fourth quarter. So, I think that this has been year-over-year a success story in terms of our investments in this business, and is something we feel good about as we head into 4Q.
Mike, I'd add a couple things to that. One is that we've been saying now for a long time that we want to build out both products and distribution capabilities so that we can build volumes and take market share. I think I would urge you to focus on the volume number. Secondly, adding onto John's point there, this was mostly in the APAC region where parts of APAC saw record high volatility in the second quarter. That came back. It's still elevated, but certainly started to normalize, and that explains most of it.
Okay. Separately, what are you targeting for servicing wins in 2026? I think you mentioned a number that was a little below what you previously said. On the other hand, it looks like you're showing a decent amount of organic growth in servicing fees and asset management. So I'm trying to reconcile what might be you falling short of your servicing win target with what looks like decent organic growth.
Yeah. I'll put that all in context. I think we're at $200 million year to date. We're expecting a north of $100 million quarter in the fourth quarter. That'll be the fourth year of north of $300 million. I think the final number depends upon some lumpiness in the timing of some larger deals, as is often the case in the fourth quarter. We'll be tracking that and updating along the way. But I think zooming out, organic fee growth of 10% year-over-year in servicing is exceptionally strong. It is critical to drive that engine on net new business, which has been positive all throughout the year. But we also would add that our premier client base is growing in their own right, and the flows and the activity that we're seeing are also big contributors to organic growth.
It's one of the two or three legs of the story in terms of servicing. Again, the organic growth number, I think I said 10%, I should have said 7%. It's 10% overall and 7% organic coming from servicing fees which is extremely healthy. But when you take all those together, net new business flows and client activity, sales are critical to the net new business piece. We'll see how the fourth quarter plays out. But north of $100 million, it'll be a very strong largest quarter as you see in 2026. We'll be tracking it and feel really good about the sales trajectory.
All right. Thank you.
Your next question will come from Ken Usdin with Autonomous Research. Your line is open. Please go ahead.
Thanks. Hi, good morning. Hey, John, you had been previously talking about average deposits of $270 billion for the year. It looks like to get to that, the fourth quarter would have to average around $280 billion. Just wondering if that's still what you're expecting, and if not, any delta that you might be seeing.
Yeah, I think we're going to approach that. I think the outlook for the fourth quarter is maybe in that $275 billion- $280 billion range. That'll put us right around possibly very, very slightly below the $270 billion. But I think the outlook for 4Q, a good operating range and expectation would be growth from the third quarter, good solid deposit trends that we're seeing even quarter to date and ranging from $275 billion- $280 billion in 4Q.
Okay. Can you remind us how much benefit the terminated swap drag will be sequentially as well as we try to think about where that fourth quarter NII exit will be?
I said the year-over-year, actually terminated hedges year-over-year was worth about 5 basis points. That moves around quarter to quarter. I'd say maybe a basis point as you head into the fourth quarter from terminated hedges. You'll have some rate benefit because of what happened in the third quarter from the Fed and the ECB. So those would be some of the tailwinds for NIM heading into fourth quarter.
Okay. Just one more on fee capture rate on servicing. I know this is not the best population, but servicing fee growth, I think, was below expectations because it looked like the fee capture rate came down a lot. Was there anything in there that went the wrong way that you would also get back, and how does that tie in to your point you made earlier? I am making two points into one, but you mentioned that the other fees was also low. Just kind of thinking about what gets better, if anything, in a couple of these lines that kind of went a little bit the wrong way this quarter. Thanks.
Yeah, sure. I think year-over-year, we had some gains in the year-ago quarter on the other fee line item that didn't reoccur. That's the primary driver of the decline in other fee revenues from 2Q into 3Q. We don't expect that to reoccur. We expect stability on the other fee line item heading into the fourth quarter, so that's first and foremost. We expect growth coming from the top three drivers of our fee revenue line item outside of that. So servicing management fees and FX trading we expect growth heading into the fourth quarter from all three of those. I think that will be a nice driver for fee growth as we head through the end of the year.
Okay. Thanks, John.
Your next question will come from David Smith with Truist Securities. Your line is open. Please go ahead.
Hi. Good morning.
Morning.
On the capital front, I think based on your guidance for the year, it would imply you need something like $650 million of buybacks in the fourth quarter to get to a 75% payout ratio for the year. As you think about approaching 80% for the year, is that kind of the lower bound that you hope to be at based on other organic capital demands?
Yeah, I think the buyback number was $400 million in 3Q. I'd say that the buybacks heading into 4Q would be north of the number you just mentioned. To line up with that approaching 80%, the number's probably closer to $700 million± .
Okay. Just bigger picture, you're doing 25% ROTCE, 34% pretax margin the past two quarters. So you're kind of already knocking on the door of your medium-term targets that you laid out for three to five years from now. I know we shouldn't read too much into any given quarter, but are there any real headwinds that you see on the horizon to this point that would stop you from just continuing to make steady progress from the base you're already at over the next few years? I know it's a pretty good market backdrop, but I know you've done a lot of work to insulate yourself from market movements at the same time to some degree.
Yeah. A couple of things. Very strong quarter. If you look in the third quarter, we are rounded at around 35% pretax margin, where we feel very good about what we've executed against this quarter and throughout the year. If you average that out for the implied levels back in July, we said that 2026, our guide would have implied something in the neighborhood of 32% pretax margin. Our updated and improved guide this quarter based on all of the trends would imply something closer to 33% margin for the year. Yeah, and that's in part related to how we have some accounting issues in the first quarter of seasonal expenses that we tend to book that. If you spread all that out, you could basically say that we've continued to raise the bar on the implied baseline heading into the medium-term outlook.
That's extremely encouraging, and we feel very constructive about the ability to deliver against that 35%. I think the key drivers of that and building blocks are strong trends in NII, as I articulated earlier. We've grown NII every quarter this year. We expect to grow it again in the fourth quarter. It's organic fee growth across our largest businesses in servicing and in management fees. It's our transformation program where it's allowing us to continue to invest in some really exciting strategic initiatives while contributing to that margin over time. All of those trends that we talked about in July are on track and on schedule in a lot of ways in terms of what we were trying to deliver to create that confidence in the MTO over time.
We do want to make sure that we deliver that on a full-year basis, and we want to ensure that it feels sustainable. Then we'll consider future opportunities to improve performance from that perspective once we've achieved the goal.
All right. Thank you.
As a reminder, you may ask one question and one related follow-up question. Our next question will come from Manan Gosalia with Morgan Stanley. Your line is open. Please go ahead.
Hi. Good morning. John, you just spoke about the NIB mix staying constant as the deposit portfolio continues to grow. I know there's some noise in the period-end deposits each quarter, but average NIB deposits were also down this quarter. Can you talk a little bit about what drove that? As rates rise, how do you expect NIB deposit growth to behave?
Yeah. Again, I think from quarter to quarter, you can see some movement that may or may not be reflective of what we believe the trends are going to be over the near and long term. So from a percentage standpoint, maybe coming off a little stronger earlier part of the year where we had some surge in the non-interest-bearing deposit levels. So down slightly, but still in the 10% range. I think that client mix and activity, and as our asset manager clients actually grow themselves, we see that being a good planning assumption going forward, even as we grow deposits.
Got it. Then maybe on the upcoming liquidity rules. So, we should get a proposal from the regulators at some point giving banks credit for pledged collateral with a discount window. As you think about your balance sheet and your liquidity levels, would that drive any change in terms of how you're thinking about the balance sheet mix going forward?
We've been monitoring that rule and been in discussions as most banks have on this topic for some time. I don't think that at this point that there's much impact that we would really expect. I think there's going to be a proposed liquidity rule kind of expected by year-end, and we'll think about that when it arrives. But I don't really think that it's expected to have much of an impact in terms of how we're managing the balance sheet. We have an extremely liquid balance sheet with a significant amount of ready high quality liquid assets on balance sheet. And so I think we would be well-positioned to address and potentially take advantage of any flexibility that the regulators think is appropriate.
Great. Thank you.
Your next question will come from Brennan Hawken with BMO Capital Markets. Your line is open. Please go ahead.
Hi there. Thanks for taking my question. Just one left for me. Average loan growth in the quarter slowed, and the EOP loans actually were down sequentially. I know EOP balance sheet can bounce around a lot. So maybe could you give us some color on what impacted those trends and how we should think about loan growth going forward?
Yeah. We're doing some optimization on that line item as we may have discussed a couple of quarters ago. I'd say that we see healthy opportunities in supporting our clients in the subscription finance space and in AAA CLOs and also even in fund finance. Those three line items would continue to grow on a go-forward basis, and those are done in conjunction with deep relationships from a servicing fee standpoint. All together, it's an entire client sort of One State Street approach to supporting clients that are custody clients of ours that also request access to balance sheet support. That's very attractive and is strong business that will continue. We did have some categories of loans that were not quite as deep from a relationship perspective that have been in runoff throughout the year.
I think that explains the overall loan portfolio trajectory that you're seeing which is flattish. But much of that optimization probably is completed maybe by the end of this year or early next. As you get into next year, you'll see some loan growth that flows through given the runoff of those other books probably slows down as you get into 2027.
Okay. Thanks for that.
Your next question will come from Scott Siefers with TD Cowen. Your line is open. Please go ahead.
Morning, guys. Thanks for taking the question. John, was just hoping to sort of revisit broad non-interest income dynamics. Feels like maybe a couple crosscurrents. I think kind of coming in, I think maybe some of us felt like the update that you had given last month maybe was on the conservative side, and then there's been a little concern this morning that fees were sort of a shortfall. I guess maybe to sort of level set things, how did the third quarter specifically for broad fee income stack up relative to your expectations? Because I guess I'm trying to reconcile if there's a sort of a disconnect between the way we might've been thinking about the third quarter and then what it implied for the full year. Because you gave those comments about what should grow servicing management and FX in the fourth quarter.
It sounds like we're on the right track, but just trying to get a sense for the quarter itself and then enthusiasm about momentum going forward.
Yeah, sure. A couple of comments. Overall, we did give an update earlier back in September that fees would come in for the year at around 13%-14%. We affirm that today. We feel good about that outlook. That's the overall construct. When it comes to the quarter-over-quarter expectations, we did have an impact on the other fee line item that was related to late quarter, late in September, mark-to-market adjustments that had an impact that earlier in September were not expected.
Yeah, Scott, what I would add to that, it's Ron. That when we look at this in terms of core fee growth, which we would include in that core servicing fee, management fees, and markets-related fees, we feel very good both about what occurred in the third quarter and what the outlook is for the fourth quarter. This other fee line, one, it's not that large. Two, it has a lot of things in it, particularly mark-to-market, typically related around the capital investments we make. I put some of our small strategic investments in there. That does move around. But in terms of the core fees, we feel very good about that.
Yeah. Two other points to add to that, Scott. One is that absent that late quarter mark activity our fee revenues would have come in around 12%, which would have been right on top of what we were expecting for 3Q. Heading into 4Q, to Ron's point, our three biggest fee line items we expect growth heading into the fourth quarter. That's very encouraging and constructive to see that trajectory.
Yeah. Perfect. Okay, good. I appreciate you sort of rounding out all that. Thank you very much.
Your next question will come from Gerard Cassidy with RBC Capital Markets. Your line is open. Please go ahead.
Good morning. Hi, John. Hi, Ron. John, can you share with us, you talk about the improvement in the net interest margin partly due to the repricing of maturing securities. I think you said the duration of your available for sale portfolio is about one year. How much of that could you quantify that, I guess? For what you saw this year, and do you expect that kind of yield pick up potentially next year if the Fed fund futures market is correct in saying we get two more rate increases by, let's say, March of next year?
Yeah. A couple of things related to net interest margin. We do think that investment portfolio reinvestment continues to be a tailwind, and will be for the medium term, and will continue to be a tailwind as we turn that book over. The 16 basis point increase in net interest margin in the third quarter of 2026 versus the year ago quarter, about 5 basis points of that is from the turnover of the investment securities portfolio. So that can give you a sense for what that could look like on a year-over-year basis. On a sequential quarter basis, on a run rate, would be more like 1 basis point or a little more. So that can accumulate over time and will continue to be durable over time across rate cycles. I think that would be the first thing to highlight.
I think the second thing is that when it comes to our asset sensitivity, for a given 25 basis point rate hike, most of our asset sensitivity would be outside the U.S. A good example of that would be in the euro area of our balance sheet. Euro-denominated balance sheet for every 25 basis points, that ends up being worth about a basis point of net interest margin for the overall firm. For the Fed, that's more call it maybe even 0.5 basis point for planning purposes. So rates would be a tailwind, and the presumption, the expectation there is that we're managing betas and that deposit mix is also constructive and holds in, which is what our expectation would be even through the expected rate rises that you see in the forward curve.
Very good. As a follow-up, when we go back, assuming the historical numbers I'm looking at are accurate, it looks like back in 2023, you guys were just under $200 billion in average deposits in the middle of the year. Full year ended up over $200 billion. But you've had really good growth since that period. How much of the growth do you think is due to new business wins you bring in these customers or market conditions where your customers' businesses are doing so well because obviously we've had some very strong markets over the last two to three years.
Yeah. Gerard, it's Ron. I'll begin with that. Most of it really is due to the new business growth because particularly if you think about the core back office custody, with custody comes deposits. So that really is the number one thing there. As you look upon a business like this and trying to forecast deposit growth, you look first at what's the forecast for custody growth. Secondly, market conditions, and we'll start to change our clients' behavior. How much cash are they holding? For a particular kind of thing. Is it an environment where they want to hold a little more cash, either to invest opportunistically or manage for their own redemptions? That'll drive that. So certainly markets and what's going on there in customer client behavior matters, but the core would be where's the custody business going?
Yeah. Just to add on to that.
Very good. Oh, go.
Yeah, just adding on, the significant increase in AUC/A in 2025 and 2026 alone, I think it's up maybe along the lines of 33%, 30%, 35% growth just over the last two years is a huge driver. The money supply growth for the overall banking system is a driver that is also two kind of, one, idiosyncratic to us, meaning really strong growth. And the other is as your positive GDP and money supply continues to expand, those are all consistent with what we would expect to be tailwinds for our deposit franchise going forward.
Well, thank you. I appreciate that.
Your next question will come from Ben Gerlinger with Citi. Your line is open. Please go ahead.
Hi. We've danced around it a little bit. The higher revenue, higher NII, increased expenses a little bit. Is it almost entirely related to revenue-related costs, or is there something within that as well where you see an opportunity to maybe pull forward some 2027 investments into the fourth quarter?
Yeah. From an expense standpoint, as we mentioned, 8% growth, 5 percentage points of that is revenue related. That tells us that the grow and run the bank aspects of that here in the third quarter are around, or is it around in the neighborhood of 3%? It will move around from quarter to quarter, but that range of 3%-4% is a good sort of run and grow the bank by investing in strategic investments and run costs offset by our productivity. Productivity levels have been very strong in 2026, and we expect that to ramp and grow over time. But it is a good assumption that, given the strength in revenues, the majority of the expense growth in 3Q 2026 from the year ago quarter is driven by revenue related costs.
Got it. Okay, that is helpful. The updated numbers is largely the positive of better revenue. There is compensation associated with it. It is not necessarily like the pace of investment expenses could potentially be lower near term because you are pulling it forward. I just want to double check I got that right.
No. I think we have really an exciting portfolio of strategic opportunities, and I think as I mentioned back in July, as transformation and productivity ramps over the medium term, we actually have an opportunity to continue to grow our investments that are strategically oriented and still balance that and maintain our trajectory from a pre-tax margin standpoint. So that's an important message to take away as well.
Got it. Thank you.
If there are no further questions, I will turn the call back over to Elizabeth Lynn for closing remarks.
Thank you all for joining us today. Please feel free to follow up with investor relations for any other questions. Thank you and have a good day.