Good morning, and welcome to State Street Corporation's third quarter 2023 earnings conference call and webcast. 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 rebroadcast or distribution in whole or in part 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 introduce Ilene Fiszel Bieler, Global Head of Investor Relations at State Street. Please go ahead.
Good morning, and thank you all for joining us. Good morning, and thank you all for joining us. On our call today, our CEO, Ron O'Hanley, will speak first. Then Eric Aboaf, our CFO, will take you through our third quarter 2023 earnings slide presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.com. Afterwards, we'll be happy to take questions. During the Q&A, please limit yourself to 2 questions and then re-queue. 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 appendix to our slide presentation, also available on the IR section of our website. In addition, today's presentation will contain forward-looking statements.
Actual results may vary, may differ materially from those statements due to a variety of important factors, such as those factors referenced in our discussion today and in our SEC filings, including the risk factors 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 change. Now, let me turn it over to Ron.
Thank you, Ilene, and good morning, everyone. Earlier today, we released our third quarter financial results. As we issue these results, the world has witnessed a surprise and unconscionable terrorist attack on innocent Israeli citizens and the resulting enormous human toll in Israel and Gaza. These terrible events have shocked the world and created further global geopolitical uncertainty. State Street stands with the people of Israel, and we are united with all those impacted. Now, turning to the third quarter, global financial market performance was mixed as a positive start for equity markets in July turned decisively negative as the quarter progressed. Against a backdrop of softening economic data, market sentiment was negatively impacted by continued global central bank rate hikes and investor concerns of a higher for longer interest rate environment and an economic hard landing.
As a result, equities fell while global bond yields continued climbing around the world, reaching levels not seen for many years, with the U.S. ten-year yield reaching its highest level since 2007. Despite these factors, the third quarter continued to be characterized by relatively low currency market volatility. Turning to slide 3 of our investor presentation, I will review our third quarter highlights before Eric takes you through the quarter in more detail. Beginning with our financial performance, third quarter earnings per share was $1.25 or $1.93, excluding a loss on sale from an investment portfolio repositioning, which was a notable item in 3Q. EPS growth year-over-year, excluding notable items, was driven by our significant common share repurchases during the period, coupled with a 3% increase in total fee revenue.
This fee revenue growth reflects higher servicing and management fees, better front office software and data fees, and an increase in other fee revenue. Taken together, the benefit of share repurchases and the improvement in fee revenue more than offset lower NII, market headwinds within trading businesses, as well as the impact of year-over-year expense growth. That said, we are pleased with our ongoing transformation and productivity initiatives, which help us to contain that expense growth while allowing us to continue to invest in our businesses. Turning to our business momentum, within investment services, total AUCA increased to $40 trillion at quarter end, and we recorded $149 billion of new asset servicing wins during the third quarter, largely driven by wins in official institutions and private markets.
The estimated annual new servicing fee revenue to be recognized in future periods associated with 3Q asset servicing wins amounted to $91 million, which is the highest level of quarterly new servicing fees in over two years, demonstrating our ability to achieve our ambition of driving stronger sales performance. Encouragingly, Alpha's momentum continued in 3Q. We deepened relationships with existing mandates and recorded two new Alpha mandate wins, including our first Alpha for private markets mandate for one of the world's most influential investors. During the third quarter, we outlined a number of strategic focus areas for our investment services franchise as we aim to drive opportunities across key regions and product areas and realize the full potential of our State Street Alpha value proposition. Importantly, we are taking actions aimed at gaining market share and reinvigorating revenue growth.
We are executing against our plan to improve core back-office custody sales performance, as it is our largest revenue pool, installs quickly, and has significant scale and drives high-margin ancillary revenues. As an illustration of our custody sales momentum and the power of Alpha, in the third quarter, State Street and Vontobel, a premier global asset manager headquartered in Switzerland, entered into an agreement to expand our existing front and middle office relationship by providing back-office services, subject to the necessary approvals. State Street had no relationship with Vontobel until discussions began in 2020 around Alpha, resulting in the adoption of our front, middle, and now back-office services. Key client wins, such as Vontobel, demonstrate how Alpha can establish, broaden, and deepen client relationships, further positioning State Street as our client's essential partner.
It illustrates the value of the Alpha proposition and confirms our strategic rationale of how Alpha can grow and tie together the full breadth and depth of State Street's capabilities in a true one State Street solution for our clients, from front to back. Accelerating the Alpha sales cycle and implementation timeline, particularly back-office services, remains important strategic priorities to drive even more fee revenue growth. Turning to our front-office software and data businesses, CRD continues to perform well and has a strong pipeline. By the end of the third quarter, annual recurring revenue for our front-office software and data business increased by 12% year-over-year to $299 million. At Global Advisors, assets under management reached $3.7 trillion at quarter end, supported by a record $41 billion of net cash inflows in 3Q.
Importantly, our cash business gained market share in an expanding market, driven by strong investment performance, coupled with the higher yield environment. In aggregate, Global Advisors gathered $10 billion of total net inflows in 3Q. Record quarterly flow performance in cash was partially offset by outflows in the institutional business, coupled with the impact of risk-off market sentiment in our ETF business in 3Q. While our ETF franchise saw modest net outflows in aggregate in 3Q, our U.S. low-cost SPDR ETF franchise continued to be a bright spot, generating $7 billion of net inflows, gaining further market share. To drive continued growth, in 3Q, we reduced the price on 10 low-cost SPDR Portfolio ETFs, demonstrating our commitment to delivering institutional-quality investment solutions at competitive price points.
Lastly, on business momentum, I am proud to highlight that State Street's foreign exchange business has once again been recognized as the industry leader. After being ranked number 1 FX provider to asset managers by Euromoney Magazine in 2022, this year, Euromoney Magazine's 2023 FX Awards named State Street as the winner across four categories, including Best FX Bank for Real Money Clients, Best FX Bank for Research, Best FX Venue for Real Money Clients, and Best FX Bank Sales. Turning to our financial condition, State Street's balance sheet, liquidity, and capital positions remain strong. Our CET1 ratio was a strong 11% at quarter end, well above our regulatory minimum. This strength has enabled us to deliver against our goal of capital return to our shareholders.
In 3Q, we returned $1.2 billion of capital, buying back $1 billion of our common shares and declaring over $200 million of common stock dividends. This means that cumulatively, over the last four quarters to the end of September, we have returned approximately $5.6 billion of capital to our shareholders through a combination of share repurchases and common stock dividends. As we look ahead, in the fourth quarter, it remains our intention to continue common share repurchases under our existing authorization of up to $4.5 billion for 2023, subject to market conditions and other factors. To conclude, amidst the challenges of the market environment in 3Q, we remain dedicated to driving stronger business momentum and improving fee growth.
To that end, in the third quarter, we outlined our sharpened execution plan for the investment services business, underpinned by a number of actions aimed at accelerating sales and revenue growth, while simultaneously improving the discipline and accountability for this execution. Our laser focus on expense discipline also remains high. We have a well-established track record of reengineering our processes and transforming our operations to improve our efficiency and realize productivity growth. In the third quarter, we reduced expenses quarter over quarter and announced another step in our multi-year productivity efforts aimed at improving our operating model, while enabling even greater investment in our business. As part of our ongoing transformation and productivity initiatives, we are streamlining, streamlining our operations in India, and have now assumed full ownership of one of our joint ventures in the country.
This consolidation will continue the transformation of State Street's global operations and enable us to achieve productivity savings as part of our plans to deliver positive fee operating leverage in 2024. Now, let me hand the call over to Eric, who will take you through the quarter in more detail.
Thank you, Ron, and good morning, everyone. I'll begin my review of our third quarter results on slide 4. We reported EPS of $1.25, which was down year-on-year due to the impact of the $294 million loss on sale in connection with the repositioning of our investment portfolios, which will benefit NII in future periods.
... EPS was up year-on-year at $1.93, excluding the re positioning, which you can see on the right-hand side of the page. Turning to the core business, as you can see on the left panel of the slide, total fee revenue grew by 3% year-on-year, driven by growth in our front, middle, and back-office investment services business, as well as solid management fee performance at Global Advisors. This performance enabled us to offset some of the industry-wide headwinds we saw in our global markets business, as well as lower NII, given the mixed macroeconomic backdrop in the quarter. Lastly, we remain focused on managing costs in the current operating environment, limiting expense growth to just 3% this quarter and achieving productivity savings as part of our plans to deliver a positive fee operating leverage in 2024.
Turning now to Slide 5, we saw a period-end AUCA increase by 12% on a year-on-year basis and 1% sequentially. Year-on-year, the increase in AUCA was largely driven by higher period-end equity market levels and net new business. Quarter on quarter, AUCA increased primarily due to client flows and net new business. While net new business was positive, long-term flows in the asset management industry have been muted, as you can see on the bottom right of the slide. This risk-off sentiment leads to the current headwind across the servicing industry. At Global Advisors, period-end AUM increased 13% year-on-year and was down 3% sequentially. Relative to the period a year ago, the increase was primarily driven by higher quarter-end market levels and inflows of $10 billion.
Notably, in the quarter, our cash franchise continued to perform strongly, generating a record $41 billion of net inflows as our competitive performance contributed to market share gains. Quarter-on-quarter, AUM increased mainly due to lower quarter-end market levels. Turning to Slide 6. On the left side of the page, you'll see third quarter servicing fees up 1% year-on-year, primarily from higher average equity markets, net new business, and the impact of currency translation, partially offset by lower client activity and adjustments, normal pricing headwinds, and a previously disclosed client transition. Sequentially, total servicing fees were down 2%, primarily as a result of a lower client activity and adjustments and the previously disclosed client transition, partially offset by higher average equity markets.
As I've mentioned over the past year, we continue to see lower levels of client activity inflows, all of which impact transactional volumes, leading to a 2-3 percentage point headwind on servicing fees year- to- date. Part of this is the cyclical nature of the servicing business. The full year effect has ranged from -2%, -2% to +1 percentage point impact over the last five years. Within servicing fees, back-office services were generally consistent with total servicing fee, fees. Middle Office Services, which is part of the Alpha proposition, had another quarter of good growth. On a year-over-year basis, Middle Office fees were up 3% and up 1% sequentially, largely driven by net new business. On the bottom panel of this page, we highlight the business momentum we saw in the quarter.
We won $149 billion of new AUCA. We onboarded roughly $250 billion of AUCA in the quarter, primarily in the asset management client segment. Importantly, as Ron mentioned, we achieved new annual servicing fee revenue wins of $91 million this quarter, which will be recognized in future periods. These servicing wins underscore the progress we're making towards stronger sales performance. While we've historically only described wins in AUCA terms, we recently expanded our disclosure to indicate that a healthy level of annual servicing sales is in the $300 million range this year. You can measure us against this benchmark. We now have about $2.3 trillion of assets to be installed and about $255 million of servicing fee revenue to be installed as well.
Turning to Slide 7, third quarter management fees were $479 million, up 1% year-on-year, primarily reflecting higher average equity market levels, partially offset by a previously described shift of certain management fees into NII. Quarter-on-quarter, management fees were up 4% as a result of higher equity market levels and record quarterly cash net inflows. As you can see on the bottom right of the slide, our investment management franchise remains well-positioned, with very strong and broad-based business momentum across each of its businesses. In ETFs, we had neutral overall flows, but saw positive net inflows and consistent market share gains in the SPDR portfolio low-cost suite. As you know, we strategically dropped the fees on about a third of our low-cost suite of products and expect more growth in the coming quarters from this action.
In our institutional business, notwithstanding net outflows of $30 billion in the quarter, which were primarily driven by client insourcing, both our defined contribution and index fixed income products continued to drive strategic momentum. Lastly, across our cash franchise, we saw record quarterly cash net inflows of $41 billion as we captured some of the cyclical movement of cash in the financial system. I'll just remind you that cash flows can be volatile quarter to quarter. Turning now to Slide 8. Third quarter FX trading services revenue was down 2% year-on-year, while up 3% sequentially. Relative to the period a year ago, the decrease was mainly due to lower direct FX spreads and lower FX volatility, partially offset by higher volumes. Quarter-on-quarter, the growth primarily reflects higher volumes....
Industry volatility is down 25%-40% across developed markets and emerging markets relative to the period a year ago, and down 5%-10% sequentially, which is presenting fewer trading opportunities and lower spreads. Securities finance revenues were down 6% year-over-year due to lower specials activity and lower agency balances. Sequentially, revenues were down 12%, primarily as a result of seasonally lower activity and the recent industry drop-off of U.S. equity shorting activity and specials. Third quarter software and processing fees were up 2% year-over-year, but down 15% sequentially, largely driven by CRD, which I'll turn to shortly. Other fee revenue increased $49 million year-over-year, primarily due to the tax credit investment accounting change and the absence of negative market-related adjustments.
Moving to Slide 9, you'll see on the left panel that front office software and data revenue increased 2% year-on-year, primarily as a result of higher growth in our more durable software-enabled and professional services revenue as we continue to convert and implement more clients to the SaaS environment, which now accounts for about 60% of our clients, partially offset by fewer on-premise renewals. Sequentially, front office software and data revenue was down 20%, primarily driven by lower on-premise renewals, partially offset by higher software-enabled revenues. Our sales pipeline continues to grow and remains strong for our Charles River Development front-office solutions products. Turning to some of the other Alpha business metrics in the right panel, we are pleased we had 2 more mandate wins in the quarter for Alpha. Most notably, we also had our first Alpha for private markets win.
We also meaningfully advanced CRD's institutional fixed income capabilities. Turning to Slide 10, third quarter NII decreased 5% year-over-year and 10% sequentially to $624 million. The year-over-year decrease was largely due to the continued mix shift from non-interest-bearing deposits to interest-bearing, and lower average deposit balances, partially offset by higher interest rates. Sequentially, the decline in NII performance was primarily driven by lower average deposit balances in the deposit mix shift, partially offset by the benefit of higher interest rates, including international central bank hikes and our investment portfolio repositioning. The NII results were somewhat better than expected due to non-interest-bearing deposit levels coming down slightly less than expected and the portfolio repositioning, partially offset by client repricing, some of which will be delayed and will impact fourth quarter instead.
On the right of the slide, we show our average balance sheet during the third quarter, with average deposits declining 4% quarter-over-quarter. Cumulative U.S. dollar client deposit betas were 73% since the start of this recent cycle, while cumulative foreign currency deposit betas for the same period continued to be much lower in the 25%-50% range. Finally, as I mentioned earlier, last month, we executed an NII accretive and capital accretive investment portfolio repositioning exercise to take advantage of both higher yields and spreads, which, all else equal, should drive NII towards the higher end of the previously disclosed range of $550 million-$600 million per quarter next year. Turning to Slide 11. Third quarter expenses, excluding notable items, increased 4% year-on-year.
Sequentially, third quarter expenses were down 1% as we actively managed expenses and continued our productivity and optimization savings efforts, all while carefully investing in the strategic elements of the company, including Alpha, private markets, and technology and operations automation. On a line-by-line basis, year-on-year, compensation and employee benefits increased 4%, primarily driven by salary increases associated with wage inflation, higher headcount, and the impact of currency translation. Sequentially, however, we brought headcounts down, and we also reduced incentive compensation this quarter, in line with our year-to-date performance. Information systems and communications expenses increased 3%, mainly due to higher technology and infrastructure investments, partially offset by the benefits from ongoing optimization efforts, insourcing, and vendor savings initiatives. Transaction processing increased 6%, mainly reflecting higher subcustody vendor costs.
Occupancy increased 4% as we relocate our headquarters building, and other expenses were up 4%, mainly reflecting higher marketing spend and professional fees. Moving to Slide 12. On the left side of the slide, we show the evolution of our CET1 and Tier 1 leverage ratios, followed by our capital trends on the right side of the slide. As you can see, we continue to navigate the operating environment with very strong capital levels, which remain above both our internal targets and the regulatory minimum. As of quarter end, our standardized CET1 ratio of 11% was down 80 basis points quarter-on-quarter, largely driven by the continuation of our share repurchases and modestly higher RWA, partially offset by retained earnings.
Our LCR for State Street Corporation was a healthy 109%, and 120% for the State Street Bank and Trust. In the quarter, we were quite pleased to return roughly $1.2 billion to shareholders, consisting of just over $1 billion of common share repurchases and over $200 million in common stock dividends. Over the last year, ending September 30th, we repurchased approximately 12% of shares outstanding. Finally, a few brief closing thoughts before turning to outlook. Our third quarter performance was solid, with fee revenue growth of 3% year-on-year. We executed our plan to improve sales capacity and reported $91 million in new servicing fee wins in the quarter, as we look towards our goal of $250 million-$400 million in servicing fee wins in 2024.
As you have seen us do for the last four years, we again demonstrated expense discipline while continuing to invest in the business. Next, I'd like to provide our current thinking regarding the fourth quarter. At a macro level, our interest rate outlook is broadly in line with the current forwards. We currently assume global equity markets will remain flat from now to quarter end, which implies the daily average is down about 3% quarter-on-quarter. Bond markets are also expected to be down about 3% on average quarter-on-quarter. Regarding fee revenue in 4Q on a year-over-year basis, we expect overall fee revenue to be flat to up 1% year-over-year, with servicing fees approximately flat and management fees to also be flattish, as we expect the year-over-year business drivers similar to what we saw this quarter.
We do expect fourth quarter sales momentum to be similar to the strong sales performance we saw in third quarter. We also expect that our markets businesses will be down modestly year-over-year, given lower volatility. We expect software and processing fees to be up 10%-12%, largely due to the timing of on-prem renewals and the expected new SaaS installations. We expect the other revenue line to come in at around $30 million-$40 million in fourth quarter. Regarding NII, we now expect 3Q NII, we now expect 4Q NII to be towards the middle of the $550 million-$600 million range we previously mentioned.
This includes continued expected rotation of about $3 billion-$4 billion out of non-interest-bearing deposits and the impact of deposit pricing, which we previously noted, but with more stability in the total deposit averages. Turning to expenses, we remain focused on controlling costs in this environment and expect to maintain relatively flat expenses in 4Q quarter-over-quarter. As always, this is on an ex-notables basis, and in this regard, we are keeping an eye on the likely FDIC assessment. We expect our adjusted effective tax rate for 4Q will be around 22%. With that, let me hand the call back to Ron.
Thanks, Eric. Operator, we can now open the call for questions.
Thank you, ladies and gentlemen. I will now conduct the question and answer session. If you have a question, please press star one on your touch tone phone. You will hear a three-tone prompt acknowledging your request. If you would like to cancel your request, please press star two. Please ensure you lift the handset if you are using speakerphone before pressing any keys. One moment for your first question. Your first question comes from Mr. Alex Blostein from Goldman Sachs. Goldman Sachs, sorry.
Good morning.
Your line is open.
Hey, good morning. Thanks, thanks, everybody. Hey, Ron and Eric. I was hoping maybe we can touch on your comments earlier around positive fee operating leverage into 2024, which is definitely very encouraging to hear after a couple of years of very good cost management already. So as you think about the revenue uncertainty between the markets and customer flows, I guess, what is the range of outcomes you're assuming for fees as you look out into 2024? And if revenues prove to be more challenging than the base case, is there enough room to still deliver that positive fee operating leverage? Thanks.
Yeah, Alex, it's Ron. I mean, we're basing that comment largely on two things. One is, we feel like we've got quite good visibility around what we're doing from a cost perspective. So we feel like, we've got a series of initiatives underway that will continue into 2024 on managing our costs while also continuing the investment program that we've got in place. That investment program includes some investments that will drive revenues in 2024 and beyond. But also, it's the second thing it's based on is some of the actions we've taken around strengthening our sales and sales effectiveness. And, you know, just pointing to the results we had in Q3, the note that Eric just made to you in terms of the visibility we have on 2024.
So those two things, our confidence in expenses and what we believe is a nicely developing pipeline and this set of sales capabilities and processes. You know, I mean, obviously, markets could turn everything upside down, but based on a reasonable market forecast and not necessarily you know one that's going to be necessarily a tailwind, we do believe we can achieve positive fee operating leverage.
That's great, and appreciate the new disclosure on the backlog and the revenue backlog. Definitely helpful. So maybe within that, can you help us maybe understand the cadence of how quickly some of that 255 of backlog will sort of get converted into servicing fee revenues? Is that expected largely over the course of 2024, or some of that is going to spill into 2025? And then ultimately, do you think that's going to be enough to offset some of the BlackRock-related outflows and revenues that you still expect? Thanks.
... Alex, it's Eric. Let me answer that from a couple different directions to give you some texture because as we think about, you know, go forward fee revenues, right? Part of what matters is installing the backlog. Part of what matters is new sales, right? Sort of maintaining the third quarter momentum to fourth quarter and into next year, because some of those sales actually come through, you know, in the subsequent few quarters. And then, as we talked about back in September, making sure that we're very effective on our retention activity. So every one of those matters.
In terms of the backlog, we said there's about $255 million of revenues in the backlog on the servicing fees and north of $2 trillion on an AUCA basis. The implementation's a little bit different in each the regards. In terms of revenues, we think about 5%-10% of that'll come through specifically in the fourth quarter, so that's included in our guide. We expect 50%-60% of the $255 million to come through next year, and then the balance in 2025. So it's kind of a good mix and aligned with what we'd like. The AUCA implementation's a little more. It's a little quicker, just sometimes that happens. It's quicker, sometimes it's slower.
That's a little closer to 30% in fourth quarter and around 60% next year. But those will move around as they play out. But we've got good visibility now, and what we've been particularly pleased with on our third quarter sales in particular was that a lot of that was around back office services. And back office services, as you know, are one of the fastest to onboard and implement, and that's going to provide some momentum into the first half of 2024.
That's great. Thank you very much, both.
Thank you. And your next question comes from Mr. Ken Usdin from Jefferies. Your line is-
Oh, hey, guys. Good morning. Hey, Eric, just one follow-up at the, you know, fourth quarter NII, you're expecting to be in that middle of that, you know, kind of 55-75 zone, and then you're talking to the upper end for next year. I just wanted to ask you to walk us through, you know, that direction of travel. Like, what are the factors that start to turn to perhaps a slight positive as you exit the year into next year with regard to either, is it either, you know, left side repricing or just deposits getting to the right zone? Just can you kind of walk us through the moving parts? Thanks.
Yeah, Ken, it's Eric. As you surmise, there are a number of factors that matter, especially at this point in the cycle, as we, you know, as we transition from declining NII to some level of stabilization, and we see a good rationale for some uptick from fourth quarter into the first quarter of next year. So let me just go through them, right? There's the continuing amount of rotation of NIB, non-interest-bearing deposits. We still expect some in the fourth quarter, but we expect that that starts to flatten out the beginning of next year. You know, we'll see exactly how much when. It's hard to call, and it moves around.
We've got quite a bit of visibility into our repricing, especially for our largest and most sophisticated clients. I described that last year. And then we're, you know, through a good bit of that, we have, we execute on some more of it in third quarter, we expect, and we have very good visibility fourth quarter. And so the kind of the repricing effects and the catch up, you know, is kind of a bubble that works its way through. On the tailwind side, we then have the investment portfolio rolling through. And, you know, the investment portfolio matures, you know, $4 billion or $5 billion of bonds a quarter.
You've got the new bonds come on roughly at, you know, 200, sometimes 300 basis points higher than the ones that are maturing. And so that's what's giving us a positive trajectory. And so it's really those three factors, plus a little bit of, you know, lending growth and some of our other actions that we can control, that we think starts to shape, you know, a stabilization of NII, as we get from fourth quarter to the first quarter. But it'll, you know, it'll depend. There'll be some movements. And as you know, we update all of you as frequently as we are in public, and we'll continue to do that. But those are the trajectories and our expectations at this point.
Understood. Thanks. And my second one is just, you know, the costs were, I think, a little better than you had thought, and you're flat to 4Q also, probably a little better than the market thought, and a slower implied year-over-year rate of growth. Just wondering, have you done anything incremental to slow the organic growth rate of expenses? And is that something we should think about as we go forward as well?
Yeah, Ken, it's Ron. I mean, there's a number of initiatives underway, as we, I think, always talk to you about. We've really got an ongoing productivity set of actions underway that is comprehensively looking throughout the organization. Some of the things that are underway now, we mentioned what's going on in India, and this India JV, bringing that inside. I mean, this JV goes back to our early days in India before we had our own center of excellence there. It's going to enable us to eliminate redundancy, and eliminate a lot of oversight activities, so we'll be able to take down costs there, take down repetitive costs.
We've got a comprehensive look at operating models throughout the business, which will start to yield results into next year, as we're looking at somewhere work gets done throughout the world, and are there places where we can move and combine things, create more end-to-end? So it's a series of things. Some of them, you know, a lot of the easy work's already been done, so some of these things the work's been underway for a while, and we'll start to realize the benefits of it. But we see visibility such that we can make the statements that we are, that notwithstanding that we continue to make significant investments in the business, that we feel we can keep our costs in reasonable check.
And Ken, I'd just add that the other thing that we have bore down on effectively, that we talked about over the last quarter or so, is our hiring freeze. I mean, what we've found is we've got outstanding individuals and people on our team, and part of what we need to do as we reinvest in different features of the business or different areas, we actually need to reallocate some of that talent to those areas. And actually, at the same time, we need to find efficiencies in others. And so that's been, while it is hard work, it's been an effective way to, you know, actively manage our team and our human resources.
It still means we invest in, you know, all that we need to do for new products, functionality, you know, regulatory requirements, and so forth. But the reallocation that's born from this sort of freeze is actually a very effective tool for us at this stage in the cycle.
Yeah. Ken, what I would add to this, I think what we're talking about now is a continuation of what we started going back to 2019. That was rudely interrupted by COVID and everything that occurred coming out of COVID. You know, the disruption, the great resignation, the issues that arose out of that with service quality and where we needed to overinvest to make up for some of the turnover that we were seeing, that led to the kind of cost increase that you saw. That's all been normalized. Service quality is stabilized. And so I would say that we're back on the path that we started back in 2019 and overcome what we saw in the kind of 2021, 2022 period.
Thank you.
Thank you. And your next question comes from Brennan Hawken from UBS. Please go ahead.
Morning, Ron and Eric, and thanks for taking my questions. One question on your expectations for Q4, Eric. Encouraging to hear that you still are expecting non-interest bearing, you know, to find a stable point here in the beginning of next year. But when you think about your fourth quarter expectations, are you thinking that the typical seasonality that we see in deposits will come through, and is that embedded within the middle of that range of $550-$600 for NII?
Brennan, it's, it's Eric. Yes, broadly, but with the asterisks that the seasonality that we've seen, you know, has moved around a bit, sometimes a little stronger, sometimes it's a little weaker than than typical. So, you know, we do see a bit of an uptick and a normalization in total deposits. And so, you know, we'll we've guided to stabilization. Maybe we'll see an uptick. We'll see. But you know, this is based on really quite deep analysis of our client deposit base. Remember, we manage it on a US dollar. We manage each of the foreign currencies. We have, you know, just an NIB, for example, I think we have, you know, 30,000 accounts, right? The average account size, $1 million.
We've seen the trends in the largest, most sophisticated client and largest accounts come down, you know, quite a bit. The smaller ones tend to have, you know, a flatter line and evolution. So, the guide is based on that, plus a little bit of the seasonality, and, you know, we'll just update as we go. But, I think we started to see some amount of inflection here, but we want to be careful, right? There's still some amount of rotation playing out. There's some amount of balances and pricing coming through, a good bit of which we have a visibility into, but it'll take a little time to just, you know, work through it in the next few months and quarters.
Okay. Okay, great. Thanks. And then maybe following up a little bit on Ken's question, I'm sure at this point, you're going through the budgeting process for 2024. You know, do you have any preliminary expectations for what you could be looking at for expense growth, operating expense growth here in the next year?
... Brendan, it's early to do that. You know, I think what gives us, you know, confidence and actually, you know, the feel of necessity on fee operating leverage is we need to run the business in a way that is healthy for our shareholders and our various stakeholders at the same time, and we need to find a way through that. We've certainly gone through a strategic planning exercise. We do that, you know, through the summer, July, August, and September, and we have, you know, we've got a path forward, we believe both on the top line and on expenses. It's a little soon to get into that, but, you know, we're working through that.
Part of what we're doing now is actually making sure that we have detailed plans, you know, business by business, function by function. We run alternative scenarios, we even develop contingency plans, and we also, you know, we are careful about metering out our spend next year. Where we do add to spend, we're going to do that, you know, with stage gates. So there's a lot going on right now, and we'll come back with a, you know, kind of a full set of guidelines and guidance in January. But I think, you know, we're confident that we've got a path forward here that'll be healthy.
You know, fee operating leverage is a very good way for us to think about it and, I think, for you guys as well.
Yeah. Thanks very much, Eric. Appreciate that color.
Thank you. The next question comes from Glenn Schorr from Evercore. Please go ahead.
Hello, thank you. So we've discussed over time and today that the lower client flows from the market, the whole active to passive trend, and that how disadvantages kind of all of us. Can we talk about what you're seeing in alternative private markets, both from a servicing standpoint, and you sprinkled in a little comment about Alpha for private markets? Like, bring this to life a little bit. Is-could this be a growth industry for the next handful of years? Just curious on that. Thanks.
Hey, Glenn, it's Ron. You know, obviously, you know the kind of growth that the private markets have seen, whether it's private equity, and more recently, private credit infrastructure, and we see none of that abating. You know, private equity may be taking a bit of a pause, but, all of the fundamentals point to those industries increasing. And in fact, many of the large... If, if you look at some of the large multi-asset asset managers, a lot of their growth is actually coming from, from privates. Much of that business today remains insourced, and, there's very few standards in the business. A lot of it gets serviced in very expensive locations, and is not a very good experience for the ultimate LP investors.
So it's a very fast growth area for us, and it becomes more important for the, for the sponsors, for the actual firms to actually get their arms around this because the average ticket size is going down. 10, 15 years ago, the LP investors, typical LP investor was a, it was an institution. It was a, it was a, you know, pension fund, a sovereign wealth fund. Today, the average investor is, you know, some affluent person, you know, that's in some kind of a pooled fund. And so getting this all right is actually quite important, and the demand is very high for us. We're investing a lot in it, a lot of technology in it.
Increasingly, as these firms become multi-asset, not just focused on in one area, the idea of an alpha front-to-back kind of thing and all that's associated with it, with data, becomes very important, both as providers, but also as investors. So the opportunity here is not just the big private providers, but also the big private investors, the sovereign wealth funds and asset owners here. So yes, we see it as a very significant opportunity for us.
And Glenn, just to add a little bit of the kind of quantitative, elements of this. You know, private markets, you know, broadly defined around the world, from a servicing fee standpoint, are growing in the 9%-10% a year. You know, we described our, performance, which is, which has been quite strong, in that area. And, and based on our client base and our pipeline, you know, our expectation is that, you know, we should be growing in the 15% range next year. Part of that is because we serve so many large global asset managers who, you know, have a, a wide range, both in traditional products and in privates, right? So they're, they're coming to us and partly, because increasingly we're serving the, you know, the trad...
The classic alternative and private organizations, right, who increasingly, you know, want to focus on what their core investment process is as opposed to processing. So, you know, we see more and more outsourcing and opportunities for us from that segment as well.
Maybe just one follow-up to all that good detail. You were early on a lot of the offshore outsourcing. You were early on hedge fund outsourcing, and it helped you on your growth rate over time. Do you have a sense that you're early here? Do you think you have a head start and competitive edge on this private front? We just don't see the same competitive landscape, so curious on your thoughts. Thanks.
It's a little bit hard to tell, Glenn. I think that we certainly amongst the traditional asset servicers, we think that we're early. You know, you've got some of the very focused fund administrators that do you know, some narrow kinds of activities in there. And certainly, in terms of offering a full front-to-back solution that includes data, as far as we can tell, we're the only ones out there. So yes, we think in general, we're early.
Okay, thank you for all that.
Thank you. Your next question comes from Ryan Kenny from Morgan Stanley. Your line is already open.
Hi, thanks for taking my question. So the industry has been seeing servicing fee rate pressure for a while. Can you update us on what you're currently seeing in terms of fee rate repricing, and are the newer wins coming in at a lower fee rate than your existing contracts or at a higher fee rate?
Ryan, it's Eric. The overall cadence of, you know, fee repricings have been stable for us, and I think for the industry the last couple of years. As, you know, back in 2019, we went through a phase of higher repricings, but they've been relatively consistent in that kind of 2% or so headwind level, which, you know, which is not that different from what it was over the last five, 10 years. So that's been relatively stable. What we have seen is very good fee rates on new business, and part of that is the discussion we just had in privates, where just because of the nature of the activity, the servicing, it tends to be a manually intensive process.
The fee rates are multiples of the average, you know, fee rate for our business. In fact, the last couple quarters, we've seen you know fee rates on new business comfortably above the average that we've seen. You can just do a little bit of comparison, and we'd be cautious about doing it for every quarter, but take the last you know few quarters of AUCA wins, the last few quarters of fees wins, and you kind of get to that view. We've mentioned that in ways in our quarterly reports this year in particular.
So I think in some ways, you know, what we've been able to find is that, you know, with Alpha, we bring more to a client across the AUCA base, right? So we have fees on the front office side, which we disclose separately, but both the middle and the back office, we have, you know, complex clients, and so, you know, that's been quite fruitful for us. And then the alternatives and privates is a much higher fee rate area just by virtue of that industry. And that together is what gives us some of the, you know, revenue kind of momentum, you know, that we've seen into the third quarter of this year, and we expect in the fourth quarter as well.
Thanks. That's helpful. If we look at the quarter, it looks like the servicing fee rate over average AUCA did come down a bit. Was there anything driving that? Is that just a function of lower volatility and timing, or, or is there anything else in that number that we should think about?
No. If you just look at the aggregates, remember, you've got this kind of effect where when equity markets are up, right, you kind of have this natural thinning in the fee rate just because of how the fee schedules are structured, right? And they're not quite like they are in the asset management business. So no, that's fair. That's been fairly... That was expected and in line with, you know, the ranges that we've been seeing.
All right, great. Thank you.
Thank you. Your next question comes from Brian Bedell of Deutsche Bank. Please go ahead.
Great. Thanks. Thanks very much for taking my question. Just actually to follow on that last one, Eric, and just doing the math, and if you can confirm if I'm correct on this, the $91 million over the $149 billion is the appropriate way to look at that, and that would be 6 basis points, as opposed to, you know, the $255 million of servicing revenue to be installed over the, you know, the $2.3 trillion, representing more than, you know, just like a basis point or so. So I guess, first of all, am I looking at that correctly, and is it all characterized as servicing fee revenue? And I guess, what's driving that.
You know, is that differential sort of a sustainable type of new revenue win run rate for, I guess, private market types of business?
Brian, it's Eric. I'm really glad you asked that question because with new disclosure comes sometimes very simple answers and sometimes more textured ones. So what you've done is an analysis if you look at our fee wins divided by our new AUCA wins, which on average, over time, I'll stress that, will approximate the rates of the wins. The challenge is, in any one quarter, remember, some of what we win is on existing AUCA business. So Ron mentioned one of the global asset managers, we added, you know, back office to that relationship. Those AUCAs were already in our base. Why? Because we had already been doing both front and middle office processing for them.
So in a way, those fees wins in the quarter cannot be compared to any of the new AUCA. That's a kind of apples and oranges. On the other hand, sometimes the opposite happens, right? Where we might be adding an AUCA and a fee that's quite high, one that's quite low because we're just adding a small service. And we've had some of those over the last couple quarters. So I'd just be cautious about, you know, the quarter-by-quarter map. I'd encourage you over time, you know, we can look at that through time.
But I think what we'd encourage you to do is take a look at the revenue, the wins on a revenue basis against, you know, the base of servicing fees, right? $91 million in a quarter against the $5 billion of servicing fees is a very healthy amount of revenue. And, you know, our ability to maintain that momentum gives you an indication of the kind of sales effectiveness and the growth dynamic that we can create, net of the, you know, the retention rates that we need to manage to. So I'd encourage you to spend the most time there. You can do a little bit of, you know, AUCA wins versus the AUCA base. That gives you another indication.
But I'd encourage you to do it in that direction because you'll get a better indication, I think, of our momentum.
Okay, that's, that's super helpful. And then the follow-up would be on the deposit beta, the differentials between the U.S. and the, and non-U.S., and we've heard this from the other custodians as well, in terms of non-U.S. deposit betas being, you know, significantly lower than U.S. And just maybe some thoughts on as we move into this, you know, into 2024, and, you know, potentially Europe may be even, you know, higher for longer versus the U.S., potentially. And should we see, you know, more aggressive or I'd say, more incremental deposit beta, you know, moving through the non-U.S. markets to sort of almost catch up to U.S. or not so much?
You know, our current indication, and we're, you know, well through the cycle in the U.S., at least we think so. We'll see. It feels like there's a little more to go on the international side, and it started later, so it's harder to read. We do see that there are some structural differences in the markets around deposit betas between the U.S. currency and the non-dollar, even for the same clients in some cases. And part of that is just the... you've got this non-interest-bearing versus interest-bearing construct in the U.S., and internationally, you tend to have just an interest-bearing deposit construct. So, you know, it's a little more straightforward.
So as I've described, you know, we have cumulative deposit betas in the US in the 70%-75% range. You know, we expect that'll float up a little more as we kind of as the cycle, you know, let's say, finishes. Could go up another five, you know, 10 percentage points, but it's starting to level off. In Europe, you know, we're in the 25%-50% range of cumulative betas, and it could go up another 10 points, maybe 15 points, we'll see. But it's not going to reach the same levels that you have in the US based on the indications we have and the, you know, the way we both we price and we see others competitively price in the market.
So fairly, fairly different between the U.S. and the international currencies. And in some ways, you know, that plays to, that's good for us. We know how to manage in both, U.S. and non-U.S. currencies. We've continued to have some tailwinds in NII in the international currencies. We obviously need to make sure that we share, you know, some of that with clients. But given the international composition of our balance sheet, you know, that's one of the areas that continues to be supportive of our, in a positive way of our NII trajectory.
Yeah. Thanks very much. That's great. Thanks.
Thank you. Your next question comes from Ebrahim Poonawala from Bank of America. Please proceed.
Hey, I guess good afternoon. Just a couple of quick follow-ups. One, on capital, I think heard you regarding completing your $4 up to $4.5 billion in buybacks for the year. Just give us a sense with the CET1 at 11% close to your target, how are you thinking about capital management going into next year? Would you rather operate with some amount of excess capital as you look forward to some of the macro uncertainties relative to just continuing buybacks and paying out any excess,
... Let me start on that, Ibrahim. It's Eric. You know, capital is one of the most important elements of the balance sheet, and we spend a lot of time thinking about what are the levels of capital, how to manage, and it is based on facts and circumstances, right? The economic environment, the uncertainty, our confidence in earnings and earnings momentum, you know, what we can see in the strength of our balance sheet, right? We're incredibly liquid, and we have a very upmarket, you know, lending book, which is quite, you know, quite high quality. So many, many things come together.
I think what we've laid out on the page on capital in the materials is that, you know, our minimum requirement is 8%. We tend to run with a very healthy buffer above that. We've got a target range in the 10%-11%, and we've been way above that range, partly because of a little bit of history over the last two years. And we bring that down, but in a, you know, in a both at pace and also in a thoughtful way. I think what you'll see us do, and again, I say this is, you know, given what we know today, because we're gonna be careful.
If markets disrupt, you know, then you're slow a little bit. If you've got a lot of confidence, and markets ease, and there's confidence, then you might go in the other direction. But, you know, the middle of that range is a good place for us to aim towards, partly, because, you know, you want to keep a little bit of extra. That's still 2.5 percentage points above the requirements. On the other hand, there are some uncertainties in the world, and it doesn't feel like we should run down to the lower end of that range right now, right? That feels like it wouldn't be appropriate.
So there's a range for a reason, I guess, is what I'd say. You know, we've been returning capital at pace in the last few quarters, $1 billion or more. You know, we'd certainly like to continue to return capital at pace. You know, you can kind of do the math of, you know, 11%, you know, go down to the middle of the range. You've got to remember, there's pull to par that matters from the AFS portfolio that provides a tailwind and capital accretion. There's earnings, and then there's the RWA management. You saw RWA tick up a little bit this quarter. You know, our goal is obviously to continue to optimize RWA and turn that into an advantage as well.
So we see, you know, quite a healthy buyback going into the fourth quarter. We've got authorization, plenty of authorization to deliver on that. We know it's important to our shareholders, and you know, have, I think, a good path forward.
That's helpful. Thanks for walking through that, Eric. Just a follow-up quick question around NII, or I guess, as you're thinking about ALCO management. Is there, as things reprice on the asset side within the securities book, are we kind of holding duration relative to where the back book is? Will at any point, the thought process evolve to adding duration? I'm just wondering how you're thinking about this cycle, the environment we might be for the next few years, and how that informs the duration you're willing to take on.
Ibrahim, the answer is all the above. So, you know, every one of those factors matter. If we get more steepness to the yield curve, right, that would encourage us to add some duration. At the right time, we want to- we may need a little more duration to protect against, you know, falling rates, right? That's a-
Right.
You want to ideally be ahead of that. On the other hand, you know, you know, rates could move upwards further, and so you want to be careful. I think we're careful in how we've configured the portfolio. You saw us do some of the repositioning. You know, we unwound $4 billion or $5 billion of bonds. We reinvested, you know, towards the middle of the curve, but also at the front end, right? You know, we have, so it's not just an average duration position that we are focused on, but where are the points across the curve? And then, you know, there's a whole window of work that we do around, you know, the U.S. curve, the euro curve, and then the other foreign currencies.
And then there's also a mix of, duration, you know, clean duration we put on through Treasuries and, you know, some of the, the convexity products like the agency MBS. So there's a wide range, but it's an active discussion, I'd say, at ALCO, and one that, you know, we think will both be, we, we think of it both on an economic basis, but also on a risk management and protective basis, that, that we'll have, I think, you know, quarter to quarter.
Got it. Thank you.
Thank you. Your next question comes from Steven Chubak from Wolfe Research. Your line is already open.
Hey, good afternoon. Thank you so much. Good afternoon. Eric, I want to ask a follow-up on the new revenue disclosure. In the past, you spoke about the level of gross asset flows that would be needed to offset natural attrition in the business. In a similar vein, I was hoping you could frame the level of gross revenue wins that are required to offset natural attrition, recognizing per, I think it was Brian's earlier question, that fee rates will certainly vary depending on new wins. But any way you could frame it in that context would be really helpful.
Yeah. Here's what I'd describe. You know, in the past, we've talked about AUCA wins. We had talked about, about $1.5 trillion of AUCA wins a year. That's kind of a, kind of volumetric benchmark. And as some of the discussion we've had, you know, typically we've been, winning on average higher than the current fee rate, and so you can kind of work through that. On the fee revenue side, and this is really around the servicing fees, you know, our, our goal for this year, 2023, is to deliver about $300 million of servicing fee wins. And you can compare that to the, you know, five trillion of, of... I'm sorry, $5 billion of, servicing fees for the year.
That kind of gives you a sense for, I'll call it gross revenue wins. As Ron described, we've got a series of initiatives, some of which are already playing through around adding to sales capacity, sales effectiveness, product feature functionality, and so forth. And part of the disclosure that we provided just last month was that, while $300 million of servicing fee wins is appropriate for this year, we'd like to get closer to $350 million-$400 million next year. And again, you can kind of compare that to the $5 billion of servicing fees, and that kind of gives you a sense of gross fee revenues.
I think the follow-on work you'd want to do is just think about the other, you know, drivers of servicing fee revenue growth on a net basis, right? There is, typically, some amount of attrition. We said we'd like to have retention at 97%. So, you know, we can think about 3% servicing fee attrition. That's about $150 million a year, is a way to compare, you know, the gross wins versus the gross losses. And then there's some amount of fee headwinds, which is about 2% a year that we've described. So what we're trying to do is, you know, create clarity for all of you on the elements of that growth, kind of the growth algebra.
I'll say it in an analytic manner, so that you can see where we're really focused. And every one of those levers matter. We have tense efforts on each one of those. But it's that mix of activity and the sales, the servicing fee, sales in particular, that will help us then deliver a core organic growth, you know, from year to year to year. And a good way for, I think, us internally, to be clear about what we need to accomplish and externally with you all as to what the bar is for, you know, for good organic growth and success.
No, thanks for that, caller Eric. And if I could just squeeze in one more clarifying question. There was a lot to unpack in the response to Ibrahim around capital management. You know, it does appear, given the 4Q buyback level, assuming you execute on the 4.5 in its entirety, that you'll be at the lower end of that 10%-11% range of CET1. Recognizing there'll be a pull to par benefit, but should we be anchoring to the 80%-100% payout that you guys have managed to in the past? Just recognizing that there's not as much excess if you're going to run at those levels.
I think for the rest of this year, you know, the analytics I'd encourage you to do is to think about, you know, where we ended third quarter, kind of the middle of the range, and that's not necessarily a point, but there's a range through the middle of the range. For fourth quarter, there's pull to par, there's RWA management. That gives us quite a healthy amount of buyback, and I think the continuation of something that's quite, accretive to, to shareholders, that is, that is substantial in terms of, capital return. I think once we get to the middle of the range, then, you know, we're more likely to be to the, you know, that over 80% level of earnings.
But I think, and that, that'll be probably how we think about next year. But that's next year. I think there's, I think we, we have, we have good visibility into a, you know, good and healthy amount of capital return and, you know, comfortably over, you know, what we've, you know, what we've committed to, I'll call it in the medium term.
Really helpful, Eric. Thanks for taking my questions.
Thank you. Your next question comes from Mike Brown of KBW. Your line is already open.
Okay, great. Thank you for squeezing me in. So, multi-part question here on the asset management business. So first, it was just great to see the money fund flows come in this quarter, and you mentioned that you believe there were some market share gains there. Can you just touch on what contributed to those gains, and maybe some thoughts on the coming quarters? And then I look at the equity side, and consistent with the industry, there was pressure there on the flows. What's your thoughts on maybe when investor sentiment could improve and inflect there?
Then just last part here, when you take a step back and you look at SSGA today, is there anything strategically that could be interesting to you from an M&A perspective to help bolster the, the asset mix or accelerate some of the future growth potential in the business? Thank you.
Yeah. Mike, it's Ron. So, there's a lot there in your question. I think on the cash business, I mean, this is a core competency that we've had for a long time. And it's also we've built up the capability both on the investment side and really on the distribution and channel side. So we've got distribution and, if you will, kind of hooks in the water in many different pools. And that's including, by the way, lots of connectivity into the core custody business. So as you've seen, for example, rotation from deposits, we've captured some of that in the money market business. But a lot of it-- most of it's been external.
Most of it's been around investment performance and kind of being where the money is flowing. The other areas that are also growing, DC is growing, and it's been growing for a while. Share has continued to grow there in the DC investment only, and that's been very much product and product innovation driven. SSGA was one of the first to figure out how to put an annuity product into a target date fund. Did it actually before it got the broad regulatory go-ahead to do that, and that's actually now a source of real growth. So we see that as a growth area, you know, as the defined benefit just goes away and people realize that longevity protection is something that people need.
I think that combination of a target date fund with, some kind of an insurance longevity product, will be important, and we've got real distinctive expertise in that. In terms of the growth areas, I mean, there's. We are really, for the most part, an institutional shop. We've built out the product capabilities in the retail and the intermediary space. Yie-Hsin Hung, who, joined us as CEO, late last year, she's got a lot of expertise there too, so some of it will be just, moving and expanding share in the retail intermediary space.
And then there's a real move into blending the line between public and private markets, and the belief that those lines really don't make sense, and the blended products where you get sufficient liquidity, but enable those that don't need the liquidity to take advantage of the illiquidity premium. So some of this will be in product design, whether that's organic or inorganic, I mean, we think there's opportunities in both. And there's the team's got, you know, lots of product development going on, so we're fully committed to that business. We see lots of growth in that business and excited about the prospects there.
Okay, great. Thank you. I'll leave it there.
Thank you. The next question comes from Mike Mayo of Wells Fargo Securities. Your line is already open.
Hi. Well, it's been a long journey for you guys to get the front-to-back solutions in Alpha, and I'm just trying to figure out how much traction that has and where we're seeing that in the financial results. On the one hand, I hear your excitement, and you have alternatives now part of that program, and you're guiding for positive 2024 fee operating leverage, and you have all these new mandates. On the other hand, I look at the fee growth this quarter, and it wasn't that great, right? And then so, are we seeing evidence of the front-to-back momentum in the results? Is it something that you expect to see, or is it simply such a long sales cycle that we should be thinking two, three, four years out? Thanks.
Mike, let me just start and maybe address the journey here, because, you know, this was not something that you bought off the shelf. It was actually something that nobody had ever done before. So there was an awful lot of development that we need to do, and I think we signaled that at the beginning. I mean, Charles River was an important acquisition, but, you know, to be clear, that was the front, and it itself needed some investment, particularly in the fixed income area. So much of what we've been doing over the last several years is selling and developing. Many of the early, particularly some of the early large ones, were explicit development partners.
You know, we targeted them, they targeted us and came in as development partners, with the idea that they would help us to build this out. It's purposely taken longer because they're the ones that are actually helping to shape what the overall thing will look like. This has been a very, very big year, Eric alluded to it, in terms of some of the features and functionality, particularly around fixed income, and getting up to not just par, but to a market leading position in terms of fixed income capability. So, in terms of just getting the program up and running, we're actually quite pleased with where we are.
I don't think we would have thought back in 2018, 2019, when we launched this, that we'd have the number of clients that we do now. The other thing that we were convinced of, but we had to prove it to ourselves, was that this could be a tool to actually generate new clients. That it wasn't just a way to solidify existing relationships, but it was a way to actually grow share and shift share. And that's what we're starting to see now. Vontobel was one, there's others in the pipeline. So it's a journey that we believe will see revenue growth at an accelerating rate. And maybe I'll leave it there.
Mike, it's Eric. On the financials, it's a very fair question. I'd just remind you the context for the current year, because there are some other large movements on servicing fees. So if you think about it, we recorded a 1% growth in overall servicing fees. But there were tailwinds and headwinds away from the kind of organic new business creation that's important that we need to demonstrate, you know, year after year. You know, the market tailwind for year-on-year for this quarter was about 4 percentage points of servicing fees. So you'd say, "Hey, where is that?" Part of that was about 3 percentage points of headwind came from lower client volumes and activity, right?
A little bit of what we described as, you know, we've seen less trading activity out there, which comes and goes, tends to be cyclical. And then the other thing we did see this year in this quarter is that previously disclosed client exit was worth, you know, almost 2 percentage points, as well. So there are, I think, some larger headwinds and tailwinds in particular, flowing through the financials. Net new business, right, if we just want to take a look at that, was a positive 2 percentage points year-on-year this quarter, and that's where we'd like to see the value of Alpha, the value of traditional servicing fee sales, the value of private servicing fee sales.
Part of the reasons why we're adding to our disclosure is to make that more apparent to everyone over time.
Just one follow-up by Eric and then Ron. Just the exit of that large client, what inning are you in as far as that's concerned? And then, Ron, as it relates to accelerating revenue growth from the long journey of Alpha, timing, are we thinking quarter here, several years?
Yeah, on the previously disclosed client, we're about 30% through that, very roughly. The bulk of that'll come through next year, and then there's another, there's just because of how year-on-year, you know, comparisons work, you'll get a tail into 2025.
Yeah, Mike, just to... Can you clarify your question? I just want to make sure I'm understanding.
Yeah, my initial question was, you know, fees aren't growing that much, and you know, Eric identified some headwinds to that. But you talked about the financial benefits from Alpha, the increased activity, to result in accelerating revenue growth. And I was just wondering a time frame around that statement, that revenue growth should accelerate due to the benefits of Alpha.
Yeah. So I mean, as we've signaled, I think, at the beginning, I think probably, I can't remember, I think it was Al- the, my answer to Alex. We're telling you that we believe we're going to achieve positive fee operating leverage. There's revenues there, and there's expenses there. On the revenue side, we believe we've got a program in place that includes Alpha, that's going to enable us to do that. Some of that's driven by Alpha, some of that's driven by actions that we're taking, some of which have been implemented, others that will be implemented this quarter and into next, in terms of strengthening sales and revenue-related capabilities. So, what you should be hearing from us is confidence around our revenue growth generating capability.
Great.
Some of it related-
Okay, thank you.
Some of it related to the core business. And what you should also... And the point we, you know, we normally don't go into a client example that we did there, but it's such a pure example of the strength—the Vontobel example is such a pure illustration of the strength of Alpha because it's an institution we had no relationship with. We began the relationship with our front and middle office, and then we brought along the back office, which itself is, you know, Mike, as well as anybody, generates other kinds of ancillary revenues.
So, this is, that's an illustration of how Alpha is enabling us, we believe, to pick up share that we wouldn't otherwise be able to pick up, and to do it in a way that's distinctive from our competitors.
All right. Thank you.
Thank you. Your next question comes from Gerard Cassidy of RBC. Your line is already open.
Thank you. Hi, Eric, hi, Ron. Eric, can you share with us... I know, I'm not asking you to go into details on your budget for the upcoming year, but could you frame out for us, though, the outside factors that influence the budgeting process on expenses? Such as wage inflation or other types of inflation, do you feel that there's less pressure going into 2024 versus this time last year when you were doing your 2023 budget?
Gerard, it's Eric. Yes, the headwinds have lessened. They're still there, but they've lessened. If you think about it, you know, when we were doing the budget for 2023, it was the fall of 2022. We actually, at that point, had done, you know, two formal merit increases that year, some of which were going to then play through on a carryover basis for 2023. So that was partly a headwind. And then we had, you know, larger than probably typical merit increase by a little bit in the spring of this year in 2023. So that's—we're not in that environment anymore.
We certainly want to reward our employees with annual merit increases, but much more in line with what we've done over the last five or 10 years, as opposed to something that was much higher. So that's on the kind of wage side. Benefits, we're actually continuing to see some amount of you know, inflationary activity, you know, medical claims, dental, et cetera, as you'd expect. I think that's pretty broad-based. So, but that's probably similar to prior years. And then I think the interesting area where we're doing a lot of work on is all the you know, non-personnel spend, right? Our various partners and vendors and software licenses, cloud computing costs, right? Every one of those is an area for us to think about what's appropriate.
And so we have, you know, we've been having those discussions this summer and this fall, and we'll continue to have them into the winter around around next year. Are we seeing, you know, inflationary increases the way we were a year ago there? A little bit less so, but I think we're still seeing, you know, higher than we'd like inflationary increases there. And so, you know, important questions are, how do we offset them? How do we use technology if it is a little more expensive to drive increasing process engineering and automation? How do we partner with, you know, fewer suppliers in some cases and get the benefits of our scale?
So there's a number of initiatives that we're working through, but that's a, you know, that's one that, that takes some work, and in a way, that's part of what we do during the budget process.
Very good. Then as a follow-up, obviously, our industry, the world, has gone through incredible turmoil in the last three or four years with the pandemic and such. Now we're in this interest rate environment that we have not seen since prior to the financial crisis. If we assume that the Fed is higher for longer, let's say it's 4%-5% for an extended period of time versus the 0-25 basis points that you all had to operate and the industry operated on post-financial crisis going into where we are today. How is that... or is it changing some of the strategies you may pursue now that the rate environment is not, or possibly not going back to the 50 basis points that we were accustomed to?
Does that change the way you approach the business or approach your customers that you couldn't, you know, do because rates were at this level three or four years ago?
Gerard, it's Eric. I think it has several impacts on us, which actually, in aggregate, tend to be positive for how we manage and engage on our business. You know, very tactically, higher rates and especially some steepness in the yield curve we talked about earlier, you know, gives us some ability to add duration and feel like that's valuable. So, you know, there's some tactical effects there. I think more broadly, you know, with higher rates, you know, the value of cash in our ecosystem, we described $1 trillion of cash in our ecosystem across deposits, money market and cash sweeps in our asset management business, our repo activity, our platform sweep activities. You know, there's $1 trillion.
To us, cash is valuable for our clients to keep, especially in risk on versus, or especially in risk off versus risk on environments. And they want to be rewarded for it, but it also means there's a whole cash wallet out there that, for us, is a way to engage with clients, right? We, as a bank, have got not only the banking offering of deposits, but the capital markets offering of repo, the money management offering of money markets and, you know, cash management. To us, it's a way to deepen our relationships with clients. So I think over time, you'll see us add to our product offering.
Some of that's quite broad today, but we'll think about how else do we integrate cash into, say, the alpha proposition, is a way to consider it. How do we think about it in terms of, you know, our platforms and our markets activities? A number of those are important cash generators. And then I think at the most senior levels with our clients, you know, the C-suite actually cares about cash today. They care about who they keep it with, how it's managed, how they are remunerated, how it's safe, but also how, you know, it can be redeployed.
And so it's become a real C-suite discussion in a way that we think can strengthen both our relationships, given our broad offering, but also one that becomes more and more of a business activity and a business growth activity over time.
Great. Appreciate the color. Thank you.
Thank you. There are no further questions at this time. I will hand over the conference to Ron O'Hanley. Please proceed.
Well, thank you, operator, and thanks to all on the call for joining us.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.