Conference Transcript - STT 2026-06-10

Operator

Okay. Up next, we have State Street, and we're delighted to have with us today, John Woods, CFO of State Street. John, welcome back to the conference. Great to be here. All right. John, let's start with the operating environment and talk about how you see the overall environment today versus what you expected maybe heading into the year and maybe even as you

John Woods, CFO

got past one Q&A. Yeah, sure. I mean, it's been pretty constructive. I mean, when we go back to what we were thinking about in April, we had the equity markets being basically flat to year end in terms of how we were, you know, what our assumptions were in terms of driving our outlook for the year. And, you know, it's been a little bit of a wild ride, but we're still up, you know, whatever, six, seven percent, you know, year to date. So, you know, that equity tailwind is nice to have, you know, comparing and contrasting to where we were in April. Rates also a little bit of a u-turn or from earlier in the year at least you know kind of you know we were talking about cuts and now and now hikes seem to be priced in not just here but also in europe where we have exposure um and the whole volatility story or i guess volatility volatility if you will we had that large spike in the first quarter and we had a view that that was going to moderate throughout the rest of the year and for most of this quarter that's what's been going on and then friday happened with the jobs report. And we saw volatility kick back up. And so, yeah, it's been a little bit of playing out a little differently than we expected, but in a constructive way in the context of how

Operator

our businesses are performing and operating. So we should get into some of the balance sheet side of things and how you're managing that rate volatility. But before that, can you talk a bit about 2Q, you know, what you're seeing quarter to date and maybe update us in the full year guide

John Woods, CFO

as well? Yeah, I'll make a few comments about 2Q. So maybe just the headline, you know, I think we're seeing revenues coming in year over year up around low teens percentage. So that's a little better than expected. Unpacking that a little bit, if I talk about servicing, I mentioned equity markets being a little bit more of a tailwind, but nevertheless, I think the story is organic growth. When I look at servicing fees, we have positive contributions coming from client activity and flows. We have positive contributions coming from net new business and net installs. So from that standpoint, we're having both the organic growth story play out in the second quarter for our largest revenue line item, as well as a constructive backdrop from an equity market standpoint. Pretty similar story in management fees when you think about our investment management business. Very strong flows in the second quarter, meaningfully higher than 1Q. And that's really being driven you know predominantly in the etf space from both equities and fixed income and cash and um it's um you know it's and from a regional standpoint it's primarily a north american story whereas last quarter it was uh europe leading the way um and so we're seeing again in management fees both organic growth which is uh really attractive as well as the uplift that we typically get when markets levels are higher. And then speaking of markets, our markets business itself, even though we had volatility moderating into the second quarter, and that's what was playing out, you know, quarter to date, even with average volatility, frankly, being lower than the end of the first quarter, our client volumes were very resilient. And so we're feeling good about the contributions coming from the markets business so those are the big three really and and the reason why we're feeling good about revenue trends being a little better than expected in low teams year over year i'll i'll also add that i think you know what we're seeing is likely you know that translating into an operating leverage number that's that's 400 basis points or more um you know for the quarter uh for the quarter got it got it um great and what does it mean for the folio guide uh yeah i mean we'll see well i think what you know certainly the trends in the second quarter coming in a little better than expected could imply some upside for the year but you know we'll go ahead and digest these results and and um absorb uh where we are from a macro standpoint and give you further insight on that in July.

Operator

All right. So another reason to look forward to July. And I know we'll get into the other reason in a second. Let's focus on the strategic priorities here. You laid out a number of areas of focus like alts, wealth services, and digital assets. I know there's a lot to unpack there. There's a lot of recent developments there, a lot of investments that you've made. But, you know, can you talk about, you know, how you think the path to scale across all servicing, wealth, digital assets and what your major priorities are there?

John Woods, CFO

Yeah, I mean, I'd say those are we're excited about those three. You know, I'll hasten to add that the core franchise is pretty exciting, too, even without the even without those three, just the global scale that we've we've got across our core businesses is something, you know, we can also talk about. but but jumping into the three here for a second so in the alternative space uh this is a big part of our business it's um it's you know in terms of our servicing business um it's a big part of our innovation and investment management and it's a large client base for markets as well so it's across all three but within investment services it's now up to around 15 to 20 percent of our servicing fees, and it typically grows faster than the traditional space. And so the growth and return profile is quite good. So we've been investing in that. The alternative space is probably the one that's most at scale, given those numbers. And so we've got the investment services business driving that. But investment management, as part of their innovative product launch mentality, they've been partnering with key alternatives asset managers like Apollo and Bridgewater to democratize access to private assets. And as I mentioned, the markets business is a liquidity and securities finance provider in the alternative space. So that's a big part of what's driving our momentum. I mean, I think the second one, which was wealth, for us also cuts across the businesses when you think about what's going on with respect to wealth services. We're really excited about our partnership with Apex, which is a global digital first wealth manager custody and clearing platform. And it's scalable. And so from a services standpoint, we have that anchoring our wealth, you know, back office capabilities. But when you put that together with CRD wealth, that's an investment management platform that, you know, has is a holistic solution for wealth managers. And, you know, rounding it out with investment management, they've got approximately 30% of our AUM is in the wealth space coming out of investment management. So that's that we're wrapping that together from a wealth standpoint. And then maybe lastly, digital, it's early days in digital um you know as we've mentioned we want to be we want to be there for our customers as they want to support uh the traditional finance and digital finance and the interoperability among all of that and as part of that roadmap we've launched our digital asset platform our product roadmap leads with tokenized money funds um there's a there's strong business case and conviction around that being the right first place to go. There's a number of reasons for that. It creates liquid collateral out of current collateral that's sort of trapped and not in motion. It sets that in motion. It provides a yield for those that want to stay on chain and they like the safety of stablecoins. Flipping to tokenized money funds, which has a yield, is something that's attractive. And then opening up asset management, distribution, to digital investors so we like that as the first part of the roadmap and that'll be followed up with um you know tokenized etfs and tokenized deposits down the line so those are the big three

Operator

um and they touch a number of our businesses um so uh maybe i'll ask the uh the question on um ai and the impact on uh on deposit costs here because you know as you have like say tokenized money funds and you have tokenized deposits as well and that allows people to move their money around a lot faster. How does that impact, in your mind, how you think about the positive cost in the medium term?

John Woods, CFO

Well, I mean, I think most of our clients are fiduciaries, and this may have an impact over time. I suspect that the holistic value proposition that we will provide to our customers could shift around to the extent that if the balance of value that that we provide and that we extract changes because deposit levels are impacted by other services I think that'll show up and in in maybe fee pools right potentially versus balance sheet pools but nevertheless you know we've we've we've migrated over the decades with various you know you know impacts to the deposit franchise of commercial banks and trust banks overall. And that can change over time, but I feel like the value proposition that we're providing in the digital space will nevertheless be really attractive and be part of a strong

Operator

growth and return profile. Got it. Okay, let's talk about the strength of the franchise overall. You've talked about the power of the combined franchise across investment services, investment management and in markets and this idea of one state street uh how does that show up in practice today where do you see the biggest opportunities as you um as you showcase that that

John Woods, CFO

part of the business yeah i mean i think i would i would go back to the three that we talked about each one of those is an example of one state street and and how and how we're driving that distinctive strategic portfolio into the future. So I won't go back over that, but investment services, investment management, and markets, each of them has a role to play in those three. But if I come back to the core, maybe as just a reminder, as our core value that we provide across different client segments, maybe starting with the asset manager space itself, we have investment services and markets business go to get go to market together with a holistic solution for for investment services plus you know markets financing and liquidity solutions to serve asset managers and not just traditional asset managers which is a big part of our business you know it's it's 80 plus percent of our business but also alternative asset managers which we talked about in the alternative space so it's kind of an 80 20 80 you know 80 to 85 percent in the traditional space but the 15 to 20 in the alternative space investment services and and markets go as one state street to deliver those services um if i flip to asset owners you know maybe the pension funds of the world and insurance companies sovereign wealth that's more of an investment services plus investment management go to market where where you know though that that customer base will be in need of custody services but they need investment management products as well. And that's an opportunity for those two businesses to go to market together. And then we've talked about wealth managers, where the support, where we put together the capabilities of APEX in the investment services space, covering the back office and CRD in the front office, and put that together in terms of serving wealth managers. And again, another example of our core one-state street offering across the big customer segments, asset managers, asset owners, and wealth managers. So it's, it's, it's pretty powerful. And the connectedness of the, of the enterprise is something that, that, that is, that is, is pretty attractive when you think about the opportunities going forward.

Operator

All right. So, you know, I know we have an exciting update in July. I think a lot of what you uh spoke about right now will be you know uh will will go into that that update um and you know when you think about that strategic update that you're giving um without giving too much away or let me rephrase that giving away as much as you you you care to give away uh can you can you provide some more color on what metrics you think are important what should investors focus on as

John Woods, CFO

we think about that path forward yeah i can make a few comments about this i mean i think you know you'll just hear us repeat that we're very excited about the core franchise and you'll see how that momentum plays out over the medium term we are going to highlight and you know we think exciting and distinctive portfolio strategic initiatives as well and how that you know plays out through our businesses our three big businesses um i think the third thing to highlight is that underpinning this and creating capacity for investment is our transformation program which we're accelerating and communicating, you know, the impact of in July. But within that transformation program, you'll hear us talk about we're migrating to a new operating model, a product platform operating model, which is tech and AI enabled. And what does that mean? It means that we're taking an end-to-end process view of the entire company and not just re-engineering where you take steps out and interfaces and sure we'll do that, but we're going to rewire the company where we're infusing, you know, AI and technology into these business processes. So we're excited about that. And you put all that together, we think there's an earnings profile that's highly attractive. I think you'll hear us talk about pre-tax margin over the medium term, getting to your metrics question. We do look at return on Tangible Common Equity is another metric that's important to talk about. So those are the big two. I think we'll also cover operating leverage and our commitment to positive operating leverage and how that will play out. We'll have a number of, you know, a description of how the businesses that I just walked through, investment services, management, and markets, you know, what business goals will play out with respect to those businesses and you know I think that's what you're likely to see and possibly a little more.

Operator

All right that's exciting. In July and you know we're excited about being able to communicate it. Very exciting it'll be here before we know it. Yeah. Okay great so you know you mentioned AI and you mentioned transformation. Any examples of you know I guess you know, bigger use cases of AI and, you know, the highest value use cases that you're

John Woods, CFO

implementing right now? Yeah, I think today the ones that are really up and running primarily revolve around code. So, I mean, I think you're seeing us modernize our code from legacy languages to modern languages pretty quickly now with the use of AI. Code generation itself is becoming extremely efficient as we all know so that's that's the second big driver third is just you know risk managing and identifying vulnerabilities in cold in code with you know is now much more efficient you know using ai so those are those are three big ones all you know revolving around code i would add uh you know we've made the the platform investments um to um you know give access to standardized agents across the whole company. So research and analysis agents are on, on, you know, all stage traders desktop. And so that's, that's, that's important. And we're seeing augmentation and productivity that comes from that. I think going forward, you know, we are either have, have just or imminently launching our internal agentic platform and factory, which will allow us to generate customized agents. So going from standardized agents to customized agents is more of a 2H26 heading into 27 story. And then those customized agents won't exist in a vacuum. I'll take you back to the point we made about operating model. We're going to be embedding agentic capabilities in an end-to-end process view. And so that's what we mean by AI enablement and rewiring processes. It's really embedding AI capabilities into that. And I think that's what you'll see, you know, kind of heading into the second half and into 27 going forward.

Operator

So there's an investment spend also associated with this. I'm sure you're getting productivity benefits already there. And then with more to come is we think about nine consecutive quarters of operating leverage at this stage. how you think about the right balance between these this investment span as well as you know

John Woods, CFO

dropping some of that benefit to the bottom line yeah I mean I think so if I think about productivity there are multiple objectives I think the the first one that comes to mind since you mentioned it is to demonstrate progress from a profitability returns and growth standpoint so that's that's really great it's important and it is a high priority for us I will say though that you know I guess and second second point would be that productivity creates a buffer and a mitigant in downturns right it gives you some flexibility downturns when and when in fact they do arrive so that's helpful to the second one but the third one and maybe you know even more interesting is the capacity that productivity creates to invest in your strategic capabilities. And I think that's where the differentiation comes from. It, you know, productivity is necessary but insufficient in order to deliver. And so I think they come hand in hand. I think it's productivity plus strategic investment. And the differentiation shows up in customer experience, launching new products and new kind of business models broadly to continue that growth profile over time. So just wrapping it up, productivity helps you in the near term, but if you don't invest it right, then you're not going to own the medium and long term. And so I think that's how I think about it in terms of balancing near-term goals against medium and long-term durability and excitement of the franchise.

Operator

So it seems like we're pretty early innings into this whole productivity improvement game here?

John Woods, CFO

Yeah, I mean, well, we've been kind of delivering 500 million plus in the last couple of years. I think it's been 2 billion over four years or five years. And so we've been at it, but there's some low-hanging fruit there that's been picked. And so I think what you're hearing from us is that we're going to climb that tree a little bit and go after the deeper productivity that you're hearing us talk about when we talk about operating model transformation to deliver, you know, durable capacity for strategic investment over multiple years. That's what you're hearing from us is, you know, we've always been committed to productivity, but we're looking to put a several-year program in place to give us the confidence for several years of investments to support the strategic initiatives we talked about earlier.

Operator

Okay, let's talk about NII and the balance sheet. One of your initial projects as CFO has been focused on the balance sheet, and we've seen a nice improvement over the last three quarters. Can you remind us of your strategy to optimize the balance sheet from both the funding mix and the loan perspective?

John Woods, CFO

And just you mentioned NII. I think NI is kind of a little better than expected this quarter as well. I may not have mentioned that earlier. And some of that is due to the work that we did in 25 on kind of some optimization, you know, actions that we took on both the asset and liability side. I think, as you mentioned, primarily, you know, short-term wholesale funding was something that, you know, was, you know, maybe becoming a smaller, and in the loan book was another example on the assets side. And this is an ongoing activity, but we're constantly looking at any capital and liquidity that can be recycled from lower strategic profile clients and to higher strategic and risk return profile clients. And so a lot of the actions that we talked about last year have been taken, and much of the benefit of that has flown through. This is ongoing. We'll continue to optimize the balance sheet, but much of the benefit that you could expect to see from balance sheet optimization is played through. And the net interest margin and the NII have responded to that quite nicely. And again, NII coming in a little better in 2Q than we expected.

Operator

And you brought up NII, I guess. Anything to say on the deposit side? I know first quarter deposit growth is fairly strong. Anything driving the NII this quarter?

John Woods, CFO

Yeah, we said, I think we gave a 250 to 260 range for the year. 2Q deposits coming in a little better than that. So a little bit north of that range.

Operator

Got it. All right. Perfect. Great. So let's talk about capital and liquidity a little bit here. You know, I think as we, you know, as you've had more time to digest some of these NPRs that have come out, But do you have anything incremental to share on the RWA impacts of these new rules?

John Woods, CFO

No, I think we're pretty constructive on it. I mean, I think we're going to end up with credit RWA benefits that more than offset the operational RWA that's going to have to be coming through. So there'll be a net positive benefit. And, you know, so, again, pretty constructive on that rulemaking. And we'll see how that plays out in terms of getting finalized.

Operator

And as you think about the target payout ratio of 80%, is there any room to move higher in the near term, given just the level of excess capital that you have?

John Woods, CFO

Well, I mean, I think we've been operating, you know, in the around 11% or so, which is at the upper end of our policy range. And I think the way we think about it is, I may have mentioned this in previous conversations, is that there's a waterfall here where we commit to supporting and attractive and growing dividends. That's top of the list. The next level down would be supporting organic growth of our businesses as well as bolt-on partnerships and acquisitions that can accelerate our strategies faster than organic investment might. And if that's attractive, we'll think about those kinds of things. And we do a couple of those transactions in 2025 as an example. And then what falls out of that is the buyback. And I think we've been able to demonstrate an attractive buyback over time. And here into the second quarter, I think we're going to be able to indicate that our buyback level is about the same as it was in the

Operator

first quarter from a dollar standpoint. Got it. All right. Perfect. And then there's other areas in the regulatory agenda you know there's there could be changes in liquidity rules you know there might be other changes coming down spike is there anything else that you're focused on that that might that that might benefit

John Woods, CFO

history no I mean I think we've got a pretty attractive G sub score at this point and and I think a lot of the rulemaking seems to be headed in the right direction in terms of trying to calibrate and and refresh you know what's gone on in terms of growth in the banking, in the G-sub sector, some attention given to short-term wholesale funding, et cetera, but nothing significant that we're concerned about in that rulemaking.

Operator

Got it. I did want to come back to rates because one of the things you did mention is the changes not just in U.S. rates, but also in Europe. How are you thinking about the sensitivity of the balance sheet to both of those and how are you managing that?

John Woods, CFO

Yeah, I mean, I think you would I think we can say that our U.S. balance sheet, which is maybe 75 percent or more of our overall balance sheet is is is neutral to asset sensitive to to the Fed on the short end. And so, you know, you know, even if there's, you know, a hike or two, we at the margin will generate additional NII, but it's not significant. But nevertheless, that's our that's our positioning. At Europe, we have more asset sensitivity. And, you know, I think the ECB is slated to to have a couple of hikes this year, one in 3Q and one in 4Q. We benefit something in the neighborhood of $5 million or so per hike per quarter from our European balance sheet, which is, I don't know, 10% or 15% of our overall balance sheet. But we're more asset sensitive there and positioned to benefit if the ECB begins the hike.

Operator

Got it. Okay. Any changes in our thinking about managing it from here or just given the amount of rate volatility?

John Woods, CFO

Yeah, I mean, I think nothing significant in the near term. We've been well served when the Fed was expected to hike to hold, you know, hold the asset sensitivity. And so we didn't chase that in the US. And so that's played out nicely. you know, things are moving around a fair bit, you know, even as of Friday and what we saw in CPI this morning. So inflation pressures seem to be building, you know, from an energy perspective, predominantly. There are other forces, though, in terms of the consumer. Consumer balance sheets are strong, but they're spending that down now. And so we'll be absorbing that and playing that through in our interest rate positioning but we've we've been well served with our lack of action you know in terms of trying to chase chase a fed uh fed cut which is which evaporated uh so i think we like for now our neutral to slightly uh asset sensitive position in the u.s and our our clear assets into the position in europe all right perfect maybe to

Operator

to conclude here um what do you see as the most underappreciated part of the state's story and

John Woods, CFO

what do you think the market's missing? Yeah. Yeah. I mean, I'd say back into the core aspects of this, when you think about One State Street and our exceptional client base, I think there are adorable moats there and how we go to market for traditional asset managers with the number one custodian for ETFs in the world and the number one FX provider for asset managers in the world. really powerful. We have an extremely innovative investment management platform, number four in the world, 30% in the wealth space, which is growing faster potentially than some other categories. I think that that core aspect is sometimes forgotten, but increasingly we're going to make sure that's not the case. And our markets business is a global business. They're regionally diversified. They benefit from a number of forces around the world. This quarter, U.S. equities have helped our markets business, but APAC equities, in particular in Korea and Taiwan, I think it's underappreciated, our onshore presence in global markets that benefits us. Even when volatility was low this quarter. We've been doing quite well. And then, of course, I mentioned all of the three strategic initiatives that we're excited about. And to close it all out, I think the potential of our transformation to create capacity to invest in all of this and the earnings power that we're going to talk about in July, you wrap all that together. And I think that's something that investors will want to pay attention to. All right. We'll look forward to July. John,

Operator

Thanks so much for joining us. Yeah, fantastic. Good to be with you.