State Street Corp (XLF) Q3 2024 Earnings Call Transcript

Good morning, and welcome to State Street Corporation's Third Quarter 2024 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 Elizabeth Lynn, Global Head of Investor Relations at State Street.

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 2024 earnings presentation, which is available for download on the Investor Relations section of our website, investors.statestreet.com. Afterward, we'll be happy to take questions. Before we get started, I'd 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 presentation. In addition, today's call will include forward-looking statements. Actual results may differ materially from those statements due to a variety of important factors, such as those referenced in our discussion today and in the SEC filings, including the Risk Factors section of 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, Liz, and good afternoon, everyone. Our third quarter results, which we released earlier this morning, demonstrate the accelerating financial performance and strong business momentum we are achieving this year, which in turn positions State Street well for future growth. We achieved robust fee and total revenue growth and generated positive fee and total operating leverage in 3Q, which, when combined with increased capital return quarter-on-quarter, drove strong earnings growth for our shareholders on both the year-over-year and sequential basis, with quarterly EPS reaching the highest on record. In addition to strong 3Q results, our year-to-date results also highlight the strength of our franchise and financial performance in three quarters of the way through the year, with solid fee and total revenue growth and good expense discipline driving better than expected positive fee and positive total operating leverage, as well as strong earnings growth relative to the same period in 2023 and excluding notable items. The operating environment in the third quarter was dynamic. While global equity and fixed income markets moved notably higher, the world's investors faced a number of risk-off events in 3Q, including fears of a U.S. recession, the unwinding of the carry trade, concerns over tech valuations and continued geopolitical tensions. These events drove bouts of negative market sentiment and significant market volatility. However, these market dislocations proved to be short-lived with markets taking comfort from a host of subsequently dovish Central Bank pivots, including the first rate cut from the Federal Reserve in four years, as well as improved economic data in the U.S. We supported clients and navigated well through this market backdrop, delivering strong business and financial performance. We remain laser-focused on successfully executing against our key strategic priorities to drive better results, which I will now discuss. Turning to Slide 2 of our investor presentation, our third quarter EPS was $2.26 as compared to $1.25 in the year-ago period. Excluding notable items, we delivered strong earnings growth of 17% year-over-year with record quarterly EPS, while 3Q ROE was a strong 12%. Relative to the year-ago quarter and excluding notable items, fee and total revenue growth was robust at 7% and 9%, respectively, and in turn driving margin expansion. All areas of our business contributed to this year-over-year revenue growth and NII was significantly higher. Q3 servicing fees increased 3% year-over-year and we are pleased by the sales momentum we continue to see within the Investment Services business as we execute well against the sharpened strategy that we outlined last year. At the same time, expenses remained well-controlled despite increases in revenue-related costs. We continue to drive transformation and productivity savings, which are funding significant investments in our business this year. As a result, while 3Q expenses increased by 6% year-over-year, on a year-to-date basis, expenses increased by just 3%, excluding notable items relative to the same period in 2023. Turning to our business momentum, which you can see in the middle of the slide, we achieved a great deal in the third quarter. Our business performance indicators, including wins, clearly illustrate the effectiveness of our strategy and positioning State Street to support our clients, compete better and gain share. Within Investment Services, in 3Q, we generated strong AUC/A wins of $466 billion, with new servicing fee revenue wins of $84 million, the highest quarter this year. 3Q provided another clear demonstration of the power of State Street Alpha, which brings together the full depth and breadth of our servicing and software solutions. Alpha is a clear competitive advantage, which strategically positions us to retain business at even higher levels, win new long-term relationships, and, as evidenced this quarter, deepen existing relationships in a meaningful way. We reported two new Alpha mandates in 3Q, with Alpha accounting for the vast majority of our AUC/A wins this quarter, as State Street was awarded a significant mandate by a premier large global asset manager. This win illustrates the compelling value proposition of our front-to-back solution for clients. What started as a front-office Charles River client will now extend to include a host of middle- and back-office services, including custody, all underpinned by our Alpha Data Platform and Data Services. We are also very pleased with the momentum at Global Advisors this quarter. Our cash, ETF and institutional businesses all had positive net flows, including record quarterly flows in cash and strong ETF flows. In aggregate, quarterly total net flows of $100 billion and quarter-end assets under management of $4.7 trillion both reached record levels in 3Q. Importantly, we expanded our market share in a number of key product areas and geographies. For example, we improved our institutional money market fund rank this quarter, while Spider also gained share in both U.S. low cost and commodities, as well as in the EMEA region. We also continue to innovate and strategically expand Global Advisors' capabilities and client solutions. For example, Global Advisors launched 20 new ETFs in 3Q, including three actively-managed digital asset-focused ETFs. We also announced a new relationship with Apollo Global Management that will aim to expand investor access to private market opportunities. Turning to our Markets businesses, stronger client volumes in both FX trading services and securities finance helped to drive revenues higher, both sequentially and year-over-year. I was particularly pleased to see State Street named as a leader in four categories by Euromoney Magazine in its 2024 FX Awards, including the world's Best FX Bank for Client Service as well as Research, which underscores the value clients place in our Markets franchise. Turning to our balance sheet, our year-over-year NII performance was strong, as a number of targeted management actions over the last year have helped to support NII growth. Our balance sheet is solid, enabling over $670 million of capital return in 3Q, including $450 million of share repurchases. As we look ahead, we remain committed to returning excess capital to our shareholders in the fourth quarter, subject to market conditions and other factors. Before I turn it over to Eric, we also announced this morning that Eric will be leaving State Street to pursue a new opportunity outside of banking. We have commenced a formal search process to identify his replacement, and Eric will stay on with us through mid-February to support us through this transition. I and the team have been fortunate to work closely with Eric over the last eight years. Personally, I have enjoyed and valued our partnership, and want to thank Eric for his leadership and wish him well in his new role. With that, let me hand the call over to Eric who will take you through the quarter in more detail.

Thank you, Ron. Before I get into the numbers, I want to say that it has been a privilege to have been here at State Street and to have worked with you and the team. I'm proud of all that we've accomplished together over the past eight years, and it's with mixed feelings that I'm moving on. But I know that the progress will continue and that State Street is well-positioned with a strong financial foundation and strategy for success. And I look forward to working with the team into 2025 during the transition. Now, let me walk everyone through our results for the third quarter. Starting on Slide 3, we reported record EPS of $2.26 for the third quarter, which included notable revenue items that, in aggregate, were neutral to earnings and are detailed on the right side of the page. You can see that we took the opportunity to do some additional repositioning of the investment portfolio this quarter, which I'll talk more about in a moment. We delivered robust EPS growth of 17% year-on-year, excluding notable items, reflecting broad-based fee growth, higher NII and continued capital return, which increased on a sequential quarter basis. Our third quarter performance builds upon our strong first half of the year, as healthy fee and total revenue growth coupled with expense discipline delivered both positive fee and positive total operating leverage, excluding notable items, in the quarter and on a year-to-date basis. The quarter clearly demonstrates good margins and returns with pre-tax margin at almost 28.5% and ROE of 12% and a return on tangible common equity of over 19%. Turning now to Slide 4, the third quarter period-end AUC/A and AUM again increased to record levels, supported by both equity and bond market tailwinds as well as strong client flows. As you can see on the right panel of the slide, after an eventful third quarter, the various external indicators for our Markets businesses were mixed. That said, we were encouraged by the continued growth in client volumes and balances across our FX trading and securities finance businesses, which I'll discuss more in detail shortly. Turning to Slide 5, third quarter servicing fees increased 3% year-on-year, as higher average market levels and new business were partially offset by pricing headwinds and previously disclosed client transition and lower client activity, including an asset mix shift. The impact of the previously disclosed client transition was a headwind of approximately 2 percentage points to year-on-year growth, while lower client activity, including an asset mix shift into cash, was a headwind of approximately 1 percentage point to year-on-year growth, which seems to be abating somewhat. We do feel good about servicing fee momentum going into the fourth quarter. Encouragingly, we generated $84 million of revenue wins in the quarter, the majority of which were driven by back-office mandates, in line with our strategic focus. Over the past four quarters, we've achieved nearly $330 million of servicing fee revenue wins. Moving to Slide 6, third quarter management fees increased 10% year-on-year, primarily reflecting higher average market levels as well as record quarterly net flows, with positive inflows across all three major product lines. We gained market share within our cash business due to strong investment performance and expanded distribution, as well as in ETFs where our strategic repricing initiative contributed to the strong flow performance and continued ETF market share gains. Taken together, our Investment Management business demonstrated strong growth in the quarter while also generating a healthy pre-tax margin of approximately 30%, up over 2 percentage points year-on-year. Importantly, as Ron mentioned earlier, we continue to position Global Advisors for success by further expanding its capabilities and client solutions and meeting the evolving needs of investors in key growth areas, such as digital assets, private markets and innovative fixed income solutions. Now, turning to Slide 7, as I noted, this quarter, we are pleased to see continued growth in our Markets businesses with higher volumes across nearly all of our FX venues relative to the year-ago period. FX trading revenue increased 15% year-on-year, excluding notable items, driven by higher client volumes with particular strength in emerging markets. Securities finance revenues increased 13% year-on-year, reflecting higher agency lending balances and share gains with excellent performance in prime services as we put more balance sheet to work to support our clients. Moving on to software and processing fees, revenues were up 11% year-on-year, mainly driven by higher front-office software and data revenues associated with CRD, which is described in greater detail on the following slide. Turning to Slide 8, our third quarter front-office software revenues increased 12% year-on-year with our software-enabled and professional services revenues up a strong 21%. We are pleased with the robust growth we've consistently delivered in our software business, with revenues up 10% year-to-date. This level of growth supports our belief that our software business has the potential to reach $1 billion of revenue over the next five years. And as Ron noted, we reported two additional Alpha mandate wins in the quarter, and we remain confident in achieving our goal of winning six to eight new Alpha clients this year. Moving to Slide 9, third quarter NII increased 16% year-on-year to $723 million as higher investment security yields and higher loan growth more than offset continued deposit rotation. On a sequential basis, NII was 2% lower, primarily driven by continued deposit rotation, as well as by the impact of lower short-end rates stemming from Central Bank actions. This dynamic was partially offset by higher investment security yields, as well as additional lending and sponsored repo activity. The market dynamics for the sponsored repo product were constructive in the quarter. As detailed on the right panel of this slide, average investment portfolio balances increased both sequentially and year-on-year. We also opportunistically repositioned a small portion of the book late in the quarter, which has a payback of approximately five quarters, benefiting NII over the next two years. Average deposits increased 14% year-on-year and 2% quarter-on-quarter, as we continue to realize the benefits of our client engagement efforts. As we move into 4Q, we'd expect to generally operate around these levels, albeit with a bit of continued noninterest-bearing deposit rotation. Turning to Slide 10, year-on-year, third quarter expense growth was 6%, primarily driven by higher performance-based compensation and revenue-related costs, which were worth about half of the increase, as well as important investments in products, technology, and infrastructure. We remain acutely focused on managing our cost base, as demonstrated by year-on-year expense growth of just 3% on a year-to-date basis, excluding notable items. As Ron mentioned, in the third quarter, we continued to deliver productivity benefits through transformation of our operating model and other savings initiatives, achieving roughly $125 million of year-on-year savings for a variety of actions. Year-to-date, we delivered roughly $350 million of savings, and we're on track to achieve our productivity savings target of $500 million this year. We're continuing to benefit from our ongoing organizational simplification, process improvements, and automation initiative, which has enabled us to further improve service quality while also lowering our headcount on a pro forma basis, including the JV consolidation by 4% year-on-year as detailed on the bottom left of the slide. Moving to Slide 11, as you can see, our capital, leverage and liquidity levels all remain very strong. As of quarter-end, our standardized CET1 ratio of 11.6% increased from the prior quarter as capital generated from earnings combined with the benefit of lower rates on AOCI more than offset increased capital return and RWA growth as we supported our clients. As I just noted, we delivered on our goal to accelerate capital return in the third quarter with common share repurchases of $450 million, up from $200 million in the prior quarter and $100 million in Q1. But falling rate moves at the end of the quarter did create some unexpected excess capital. In total, we returned over $670 million of capital to our shareholders this quarter, equivalent to a total payout ratio of almost 100%. As we look ahead, we are planning for another quarter of healthy capital return in Q4, which we would expect to be somewhat higher than this quarter, subject to market conditions and other factors. As such, we continue to expect the full-year payout ratio for 2024 to be comfortably in the 80% to 90% range as we aim to strike the right balance between our capital return goals and supporting our clients with our balance sheet. In summary, we're pleased with both our third quarter and year-to-date results, which continue to demonstrate our ability to execute against our strategy to drive sustainable business momentum while delivering positive fee and total operating leverage, excluding notable items, along with a significant return of capital to shareholders. With that, let me cover our improved full-year outlook, which is all on a year-on-year basis and ex notable basis. I would highlight that the outlook continues to have the potential for significant variability given the economic and political environment we're operating in. In terms of our current macro assumptions, we're assuming global equity markets are flat to third quarter end for the remainder of the year. Our rate outlook broadly aligns with the current forward curve, and we expect FX market volatility to remain relatively flat to third quarter average levels for the remainder of the year. Given our strong results year-to-date and higher average market levels, we now expect total fee revenue to likely be at or slightly above the high end of our up 4% to 5% range, better than our prior expectations. Turning to NII, we now expect full-year NII to be up in the 4% to 5% range, which is also better than our previous guide for NII to be up slightly on a full-year basis. Finally, given these improved top-line revenue expectations, expenses are expected to be somewhat higher than our prior outlook and now up in the range of 3.5% this year, given higher revenue-related costs. Importantly, we continue to expect to deliver both positive fee and positive total operating leverage for the full year. And with that, let me hand the call back to Ron.

Thank you, Eric. To conclude, I'm pleased with how we have been able to deliver stronger financial performance so far this year. We entered 2024 expecting roughly 3% to 4% fee revenue growth together with positive fee operating leverage, while NII was expected to be a headwind to our financial results on a full-year basis. However, with successful execution against our strategic and client engagement priorities, together with a more constructive operating environment and strong balance sheet management, we now expect to notably outperform our outlook relative to where we started the year with higher fee revenue growth and NII comfortably up year-over-year. As a result, we expect to deliver both healthy positive fee and total operating leverage this year, excluding notable items. We are positioned for a strong finish to 2024 and we are confident as we look into next year. Operator, we can now open the call for questions.

Your first question comes from Glenn Schorr with Evercore. Please go ahead.

Thanks very much. I appreciate all that detail. I like the NII guide, and what that, I think, implies for next year. Can you talk about the management actions taken? You mentioned the five-quarter payback. I want to be blunt and say, does that mean you'll make at least the $81 million of that cost over the next five quarters? And then maybe a little more color on what within the book you actually restructured and offloaded? Thank you.

Glenn, it's Eric. You've understood that perfectly. The $80 million loss recorded this quarter will be reversed over the next five quarters, resulting in a positive impact for the company. We are managing an investment portfolio with over $100 billion in assets, which includes treasuries, mortgage-backed securities, supranationals, and foreign sovereigns. We identified some lower coupon securities that could be restructured or repositioned through sales. We repurchased additional securities mostly within the treasury and international sovereign sectors, totaling around $4 billion to $5 billion in securities on a $100 billion portfolio, which is relatively modest. This also allows us to slightly adjust the position of the portfolio across the curve, which is beneficial. As expected, this will aid us moving forward and is part of the management strategies we have mentioned regarding managing net interest income. These strategies involve the investment portfolio, lending growth, and our engagement with clients regarding deposits, as discussed earlier.

That's a nice parting gift. Thank you. Maybe one quick one. You mentioned in the SSGA conversation about the hybrid product with Apollo. I'm curious if you'd give us any bits in detail of how it will work and why you chose maybe 15% going to private credit. Is that enough to drive differentiated performance and scalability? Is this just like a toe in the water to see how this is going to be received?

Yeah, Glenn, it's Ron. We're currently in a quiet period with the SEC, so we have limitations on what we can disclose. However, I can share that much of our past innovation has focused on making sophisticated client access more democratic and placing them in widely available structures. What we're discussing aligns with that approach. We will share more details after the SEC has finished its process.

Good morning. Thank you for taking my question. Eric, congratulations on the new role. There's a significant change in the multiples. I hope that doesn't cause any issues for you. With Eric's departure, I wanted to ask about succession. Ron, could you provide an update on that and share what the Board's plan is?

Are you referring to my succession, Brennan? So, as you would expect, succession is something that well-managed and well-overseen companies talk about all the time. And there's a near constant discussion about this at the Board and there's a plan in place for when that time comes.

Okay, great. And then, repo has been pretty solid. Clearly, you guys see some continued strength, hence, the updated NII outlook for the year. But could you tell us about how repo comes into play there into your expectations? And what we should think about the recent strength there?

Glenn, it's Eric. The repo product is one of many that we offer for clients, right? We offer them cash on deposit in various forms. Money market sweep repo is a collateralized activity. So, in a way, think of it as one of the broad range of elements that we offer. What we found is as the Fed has trended down its reversed repo operation, there's been more repo activity in the market and we've obviously wanted to be there to help our clients. That said, the repo activity, the sponsored repo activity that we do is 10%, 11%, 12% of our NII typically. It will bounce around by 1 percentage point or 2 percentage points. This quarter, I called it out because I think we added about 1 percentage point of NII due to the increase in repo activity. And what you're working through is sometimes balances are up a bit, sometimes margins are up a bit, and we just found more activity in the market. There's more cash out there as you've seen. And there are also more borrowers who are looking for cash and have collateral to post. And those are markets where we're happy to serve our clients on both sides of that transaction and stepped in and stepped up for them.

Great. Thanks for that color.

Hey, good afternoon, everyone. Thanks. Eric, congrats to you as well. I guess, in that vein and the question for both of you guys, State Street has made some pretty meaningful progress improving profitability recently, but with the new CFO search underway, how durable do you think these profitability improvements are likely to be? So, like, in other words, how much of this is already in motion and sort of on the rails that can more seamlessly perhaps transition to whoever comes next? And what are your ultimate sort of aspirations for pre-tax margins for the firm as a whole over time?

Yes, Alex, I'll begin with that. We've been quite clear about our activities regarding both revenue and expenses. Starting with our Investment Services business, we've focused heavily on enhancing our service quality, which has allowed us to revive growth similar to what we experienced in the past. We’ve shared details about our new sales initiatives and client service strategies that are currently underway. There’s certainly more to accomplish, but the plan is clear, and we expect to see ongoing benefits from this approach. In GA, we have a comprehensive strategy aimed at expanding our appeal and franchise beyond our traditional institutional base. We've made strides in the retail sector with low-cost ETFs, and the pace of product innovation has been rapid; for instance, we launched 20 new ETFs this year. We’ve also formed new partnerships which we’re optimistic about, contingent on overcoming regulatory hurdles. In the Markets business, our client franchise largely overlaps with Investment Services, but we recognize the need to differentiate ourselves. The improvements you've seen in recent quarters reflect our efforts, with more developments on the horizon. This franchise thrives on innovation. Regarding productivity, we've been addressing transformations since 2019, adapting our approach each year, generally becoming more sophisticated over time. The initial years focused on easier gains, while recent years have emphasized a fundamental shift in our operating model, heavily utilizing technology. This is where much of our investment is directed, and we recognize that there’s still more to do. I don’t expect a new CFO to indicate any change in our strategy. The role is very important, and we are starting the search today, having engaged a firm to assist us. We will consider candidates from both inside and outside the organization. We are confident that, along with our established plan, the four-month transition with Eric, and the overall firm performance, we will navigate this transition successfully.

Alex, I'd also add, our medium-term targets stand as stated. They are deeply embedded in our culture, in our senior executive and management teams and with our Board. And so, the 4% to 5% revenue growth rate, pre-tax margin target of 30%, those are there for the medium term purposely and topics and areas that we continue to strive for and deliver on.

And Alex, also, I'm glad Eric mentioned that. Also, it's part of our long-term incentives. It's the achievement, realization of those targets.

Yeah, all makes sense. Just wanted to clarify that. So, for my follow-up, maybe quickly on NII, obviously, very nice update for the fourth quarter. Probably too early to talk about '25 with a lot of specificity. But as you sort of think about how the balance sheet is positioned, especially in the back of the recent securities repositioning you've talked about earlier today, how should we think about the sustainability and just durability of this kind of NII run rate over the next couple of quarters? I think, in the past, you talked about being a little more asset sensitive in Europe still, maybe a little bit more neutral in the U.S., but maybe help us with some broader framework of how to think about '25. Thanks.

Yeah, Alex, it's Eric. As you mentioned, it's still early. We're analyzing deposit levels, both interest-bearing and noninterest-bearing, as well as our portfolio composition, quarter by quarter. At this point, we don't have much more information to share about next year beyond what we've already stated. We anticipate some modest deposit rotation for this past quarter and into the fourth quarter, which presents a challenge. Our investment portfolio is being adjusted, but the benefits can vary each quarter depending on specific bonds. There's also the lending activity and the repo, which we've discussed earlier, showing fluctuations. We've indicated that in the coming quarters, we expect to see NII stabilize and then experience some growth from there, though it's difficult to pinpoint exactly when that will happen. However, if you look at a one, three, or five-year timeframe, you can observe our trajectory and understand the range we're operating in. I would define that range more broadly than just a 1 percentage point difference, as it's more about the general area you would expect. Overall, I believe we're in a favorable position, which supports our margin, and while the next few quarters will have some fluctuations, we also anticipate stability and growth afterward.

Got you. All right. Well, I think we'll get you for one more quarter after that. So, I'm sure that will be another topic yet again. So, thank you.

Hi, good afternoon.

Hi, Betsy.

Eric, I'll miss you. Sorry to see you go. Good luck in the next role. And, I guess, my final question for you is just around how we should be thinking about the trajectory here of NII in an environment where maybe we get slower pace of cuts? Is that better for State Street?

Thank you, Betsy, for the question and for the thoughts. Yeah, I think, directionally, our balance sheet is relatively neutral. We have a slight asset sensitivity. And so, as rates come down, that has a slight impact to NII on a quarterly basis, but it's not dramatic. But given that direction or position, we'd have slightly better NII if rates didn't fall as quickly. I think our collective view here is rates will come down, but we've seen the market overshoot on the rate reductions. Our economists think that the terminal rate is likely to be subsequently higher than what it's been in the past. And so, I think, we're reasonably well positioned, and we'll absorb some of the central bank actions. And as we do that, we'll continue to build out our client lending activity, repo activity, our deposit engagement activity and so forth. And those will all contribute to stabilization of NII around this zone and then growth from there.

Yes, Betsy, we definitely have a presence in Latin America. It is smaller than our operations in EMEA and APAC. As anticipated, our focus here is primarily in servicing, with some involvement in the markets area; however, it really stems from our services. As countries and investment markets evolve, this presents an opportunity for us. We are gradually expanding our capabilities and activities in Latin America, which is what you observed. Our primary markets continue to be the U.S., EMEA, and APAC, but our growth over the last few years has been significant in EMEA and APAC. Recently, we have been able to return the growth rate in the U.S. to what it has traditionally been. As these markets expand, they begin to require the same capabilities we have in more developed markets, and many emerging or developing markets are bypassing some of the developmental stages that developed markets went through. This provides an opportunity to introduce advanced technology and similar innovations. However, it represents a modest investment. We expect to see modest growth in the short term, but establishing a foothold there is essential.

Great, thanks. Good afternoon. And congrats, Eric, also. Maybe just taking on a comment that you mentioned Eric about putting more of your balance sheet to work to support clients, can you just go into a little bit more detail in terms of which areas? I assume you mean on the asset side and lending. And then, in conjunction with that, maybe if you can talk about deposit pricing strategies with your asset servicing clients in terms of either deposit beta or also supporting your clients in terms of the revenue model?

Brian, sure. Let me address those points one by one. On the asset side of the balance sheet, we have a $300 billion balance sheet with about $120 billion in risk-weighted assets. As we consider capital deployment, we continue to focus on three areas where we have historically supported our clients and seek to expand further. The first area is lending, as you mentioned. We engage in a range of lending activities from capital call financing to BDC lending, creating a comprehensive ecosystem for our private markets and asset management clients. There is substantial growth potential for us and for them in this area. We find that by supporting many of these clients with our balance sheet, they are more likely to seek our services for asset management and other activities, creating a mutually beneficial relationship. Therefore, lending is a crucial part of our operations. Secondly, our trading activities in foreign exchange require a balance sheet. Engaging in activities beyond standard one- to three-month forwards and swaps, such as offering options to support our clients, also necessitates a balance sheet. We are committed to supporting our substantial global clients in this regard. Lastly, we are focused on our securities financing business, which includes agency lending that requires some capital following Basel III rules, alongside our prime services business where we lend to borrowers in the capital markets. This area is also experiencing growth. In summary, we view ourselves as relationship lenders. Our lending is designed to support our clients, leading to favorable returns while deepening and expanding our relationships with them. We aim to continue this approach. The more we lend and support clients in these areas, the greater the growth we anticipate in both net interest income and fee income.

I can connect the second part of that question to the first one, specifically regarding the revenue from your new wins, especially the Alpha platform. Should we consider those initiatives in the private market as increasing fee rates, or is there also some flexibility in pricing for those tied to deposits or compensating balances?

I believe it's a bit of both. For instance, in the servicing fee segment, we recorded $330 million in wins over the last 12 months. We are still aiming for fees between $350 million and $400 million. However, it's unpredictable, as a mandate can sometimes come in earlier or get delayed by a quarter. We'll see where we end up, but we are focused on achieving significant fee wins this year and have that target in our sights. While deposits are part of the relationship, an increasing number of clients view it in both ways. They recognize the balance of trade and understand that if they push too hard on one aspect, it affects the other. At the same time, there are genuine opportunities to collaborate with clients to meet more of their needs. We’ve found that as we engage in these discussions, we end up doing more work and offering additional support to our clients in various areas, creating a mutually beneficial cycle rather than one that cancels out.

Hey. Good afternoon. Hey, Eric, just on deposit behavior, after the rate cut, how did mix and volume growth look and pricing? Any thoughts on the initial reaction to the rate cuts in the deposit side?

Jim, it's Eric. We have generally been observing the same trends as in the past few months without any noticeable changes. Deposits across the banking system have been rising by about 1 to 1.5 points each quarter. Our results reflect this trend as well, and there haven't been significant shifts. We continue to see a market where there is a considerable amount of cash available. This is partially due to positioning and also reflects our investors' cautiousness given the political and economic uncertainties. Therefore, the rate cuts did not significantly affect deposit levels. Overall, we expect to continue operating around this level for the foreseeable future.

Okay. That's helpful. Can you discuss how quickly you expect the new business in asset servicing to be onboarded and your outlook for the quarterly trajectory from here?

We have been steadily building our servicing backlog and aim to deploy it efficiently, as both aspects are vital to our business. We anticipate that it will continue to increase gradually and eventually reach a stable level. Looking ahead, we consider the installation of this backlog in two ways. We expect that in the coming years, between half and three-quarters of the installation will occur within the next year. Regarding the servicing fee backlog, we estimate that about half will be realized during the fourth quarter and throughout next year. This means we are consistently generating revenue from our backlog. At the same time, our sales team is actively securing new business, which can be installed within three months, six months, nine months, or a year. Each year, we will see a combination of revenue from longer-term backlog installations and new business within the fiscal year.

Hi, Ron. Hi, Eric. Congratulations, Eric, on the new position. Ron, you mentioned about the new business wins in the quarter. And I think you said $466 billion in assets under custody/administration. Can you share with us how much of that came from existing clients where you grabbed the bigger wallet share from those clients versus new customers? And second, were the wins primarily in the U.S., or were they outside the United States, Europe or Asia?

Thank you for the question, Gerard. In this quarter, we achieved two significant Alpha wins, which account for a large portion of the $460 billion in assets under custody and administration, approximately $380 billion. This total is split between U.S. and non-U.S. clients, including a major global player with a strong U.S. presence. It's noteworthy that both wins came from existing clients, although in one instance, we had a limited service presence with this institution, working only with Charles River. This Alpha win will lead us to establish a comprehensive front-to-back relationship, including importantly transitioning their custody services from a competitor to us. With this custody transition, we gain numerous opportunities for additional services like deposits and foreign exchange. For years, we have discussed how our strategy emphasizes deepening relationships, which we believe provides a competitive advantage. One key aspect is that while implementation can take time, the business tends to be quite sticky. This is similar to enterprise outsourcing, where institutions decide to shift from an insourced to an outsourced model, or occasionally switch from one outsourcer to another, which doesn’t happen often. Because of the collaborative effort required by both parties, we often seek longer contract periods, and our clients—who are very sophisticated—recognize the long-term nature of their decisions and strive to get it right.

Very good. Thank you for that color. And then, as a follow-up question, obviously, you guys are well-capitalized. You've been using your capital to support organic growth, as Eric pointed out, with lending, and you're paying obviously dividends and increasing them and buying back your stock. Alternatively, obviously, capital can be used for acquisitions. Can you give us an update on your appetite for acquisitions recognizing, of course, the Brown Brothers transaction did not work out the way you intended, but can you share with us your thoughts there as well?

We view mergers and acquisitions not as a primary strategy, but rather as a means to implement our strategy more quickly or efficiently. Therefore, we will continuously monitor such opportunities, although we are quite optimistic about the organic plans we've put in place and are currently seeing positive results from. Our most recent major acquisition was Charles River, which we pursued for significant strategic reasons related to the development of the Alpha front-to-back platform. While it was a dilutive acquisition, we understood that at the time and believed it was a crucial long-term investment, which has proven to be beneficial. However, we recognize that such moves can be expensive and can sometimes lead to disappointment among shareholders. Hence, we take our responsibility for capital management very seriously and appreciate what we can achieve organically or through enhancing our existing efforts. While it's not to say we will never pursue acquisitions, any decision will need to meet a high standard, focusing on accelerating our strategy or achieving it more efficiently than through organic means. Thank you all for joining us on the call. I want to highlight that you will have Eric with us for one more quarter. He'll be present for the fourth quarter report in February and will be with us through mid-February. Thank you all.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.