State Street Corporation

Good morning and welcome to the State Street Corporation's second quarter 2020 earnings conference call and webcast. Today's discussion will be broadcast 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 any 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 Eileen Fasal-Buehler, 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 Abloff, our CFO, will take you through our second quarter 2020 earnings slide presentation, which is available for download in the investor relations section of our website, investors.statestreets.com. Afterwards, we'll be happy to take questions. During the Q&A, please limit yourself to two 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. In addition, today's presentation will contain forward-looking statements. Actual results 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, Eileen, and good morning, everyone. We released second quarter results this morning. Let me begin by saying that I am very pleased with our continued strong financial performance. I am proud of our team members worldwide who continue to put our clients first and deliver these results for our shareholders. Turning to slide three, I will provide a brief update on how we are successfully navigating the COVID-19 operating environment while also delivering earnings growth for our shareholders. Providing exceptional service quality through improved client engagement, driving product performance, supporting the overall financial system, and safeguarding our workforce are all key priorities for us. We demonstrated success in each of these areas this quarter and delivered strong results for our shareholders as a result. Our clients are at the center of everything we do. You will recall that in 2019, we took a number of actions to improve client service quality, engagement, and decision-making. These measures have led to improved client engagement, which is critically important in the current environment. and its impact is evident in our results and business performance. Our clients are continuing to turn to State Street for our operational capabilities and solutions. During the second quarter, we effectively managed to onboard a number of new client projects across various client segments, including a large asset manager, a significant asset owner, and a national wealth manager in CRD. Indeed, we see true sustainable momentum developing in our Alpha CRD platform. All this occurred while processing 13% and 35% increases in back and middle office transactions, respectively. We were the first service provider to support the launch of the semi-transparent ETF product, and we see strong demand in the market for this innovative solution. Our service quality is being recognized across the industry. For example, we are particularly proud of our ranking in the 2020 Euromoney FX survey, where State Street was named the number one FX provider to asset managers for the third consecutive year, with a number one ranking in overall customer satisfaction globally. The strong client engagement is reflected in our product performance. Our investment servicing assets under custody administration, which increased 5% quarter over quarter to $33.5 trillion, had another healthy level of new wins, amounting to $162 billion in the second quarter. Assets yet to be installed stood at a strong $1 trillion at quarter end. At Global Advisors, assets under management totaled $3.1 trillion, and we recorded $23 billion of total net inflows during the second quarter. Our SPDR range of ETFs recorded its best quarter of inflows since the fourth quarter of 2017, while SPDR GLD the gold ETF, at its strongest ever level of inflows at $12 billion. Further, we are competing and winning in key strategic areas of focus for us. Our recently expanded and re-benchmarked range of low-cost ETFs also recorded its highest quarterly level of inflows at $11 billion. Our sector spiders made strong market share gains with almost half of sector industry flows going into the product during the second quarter. And we remain a flight to quality for cash management and liquidity solutions across a suite of product options. We continue to play a critical role in supporting the financial system. The operating environment remains uncertain as the pandemic continues to impact many parts of the world. While we have seen a partial recovery in some areas, many economic indicators continue to point negatively and unemployment remains high, reflecting the real human cost of this health crisis. State Street continues to support the broader economy and markets and is actively assisting client access to various Federal Reserve programs that support the flow of liquidity and credit. Currently, State Street is involved in five Federal Reserve programs, either directly such as with the Money Market Mutual Fund Liquidity Facility or as the program's custodian and administrator, such as the Main Street Lending Facility. Lastly, developing a high-performing organization and planning ahead for our global workforce also continues to be a priority. We continue to have about 90% of our employees working from home as we optimize a work-from-home model while leveraging technology to enable better collaboration and more effective ways to serve our clients. Last quarter, we took measures to protect our employees and announced that through the end of the year, we suspended any workforce reductions other than for performance or conduct reasons in light of the COVID-19 crisis. Now we are going further for our employees by increasing their opportunities for mobility by launching an internal talent marketplace. By supporting our employees as they take on new roles and learn new skills, the marketplace will better develop and redeploy our internal talent to meet our evolving business needs and the growing demands of clients and stakeholders. Turning to slide four and our second quarter and first half performance highlights, I am pleased by our continued strong performance and the progress we are making toward achieving our medium-term financial goals. Relative to the prior year period, Total revenue increased 2% and fee revenue increased 5%. Second quarter EPS was $1.86, up 31% year-over-year, and ROE was 12.1%. I am pleased to report that our second quarter pre-tax margin improved by over two percentage points year-over-year to 27%. Our first half pre-tax margin increased by three percentage points. The front to back alpha platform strategy provides an attractive value proposition for our clients. Our second quarter performance was helped by the strong revenue performance at Charles River Development, where we had key business wins and renewals. The alpha CRD pipeline continues to develop well with a good mix of deal sizes, functionalities, and scope. We expect to be announcing new major wins between now and year end. Turning to expenses, The pandemic created an immediate challenge to our expense reduction planning relative to our original expectations at the start of the year. To help offset this impact, we took immediate action by implementing a hiring freeze, launching the talent marketplace I just referenced, and reassessing all discretionary expenses. I am pleased to report that through our continued expense management efforts, further IT optimization, and operational productivity measures, we reduced total expenses by 3% in the second quarter relative to the year-ago period. While we continue to invest in our business, first half 2020 expenses are now down 2% net of those investments relative to the year-ago period. For us, productivity management is a way of life as we continue to build on the strong culture of expense management we successfully established during 2019 when we undertook significant actions to improve our operational efficiency and reduce expenses through a comprehensive firm-wide expense savings program. We cannot control the economic environment, but we can control our expenses. Despite the challenges the COVID-19 pandemic has created, we remain highly focused on driving productivity improvements and automation benefits as we strengthen our operating model and enhance service quality, even during this challenging period. Turning to our balance sheet and capital, we are pleased with our 2020 CCAR results and the inaugural determination of our preliminary stress capital buffer at the minimum 2.5% level. The COVID-19 pandemic has provided an unprecedented real-time stress test and our strong capital position has enabled us to operate effectively, help stabilize the financial markets, and support our clients, employees, and communities. While the environment remains uncertain, State Street's performance under the Federal Reserve's severely adverse scenario is another reminder of our business model's resiliency and our capital stability. We recently announced our intention to continue our quarterly common stock dividend of 52 cents per share in the third quarter. Consistent with the Federal Reserve's instructions to all large banks, we will be suspending share repurchases for the third quarter. As we look ahead, given our strong capital position, We will consider a full range of capital actions, including the resumption of share repurchases in upcoming quarters. We will, of course, take into account economic conditions, safety and soundness, the Federal Reserve supplemental CCAR scenarios and review process, our capital levels, and any interim regulatory limitations. To conclude, I am very pleased with this quarter's results, which demonstrates continuing revenue improvement even during difficult times, as well as further evidence of our ongoing ability to tightly control expenses while continuing to safeguard our employees and serve our clients. And with that, let me turn it over to Eric to take you through the quarter in more detail.