State Street Corporation

Good morning and welcome to State Street Corporation's first quarter 2022 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 express 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 Fizzo-Beeler, 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 first quarter 2022 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 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 afternoon, everyone. Earlier today, we released our first quarter financial results. Before I review our results, I would like to briefly reflect on the operating environment in the first quarter. which included both significant geopolitical events as well as notable macroeconomic developments and market movements. Turning to slide three of our presentation, first, I would like to acknowledge the ongoing events in Europe following Russia's invasion of Ukraine. In March, I traveled to Krakow to visit some of State Street's approximately 6,400 employees in Poland. During my visit, I was moved by the selflessness of our colleagues in Poland will continue to support displaced Ukrainian people in a number of important ways, from opening their own homes and providing shelter to offering professional support, such as interpretation services. While State Street's direct exposure to Russia and Ukraine is very small, our teams are responding fluidly to the situation and delivering for our affected clients and other stakeholders with dedication and professionalism in what continues to be a stressful time. We have well-established and regularly tested business continuity plans designed to continue critical services for our clients and support for our people. The first quarter also saw dramatic market movements driven partially by the conflict in Ukraine, plus a broader set of macroeconomic forces. A tight labor market, rising energy prices, continued supply chain disruptions, and the ongoing effects of significant COVID-related fiscal stimulus has contributed to inflation reaching multi-decade highs. As a result, in March, we saw the first interest rate hike from the Federal Reserve since late 2018, a substantial upward move in long-end interest rates, as well as volatile currency and equity markets, and a stronger U.S. dollar. Each of these factors, in part, shaped State Street's financial results in the first quarter which I will now discuss before Eric takes you through the quarter in more detail. Starting with our financial performance, first quarter 22 EPS increased 15% year-over-year and was up 8%, excluding notable items, with earnings growth supported by both higher total fee revenue and stronger net interest income, leading to an improved year-over-year total revenue performance in the first quarter. Within fee revenue, our global markets franchise performed particularly well, driven by higher FX market volatility. And while State Street's revenue performance improved, we also remained highly focused on controlling the expense base. Notwithstanding continued new investments in our business and operational capabilities, first quarter total expenses were flat year over year, and increased just 1%, excluding notable items. supported by ongoing productivity efforts and the stronger U.S. dollar. Taken together, we delivered both positive fee and total operating leverage, as well as pre-tax margin expansion, good earnings growth, and higher return on equity relative to the year-ago period. Turning to our business momentum, which you can see across the middle of the slide, we recorded another quarter of solid new AUCA asset servicing wins, which amounted to $302 billion in the first quarter, while AUCA I, but not yet installed, amounted to $2.9 trillion at quarter end. Front office software and data also experienced good business momentum, with annual recurring revenue for the first quarter increasing 15 percent year-over-year to $235 million. At Global Advisors, assets under management totaled $4.0 trillion at quarter end. Importantly, we saw another quarter of solid net inflows of $51 billion, despite the volatile market environment in the first quarter. Our ETF business continued to perform well as we further focused on innovation and enhancing our ETF product offering. For example, in January, Global Advisors launched three new ESG-oriented SPDR ETFs across small-cap international and emerging market equities. aimed at helping investors incorporate ESG considerations into their portfolios. In February, Global Advisors expanded its fixed income offering with a debut of the actively managed SPDR Blackstone high income ETF, as we continue to innovate in the active ETF category, which accounted for 13% of U.S. net industry flows in the first quarter. At State Street Digital, we announced a number of exciting developments. In March, we entered into a licensing agreement with CopperCo, a provider of institutional digital asset custody and trading infrastructure. We intend to leverage CopperCo's technology to develop an institutional-grade digital custody offering where clients can store and settle their digital assets within a secure environment operated by State Street. Turning to capital, our ratios remained healthy, although CET1 declined quarter over quarter largely due to lower AOCI driven by the significant moves in interest rates. In the coming quarters, we remain focused on maintaining strong capital ratios. Regarding BBH, the regulatory review process for the proposed acquisition of the BBH Investor Services business has progressed more slowly than we anticipated. While many required approvals have been obtained, some required regulatory approvals most notably approvals of the relevant federal banking agencies, remain outstanding. We are evaluating potential modifications to the transaction that are intended to facilitate resolution of the bank regulatory review. We are working towards concluding regulatory reviews during the third quarter. While we are engaged in an ongoing dialogue with the relevant federal banking agencies, there can be no assurance of the timing or outcome of their regulatory review. Both parties, State Street and BBH continue to be excited about the overall financial and strategic opportunities of combining BBH investor services with our business. We are continuing to work closely with the BBH team on pre-integration planning. This includes all the preparatory work in product, operations, technology, as well as employee communication and client planning. We still expect the transaction to be accretive to earnings per share in the first year post-closing. To conclude my opening remarks, the first quarter was defined by both unexpected significant geopolitical events and notable macroeconomic and market developments in the face of which State Street delivered an improved year-over-year financial performance and solid business momentum metrics while supporting our clients and colleagues. As we look ahead in this environment of heightened geopolitical uncertainty and market volatility, we remain laser-focused on delivering what is within our control, including excellence of strategic execution across the front, middle, and back office, maintaining the recent improvement in our sales effectiveness and expense discipline, all while continuing to provide valuable insights and promote better outcomes for the owners and managers of the world's capital. And with that, let me turn it over to Eric to take you through the quarter in more detail.