State Street Corporation

Good morning, ladies and gentlemen, and welcome to State Street Corporation's second quarter 2022 earnings conference call and webcast. Today's discussion is being 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 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. I would now like to introduce Eileen Fizell-Beeler, Global Head of Investor Relations at State Street. Please go ahead, Eileen.

Thank you. 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 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'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 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 filing, 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. This morning, we released our second quarter financial results. The second quarter operating environment continued to be impacted by the ongoing geopolitical events in Europe, and the notable macroeconomic environment. The associated price and wage inflation, rising interest rates, years of recession are driving declining equity and fixed income markets, currency volatility, and concerns over market liquidity. These factors created a number of fee revenue headwinds for our businesses. Despite the adverse market conditions, State Street performed well in the second quarter with a strong balance sheet and good sales momentum. while delivering strong FX trading and significantly better NII growth year over year, coupled with well-controlled expenses and a healthy pre-tax margin. We remain focused on executing against our strategy and intensely managing what we can control to navigate through uncertainty, drive further business momentum, and achieve our medium-term goals. Turning to slide three of our presentation, I will review our second quarter highlights before Eric takes you through the quarter in more detail. Starting with our financial performance, 2Q22 EPS decreased 8% year-over-year, though it was down just 2% year-over-year, excluding notable items, primarily a prior year gain on sale in 2Q21. Weaker markets were the major driver of this decline. Total fee revenue for the quarter declined 6% year-over-year, primarily reflecting the impact of significantly lower global equity and fixed income market levels on servicing and management fees and the stronger U.S. dollar. Within total fee revenue, our global markets franchise continued to perform well with FX trading services revenue increasing 16% year-over-year, benefiting from higher FX market volatility, which drove higher spreads. Total revenue for the quarter declined 3% year-over-year, but was down just 1%, excluding notable items, as lower total fee revenue was largely offset by a strong NII result, which increased 25% relative to the year-ago period. In the face of market-related fee revenue headwinds in the second quarter, we remained highly focused on controlling the expense base. Second quarter total expenses were flat year-over-year, and declined 1%, excluding notable items. Our ongoing productivity actions largely offset higher than anticipated salary increases and planned business investments. Turning to our business momentum, which you can see across the middle of the slide, we reported a strong quarter of new AUCA asset servicing wins, which amounted to $972 billion, with back office services accounting for 40% of these wins by AUCA. As a result of this quarter's good sales performance, AUCA won, but yet to be installed, increased to a record $3.6 trillion at quarter end. During the second quarter, we also reported another alpha client win, with 12 of State Street's 20 alpha clients now live as of quarter end. We were also awarded the title of Security Services Provider of the Year in the Financial News 20th Annual Trading and Technology Awards. Front office software and data also experienced good business momentum in the second quarter, with annual recurring revenue increasing 20% year-over-year to $251 million. At global advisors, assets under management totaled $3.5 trillion at quarter end. Overall, second quarter AUM inflows were negatively impacted by the weaker equity market environment. but we still saw positive net inflows into both our cash and U.S. low-cost ETF franchises during the quarter. Even in a volatile environment, we continue to innovate and expand our capabilities to drive future growth. For example, Global Advisors continues to press forward in active ETFs and ESGs, as illustrated by the launch of the actively managed SPDR Nuveen Invisible Bond ESG ETF and a number of MSCI Climate Paris-aligned ETFs. Last, in terms of business momentum, I was particularly pleased to see that State Street was recognized as the top provider in FX services by Euromoney Magazine in the second quarter. Importantly, State Street regained its number one position overall for real money clients, in addition to being ranked number one for best service for real money clients. Our FX franchise supports and complements our core investment services business and has proven to be an effective deployment of our capital. Turning to our balance sheet and capital, despite a continued rise in interest rates, our CET1 capital ratio improved significantly to 12.9% in quarter end due to our active management of risk-weighted assets and the mitigating actions we executed in our investment portfolio in the second quarter. The strength of our balance sheet was highlighted in the second quarter with the release of the Federal Reserve's annual CCAR stress test results in June. following which we announced our intention to increase State Street's quarterly common stock dividend by 10% to 63 cents per share in the third quarter, subject to approval by our board of directors. We were pleased to announce the intended increase to our quarterly common dividend as we recognize the importance of capital return to our shareholders. With that in mind, in the fourth quarter of this year, it remains our intention to resume our existing common share repurchase program in an amount reflecting interest rate levels and market conditions at that time. I'll now turn to our proposed acquisition of BBH's Investor Services business, which remains subject to regulatory approvals and other closing conditions. We continue to be excited about the business and its people, the franchise it represents, and the opportunities the transaction represents for our collective clients and for accelerating our strategy. I've mentioned previously that we've been engaged in ongoing dialogue with U.S. banking regulators regarding the regulatory review process and potential modifications to the transaction intended to facilitate resolution of that process. Based on those discussions, we have developed with BBH proposed modifications to the transaction structure that the parties believe present a path forward. The proposed modifications include changes to the operating model and legal entity structure, and changes to the regulatory approvals required to complete the transaction. As part of the proposed modified transaction, State Street is seeking amendments to the transaction terms, including the purchase price. Both BBH and our Board of Directors would need to review and approve the modified transaction in amended terms. During the third quarter, we intend to finalize the proposed structure in contractual terms and confirm our approach with regulators. Assuming the financial and operational aspects of the proposed modifications are timely finalized and contracted, subject to regulatory approval and other closing conditions, the parties are aiming to close the transaction at the end of the fourth quarter of 2022. However, there exists significant timing uncertainty and risk that closing will extend beyond that timeline. There can be no assurance that a mutually acceptable modified transaction will be entered into or as to the timing or outcome of any regulatory approvals and other closing conditions for this modified transaction. After September 6, 2022, either party can terminate the transaction without penalty, absent further agreement of the parties. To conclude, as we progress towards our medium-term targets in this uncertain environment, we remain particularly focused on maintaining and further improving our pre-tax margin performance, which, despite the challenging market conditions, increased almost 29% for the quarter, excluding notable items. To help achieve this goal in the face of inflationary pressure and a challenging revenue environment, we will continue to exhibit expense discipline and to drive our automation and productivity efforts. We also remain laser-focused on innovating for the benefit of our clients and driving organic growth, as demonstrated by the strong AUCA wins in the second quarter, all while returning capital to our shareholders. And with that, let me turn it over to Eric to take you through the quarter in more detail.