State Street Corporation

Good morning and welcome to State Streets Corporation third 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 express written authorization from State Street Corporation. The only authorized broadcast of this call will be housed in the State Street website. Now I'd like to introduce Eileen Feisal-Behler, 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 third quarter 2022 earnings slide presentation. which is available for download in the investor relations section of our website, investors.state street.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 also available in the IR section of our website. 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. 2022 continues to unfold like no other year in recent memory, with the challenges faced today arising partly out of but acutely different from those the world faced in 2020 during the onset of the COVID-19 pandemic. And while the global operating environment continues to be very challenging, our third quarter results clearly demonstrate the resilience of our business model and our focus on maintaining and further improving State Street's pre-tax margin, which was a solid 29% in the third quarter, excluding notable items. During the third quarter, financial markets were negatively impacted by the adverse effects of the ongoing war in Ukraine and several macroeconomic headwinds, including continued price and wage inflation, dramatically higher interest rates, significant US dollar strength, and heightened fears of a global recession. These factors collectively drove heightened uncertainty, which contributed to meaningful declines in both global equity and fixed income markets, as well as increased market volatility, which in turn impacted flows. We continue to carefully navigate the business through this environment. While the operating climate created a number of fee revenue headwinds for our business in third quarter, the savings and efficiency of our alpha and enterprise outsourcing offering makes our value proposition even more attractive to asset managers and asset owners in the current market and inflationary environment. We maintained a solid balance sheet and strong capital position, delivered significant NII growth as well as healthy FX trading revenues, and remained laser focused on intensely managing what we can control as demonstrated by our expense management. Turning to slide three of our presentation, I will review our third quarter highlights before Eric takes you through the quarter in more detail. Starting with our financial performance, third quarter 22 EPS was 180 or 182, excluding notable items, compared to 196 or $2, excluding notable items in 3Q21. Double digit year over year declines in average global equity market values drove most of this decrease. Total fee revenue for the third quarter declined 8% year-over-year, primarily reflecting the impact of significantly lower global equity and fixed-income market levels on servicing and management fees, as well as the stronger U.S. dollar. Within total fee revenue, our global markets franchise once again continued to perform well, with FX trading services and securities finance revenues increasing 14% and 4% year-over-year, respectively. as the business was able to benefit from increased volatility while supporting our clients. We also drove a solid result within front office software and data, with third quarter revenue increasing 9% year over year. Total revenue for the third quarter declined just 1% year over year, as lower total fee revenue was largely offset by a very strong NII result, which increased 36% relative to the year-ago period. driven primarily by higher interest rates. Faced with continued market-related fee revenue headwinds and inflationary pressures, we remained focused on controlling expense growth. Even as we invested in our people and business, third quarter total expenses were flat, both year over year and quarter over quarter, primarily driven by the impact of the stronger U.S. dollar and expense management. Business momentum was solid in the third quarter, with new AUCA asset servicing wins amounting to $233 billion. Encouragingly, our third quarter wins include expanded relationships with two existing alpha clients, demonstrating our ability to broaden and deepen client relationships and drive new back office mandates through our alpha strategy. As a result of this quarter's solid sales performance, AUCA won but yet to be installed with $3.4 trillion at quarter end. Front office and data also experienced good business momentum in the third quarter, with annual recurring revenue increasing 20 percent year-over-year to $267 million. At Global Advisors, assets under management totaled $3.3 trillion. Overall, third quarter AUM flows and management fees were negatively impacted by weaker equity and fixed income markets, but we still saw positive net flows into our cash, SPI, and U.S. low-cost ETF products during the quarter. Even in the volatile environment, our global institutional money market business has continued to gain market share this year, with AUM reaching a record level in third quarter, having experienced four quarters in a row of inflows. We remain excited by our global advisor strategy and the growth potential of the franchise, and announce new leadership in the third quarter, as Yixin Hong will become SSGA's new president and CEO in December. I would now like to turn to the proposed acquisition of Brown Brothers Harriman's Investor Services business, which remains subject to regulatory approvals and other closing conditions. The current regulatory environment for M&A transactions involving G-SIBs is challenging. We are engaged in ongoing dialogue with U.S. and international banking regulators regarding the prolonged regulatory review process. We have developed with BBH proposed modifications to the transaction, including changes to the operating model and legal entity structure and a reduction to the purchase price. We anticipate that a modified transaction would be somewhat more complex and include a delay in timing and amount of deal synergies, resulting in a slower path to accretion. While discussions with regulators on the proposed modified transaction are ongoing, the likelihood of a successful outcome is increasingly uncertain. There can be no assurance that a mutually acceptable modified transaction will be agreed and entered into, or as to the timing or outcome of any regulatory approvals and other closing conditions for a modified transaction. The modifications to the transaction remain subject to review and approval by both BBH's partners and our Board of Directors. As previously noted, the sale and purchase agreement allows each of State Street and BBH the right to terminate the transaction upon written notice without a contractual penalty at any time. We continue to believe the strategic rationale for the transaction remains compelling, and that has encouraged us to continue to seek an acceptable path forward. These efforts are actively underway and, as we previously stated, we expect to reach a decision on whether the transaction can proceed forward during this quarter. Turning to our balance sheet and capital, despite a continued rise in interest rates, our CET1 capital ratio was a strong 13.2% at quarter end. As I have noted previously, we recognize the importance of capital return to our shareholders, and it remains an integral component of our medium-term targets. Accordingly, Having already announced a 10% per share increase to our quarterly common stock dividend earlier this year, we now intend to repurchase approximately $1 billion of State Street's common stock in the fourth quarter under the existing common stock repurchase program authorization, which expires at the end of 2022. Additionally, in keeping with our medium-term targets, it is also our intention to return greater than 80% of earnings in 2023 in the form of common stock dividends and share repurchases, subject to approval by our Board of Directors and market conditions at the time. If the proposed acquisition of BBH Investor Services does not progress, we would expect capital return to be significantly more than that amount. To conclude, the events of the last two and a half years have demonstrated the resiliencies of State Street's business model during times of heightened market volatility and macroeconomic uncertainty. Even as financial markets broadly declined in the third quarter, we delivered a healthy pre-tax margin of 29%, excluding notable items, in addition to solid new business wins. While the environment is challenging and uncertain, we remain confident in our ability to continue to successfully execute against our strategic agenda and improve our operating model and financial performance over the medium term for the benefit of our clients and shareholders. As we look ahead, we will continue to adapt to the highly uncertain environment by remaining intensely focused on managing what we can control, as our solid expense discipline in 2022 to date has demonstrated, with year-to-date total expenses flat to the same nine-month period in 2021, even as we invested meaningfully in our people and business. And with that, let me turn it over to Eric to take you through the quarter in more detail.