State Street Corporation

Good morning and welcome to State Street Corporation's second quarter 2023 earnings conference call and webcast. Today's discussion is being broadcast live on State Street's website at investorsatstatestreet.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 State Street's website. Now I would like to introduce Eileen Feazell-Bihler, Global Head of Investor Relations at State Street. Please proceed.

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 2023 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, 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. Earlier today, we released our second quarter financial results. Relative to the significant volatility experienced by investors in the first quarter, market conditions in 2Q were more subdued, and global financial market performance was varied. Global equities generated positive returns for the third consecutive quarter as investors saw continued strength in developed equity markets, but weakness in emerging markets. Fixed income markets fell as investors had to contend with still elevated levels of inflation and further central bank rate hikes, including the Federal Reserve raising interest rates above 5% for the first time since 2007. The second quarter was also characterized by falling currency market volatility, which created headwinds for our foreign exchange business. Turning to slide three of our investor presentation, I will review our second quarter highlights before Eric takes you through the quarter in more detail. Beginning with our financial performance, second quarter ROE was 13% and pre-tax margin expanded by 1.2 percentage points year over year to 29.5%. Relative to the year-ago period, 2Q EPS increased by 14 percent to 217, supported by our common share repurchases, significantly higher NII, strong front office software and data revenue growth, and an increase in securities finance revenue. Our results also benefited from the release of an allowance related to the support of a financial, U.S. financial institution, as well as an accounting adoption. Taken together, these factors more than offset headwinds in some of our other fee-based businesses and the impact of higher than desired year-over-year expense growth. Turning to our business momentum, in Q1, I highlighted that by strengthening our implementation capabilities, we had line of sight into a meaningful amount of client onboarding this year. We began to realize the benefits of this plan and onboarded $1.2 trillion of AUCA during the second quarter. primarily driven by State Street Alpha, underscoring the power of the Alpha value proposition to our investment services strategy and long-term growth. As a result, our AUCA installation backlog declined to $2.4 trillion, while total AUCA increased by 5 percent quarter over quarter to $39.6 trillion, sold at quarter end, in part as a result of this new business. We also recorded over 140 billion of asset servicing wins in the second quarter, largely driven by strong sales in the desirable asset owner, official institutions, and alternatives client segments. Our sales pipeline grew, and we expect substantial onboardings in the coming quarters. We continue to advance and broaden our enterprise outsource solution strategy across our clients' front, middle, and back office activities. as demonstrated by the expansion of Alpha's capabilities to ETFs, which we announced in 2Q. For the past 30 years, State Street has continuously innovated to support what has become a 10 trillion ETF market. Today, State Street is the largest ETF administrator in the world, with more than 2,700 ETFs serviced in 13 countries. That long cycle of innovation continues as State Street Alpha now supports the entire ETF lifecycle. By integrating CRD's front office products with State Street's industry-leading ETF servicing capabilities, Alpha now provides a centralized platform for ETF issuers across the entire ETF lifecycle, including portfolio management, trading, and compliance to enable a growth across a variety of ETF strategies and increase speed to market. Turning to front office software and data business, our overall CRD pipeline is strong. In the second quarter, we converted a meaningful number of on-prem CRD clients to recurring SAS revenue, which, when coupled with new SAS client implementations, increased annual recurring revenue by 12% relative to the year-ago period. In addition, Charles River Wealth Management solution continues to resonate with clients and drove a significant increase in on-prem revenues this quarter. Year-to-date, CRD's wealth-driven revenue has more than doubled as compared to the first half of 2022, and we remain on track to grow CRD's wealth revenue this year. With State Street Global Advisors, quarter-end assets under management totaled $3.8 trillion, supported by higher period and market levels, and $38 billion of net inflows from all three business lines, ETF, cash, and institutional. Our SPDR ETF business gathered $27 billion of net inflows in the second quarter, including $20 billion of net inflows into SPY, the industry's largest ETF. We also delivered a solid performance in our U.S. low-cost ETF segment, which gathered $7 billion of net inflows this quarter, continuing to gain market share. Our cash business gathered a solid $10 billion of net inflows in the second quarter as our U.S. government money market funds benefited from the attractiveness of the cash asset class in the higher rate environment. Turning to our financial condition, State Street's balance sheet liquidity and capital positions remain strong. Our CET1 ratio was a strong 11.8% a quarter end, well above our regulatory minimum. The ongoing capital generation of our business, coupled with effective balance sheet management and our strong capital position, has enabled us to deliver against our goal of returning significant capital to our shareholders. In 2Q, we returned approximately $1.3 billion of capital, buying back more than $1 billion of our common shares and declaring over $200 million of common stock dividends. This means that cumulatively, over the last three quarters to the end of June, we have returned approximately $4.4 billion of capital to our shareholders through a combination of share repurchases and common stock dividends. The strength of our balance sheet was also highlighted with the release of the Federal Reserve's annual CCAR stress test results in June, following which we announced our intention for the third year in a row to increase State Street's common stock dividend by 10% of the third quarter, subject to consideration and approval by our board of directors. It remains our intention to continue common share repurchases under our existing authorization for up to $4.5 billion in 2023 subject to market conditions and other factors. To conclude, financial market conditions in the second quarter were mixed. Although global equities recorded another sequential quarter of growth, there was weakness in emerging markets, and we witnessed a negative impact of persistent inflation and further central bank rate hikes on fixed income markets. Meanwhile, both equity and currency volatility continued to decline. Despite this varied backdrop, we achieved a number of positive outcomes in the second quarter, including meaningfully reducing our asset servicing backlog, further developing our alpha capabilities, continuing to record new asset servicing wins, driving strong growth in front office software and data revenue, and gathering solid net inflows of global advisors. And while we reached double-digit year-over-year EPS growth supported by our capital management and the higher interest rate environment, our results were below our potential. First, while we achieved sequential fee revenue growth in areas of our business this quarter, we need to demonstrate the fee growth every quarter, especially as NII. We need to demonstrate that fee growth every quarter, especially as NII is no longer a tailwind. And second, we are highly focused on controlling our expense base. We have a well-established track record of reengineering our processes and transforming our operations, in order to improve our efficiency and realize productivity growth. We plan to utilize additional tactical expense levers at our disposal in addition to our ongoing structural productivity efforts in order to support our financial performance for the benefit of our shareholders. Now, let me hand the call over to Eric, who will take you through the quarter in more detail.