State Street Corporation

Good morning and welcome to State Street Corporation's first quarter 2024 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 or rebroadcast or distributed 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 Fussell-Behler, Global Head of Investor Relations at State Street.

Please go ahead. 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 first quarter 2024 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. Earlier today, we released our first quarter financial results. We had a strong start to the year with our results demonstrating the breadth of our client franchise, the efficacy of our strategy, and our focus on execution. We reported both fee and total revenue growth, all while continuing to invest meaningfully in our business and controlling underlying expenses. Excluding notable items, we delivered both positive fee and total operating leverage, as well as solid EPS growth in Q1 relative to the year-ago period. The first quarter was an important milestone. We have detailed our strategic priorities for 2024, including the growth initiatives we are undertaking across each of our business areas, as we continue to both invest in our capabilities and also target further productivity gains. Guided by our purpose to help create better outcomes for the world's investors and the people they serve, our four strategic priorities are aimed at continuing to extend our competitive advantage while delivering positive fee operating leverage excluding notable items in 2024. These 2024 priorities are growing fee revenue, extending our leadership in our markets and financing and global advisors franchises, enhancing and optimizing our operating model, and continuing to differentiate our business through innovative client solutions and technology-led capabilities to support business growth. We remain intensely focused on executing against these strategic priorities, particularly in a dynamic operating environment in which financial market expectations continue to change significantly. For example, As inflation remains elevated and economic data continued to be robust, investors pushed back their expectation for the timing of central bank rate cuts and treasury yields increased during the first quarter. Despite this, global equity markets performed strongly and volatility remained muted, with many indices setting records as fears of a hard economic landing receded and optimism surrounding the potential economic benefit from artificial intelligence continued in Q1. Turning to slide three of our investor presentation, I will review our first quarter highlights before Eric takes you through the quarter in more detail. Beginning with our financial performance, 2024 started strongly. Year over year, we produced both positive fee and total operating leverage, as well as good EPS growth, excluding notable items. First quarter EPS was 137, or 169, excluding a notable item related to the increase to the FDIC special assessment. Underlying year-over-year EPS growth was supported by total fee revenue growth and continued common share repurchases, which more than offset the impact of lower NII on total revenue. Underlying expenses continued to be well controlled, supported by our ongoing productivity efforts, with first quarter expenses increasing just 1% year-over-year, excluding notable items, even as we have increased the level of investments in our business. Turning to our business momentum, which you can see on the middle of the slide, we continue to make progress across our client franchise in generating better fee revenue growth. Within asset services, AUCA increased to a record $43.9 trillion. We generated asset servicing AUCA wins of $474 billion in Q1, supported by key wins in both North America and Europe. Servicing fee revenue wins totaled $67 million. After hitting our full year sales target of $300 million in 2023, we remain confident in our ability to achieve our increased servicing fee revenue sales goal of $350 to $400 million in 2024. Our priority to grow fee revenue this year is underpinned by a strategy of leading with service excellence and driving stronger back office sales, differentiating with our State Street Alpha and private markets platforms. Our two new alpha mandate wins this quarter demonstrate our ability to execute on this strategy while also showcasing the clear competitive advantage and differentiation that alpha creates for our business. For example, both alpha mandate wins this quarter include back office services, which can install quickly, allowing us to realize revenue faster. Further, one mandate is our second alpha for private markets win, a key growth area for us. Encouragingly, both of these alpha wins were takeaways from a key competitor, with one of the wins having no existing services with State Street prior to becoming an alpha client, and the other a shared client that will now consolidate back office with State Street. Within markets and financing, even as low FX volatility created a headwind for the industry in the first quarter, we attracted higher FX client volumes, both sequentially and year over year, supported by our market-leading and wide-ranging FX trading solutions. In FX, we were pleased to see higher client volumes and the 8% Q over Q fee revenue growth. We also expanded our markets franchise. Within outsourced trading, we continued to expand our product capabilities and geographical reach, completing the acquisition of CF Global Trading in Q1. Global advisors perform well. Buoyed by higher equity markets, the strategic actions we have taken to position our asset management business for growth, and the benefits of the strong finish and step-off point at year-end 2023. One Q2024 management fees of $510 million are the highest since the first quarter of 2022. While GA experienced total aggregate outflows in Q1, this was driven by the impact of a large but expected single client redemption within the institutional business. We saw continued momentum in the defined contribution business, driven by our target date franchise. Encouragingly, we saw cash net inflows of $9 billion in the quarter, the fourth consecutive quarter of positive net inflows of our cash business. ETF AUM reached a record $1.4 trillion at quarter end, with GA continuing to gather net inflows and expand market share within U.S. low-cost ETFs. Now let me spend a moment on our continuing productivity efforts. We have a detailed set of initiatives across our business aimed at creating cost efficiencies and lasting productivity improvements. Regarding our ongoing operating model transformation, which forms an important part of these productivity initiatives, as you know, we are streamlining our operating model in India, and last quarter we consolidated our first operations joint venture in the country. I am pleased to note that the consolidation of our second operations joint venture in India closed on April 1. Combined, these two consolidations will propel the continued end-to-end transformation of our global operations and enable State-to-state to unlock productivity savings in the years ahead as we simplify our operating model. Before I conclude my opening remarks, I would like to touch on our continuing balance sheet strength. Total capital return amounted to $308 million in the first quarter. consisting of common share dividends and share repurchases. I would highlight that we have returned a substantial amount of capital to our shareholders in recent quarters, with total capital return over the last six quarters equivalent to almost 30 percent of State Street's total market cap at quarter end. As we pivot to a more normalized level of capital return this year, as we have outlined previously, it remains our intention to return approximately 100 percent of earnings in 2024 in the form of common share dividends and share repurchases, subject to market conditions and other factors. To conclude, we have delivered a strong start to the year as demonstrated by both sequential and year-over-year total fee revenue growth, encouraging business wins, strong underlying expense discipline, and continued capital return. As we look ahead, we remain highly focused on the execution of a set of clear strategic priorities for 2024. These strategic priorities are backed by detailed action plans aimed at driving growth across each of our business areas. Underpinning this execution is a set of business investments paired with a comprehensive set of productivity initiatives aimed at driving longer-term improvements in our operating model efficiency and effectiveness and generating positive fee operating leverage in 2024. Now, let me hand the call over to Eric, who will take you through the quarter in more detail.

Thank you, Ron, and good morning, everyone. Turning to slide four, I'll begin my review of our first quarter financial results, which included a 32-cent DPS impact from an additional FDIC special assessment, as described within the notable items table on the right of the slide. As Ron noted, we produced a strong start to the year. On the left panel, you can see that total fee revenue was up both sequentially and year-on-year. Relative to the year-ago period, we delivered robust management fee growth, higher front office software and data revenue, and servicing fee growth, while underlying expenses were well controlled. As I mentioned during the first quarter, we recorded provision for credit losses of $27 million, largely due to two CRE names. All told, we generated both positive total and fee operating leverage relative to the year-ago, excluding notable items. We also delivered solid year-on-year EPS growth of 11 percent, excluding notable items, which was supported by the continuation of our share buybacks in the first quarter. Turning now to slide five, we saw period-end AUCA increase by 17 percent on a year-on-year basis and 5 percent sequentially to a record level. Year-on-year, the increase in AUCA was largely driven by higher period-end market levels net new business and client flows. I would note that we have seen a mixed shift into cash and cash equivalents worth an estimated 1 to 2 percentage points of total AUCA versus a year ago. Quarter on quarter, AUCA increased primarily due to higher period and market levels and client flows. As global advisors, period and AUM also increased to a record level, up 20% year-on-year, largely reflecting higher period and market levels and net inflows, and up 5% sequentially, primarily due to higher period and market levels. At the right center of the slide, the market volatility indices provide a useful indicator of client transactional activity that drives servicing fees, spreads in FX trading, and specials activity in agency lending. Turning to slide six, on the left side of the page, you'll see first quarter total servicing fees up 1% year on year, primarily from higher average market levels, partially offset by pricing headwinds, a previously disclosed client transition, and lower client activity and adjustments, including changes in certain client asset mix into lower earning cash and cash equivalents. In addition, the pace of installation started slower than we expected in the first quarter. Let me dimension some of these items for you. As I've told you before, the impact of the previously disclosed client transition was a headwind of approximately two percentage points to year-on-year growth. In addition, lower client activity and adjustments, including the client asset mix shift to cash, was also a headwind of approximately two percentage points to year-on-year growth this quarter, some of which we believe is cyclical. Sequentially, total servicing fees were up 1%, primarily as a result of higher average market levels, partially offset by lower client activity and adjustments, including the changes to certain asset mix and pricing headwinds. On the bottom of the slide, we summarize some of the key performance indicators of our servicing business. In the first quarter, we generated 67 million of servicing fee wins, nicely spread across both North America and Europe. As you recall, solid sales in North America like this was one of the goals that we had described at a conference last fall. In addition, we had $291 million of servicing fee revenue to be installed at quarter end, up $71 million year-on-year, and $21 million quarter-on-quarter. We also had $2.6 trillion of AUCA to be installed at period end. Turning now to slide 7. First quarter management fees were up 12% year-on-year, primarily reflecting higher average market levels and net inflows from the prior periods, partially offset by the impacts of the strategic ETF product suite repricing initiative. Relative to the prior quarter, management fees were up 6% due to similar reasons, partially offset by lower performance fees. As you can see on the bottom right of the slide, following record inflows in 4Q23, our investment management franchise remains well positioned with momentum across each of its businesses. In ETFs, though overall flows were relatively flat in first quarter, our SPDR portfolio U.S. low-cost suite achieved continued market share gains driven by net inflows of $13 billion. In our institutional business, we saw first quarter net outflows of $19 billion, primarily driven by a single client. That said, we saw continued momentum in the U.S.-defined contribution area with record AUM of approximately $730 billion. Lastly, in our cash franchise, we saw first quarter net inflows of $9 billion, the fourth consecutive quarter of positive net flows into cash. Turning now to slide eight, first quarter FX trading services revenue was down 3% year-on-year, but up 8% sequentially. Relative to the year-ago period, the decrease was mainly due to lower spreads associated with subdued FX volatility, partially offset by higher volumes as client engagement increased across nearly all of our FX venues. Quarter-on-quarter, the 8% revenue increase primarily reflects higher volumes with particular strength in our EM business, as well as higher direct FX spreads. First quarter securities financial revenues were down 12% year-on-year, mainly due to lower agency balances and lower spreads, primarily associated with significantly lower industry specials activity. On a quarter-on-quarter basis, we have seen agency lending balances up as demand is rising. Software and processing fees were up 25% year-on-year in Q1, largely driven by higher revenues associated with CRD, which I'll discuss in more detail shortly. Quarter-on-quarter software and processing fees declined 13% permanently due to our lower on-premise renewals, partially offset by higher lending-related fees. Finally, other fee revenue for the quarter increased $5 million year-on-year. Sequentially, other fee revenue increased $17 million, largely driven by an episodic currency devaluation in the prior quarter, which did not recur. Moving to slide 9, you'll see on the left panel that first quarter front office software and data revenue increased 32% year-on-year, primarily as a result of continued SAS implementations and conversions driving higher professional services and software-enabled revenue growth. Sequentially, front office software and data revenue was down 20%, primarily driven by lower on-premise renewals and installations. Turning to some of the alpha business metrics on the right panel, We were pleased to report two additional alpha wins, including our second alpha for private markets mandate. In addition, three mandates went live in the first quarter, bringing the total number of live mandates to 21. First quarter ARR increased 19% year on year, driven by over 20 SAS client implementations and conversions over the last year. Turning to slide 10, first quarter NII decreased 7% year-on-year, but increased 6% sequentially to $716 million. The year-on-year decrease was largely due to deposit makeshift and lower average non-interest-bearing deposit balances, partially offset by the impact of higher average interest rates, client lending growth, and investment portfolio positions. We were pleased to report a sequential increase in NII, which was primarily driven by higher investment securities yields, an increase in average interest-bearing deposits, and loan growth partially offset by the decline in average non-interest-bearing deposits. The NII results on a sequential quarter basis were better than we had previously expected, primarily driven by strength in both interest-bearing and non-interest-bearing deposit balances towards the end of the quarter. While it is difficult to forecast the path of deposits in the current environment, we're pleased with the success that we are having in engaging our clients. On the right of the slide, we provide highlights from our average balance sheet during the first quarter. Average deposits increased 4% year-on-year and 6% quarter-on-quarter, mainly driven by client balance growth across the interest-bearing deposit stack, partially offset by a reduction in non-interest-bearing deposits. Average non-interest-bearing deposits decreased by less than $3 billion quarter-on-quarter. Cumulative U.S. dollar client deposit betas were 80% since the start of the current rate cycle, with cumulative foreign currency betas for the same period continuing to be lower in the 30% to 60% range, depending on the currency. Turning to slide 11, first quarter expenses, excluding notable items, increased barely 1% year-on-year, as we both invested more to fuel fee growth and increased the size of our productivity and optimization savings efforts by more than 50%. On a line-by-line basis, excluding notable items, on a year-on-year basis, compensation employee benefits decreased 3%, primarily driven by lower incentive compensation salaries, as well as a decline in contractor spend that was partially driven by the consolidation of one of our operations joint ventures in India. Information systems and communications expenses increased 4%, mainly due to higher technology and infrastructure investments, partially offset by the optimization savings and vendor savings initiatives. Transaction processing increased 4%, mainly reflecting higher broker fees due to increased global market volumes. Occupancy increased 10%, partially due to the real estate costs associated with the consolidation of the joint venture in India, which used to form part of the contractor costs within compensation and benefits, partially offset by footprint optimization. And other expenses increased 5%, largely due to the timing of foundation funding. Lastly, I'll spend a moment on our transformation efforts. If you recall, consolidating the first operations joint venture last October increased our FTE headcount as we insourced those capabilities. However, it also came with an expected financial benefit excluding integration costs of $20 million over the course of the year. As Ron mentioned, the consolidation of our second operations joint venture in India closed on April 1st. And this will also come with an increase in additional headcount from 2Q, as well as expected financial benefits. The consolidation of these two joint ventures will be a catalyst for the next phase of State Street's global operations transformation and enable us to create a second wave of service improvements and productivity savings next year. Moving to slide 12. On the left side of the slide, we detail the evolution of our CET1 and Tier 1 leverage ratios, followed by our capital trends on the right of the slide. As you can see, our capital levels remain well above the regulatory minimums. While we continue to focus on optimizing our capital stack, the strength of our capital position enables us to extend our balance sheet to support our clients. As of quarter end, our standardized CET1 ratio of 11.1% was down approximately 50 basis points quarter-on-quarter, largely driven by the expected normalization of RWA. The LCR for State Street Corporation was a healthy 107% and 130% of State Street Bank and Trust. Our exceptionally strong liquidity metrics benefit from the deep and diversified nature of our funding base and active balance sheet management. In the quarter, we were pleased to return $308 million to shareholders, consisting of $100 million of common share repurchases and $208 million in declared common stock dividends As Ron noted, we continue to expect to return around 100% of earnings to shareholders this year. In summary, we're quite pleased with the quarter. We have a clear strategy for growth, a detailed set of priorities that we are executing against in order to drive continued positive boat business momentum, and expect to deliver increased fee operating leverage this year, excluding notable items. Finally, let me cover our full year and second quarter outlook, which I would highlight continues to have the potential for variability given the macro environment we're operating in. In terms of our current assumptions, as we stand here today, we are assuming global equity markets flat to first quarter end for the remainder of the year, which implies daily averages up 5% quarter on quarter in 2Q and up around 17% for the full year. Our rate outlook broadly aligns with the current forward curve, which I would note continues to move, while we expect FX market volatility will remain muted. Given our strong start to the year and higher average market levels, we think total fee revenue for the full year will now be at the higher end of our prior guide of up 3% to 4% year-on-year, so up a solid 4%, which is better than our previous outlook. There are, however, episodic and industry headwinds impacting our servicing business this year, including a previously disclosed client transition and the impact of client activity and adjustments, which includes the client asset mix shift into lower earning cash and cash equivalents. We believe some of these factors are cyclical in nature, and we expect to offset a portion with higher sales and additional management actions this year. Turning to NII, as a result of our first-quarter outperformance, strong deposit growth and the improved interest rate outlook, we now expect full-year NII will be down approximately 5 percent year-on-year, which is better than our previous guide of down approximately 11 percent. On expenses, we expect full-year expenses, X notable, will be roughly in line with our prior guide, up about 2.5%, but with the potential for some additional revenue-related costs this year. Given our improved outlook, we now expect to deliver additional positive fee operating leverage for the full year, excluding notable items. Finally, turning to 2Q on a quarter-on-quarter basis and excluding notable items, we would expect total fee revenue to be up 1.5% to 2%, NII to be down 2% to down 5%, and expenses up about 2% to 2.5%, excluding the seasonal compensation expenses in 1Q and notable items. We think the provisions for credit losses could be in the $15 million to $25 million range in 2Q, and we would expect to have a better view on that later in the quarter as we continue to monitor our portfolio. Lastly, we expect 2Q tax rate to be approximately 22%. And with that, let me hand the call back to Ron.

Operator, we can now open the call for questions.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, please press star followed by two. And if you're using a speakerphone, we ask that you please lift the handset before pressing any keys. Please go ahead and press star 1 now if you do have any questions. And your first question will be from Brennan Hocken at UBS. Please go ahead.

Good morning. Thanks for taking my questions. Eric, your updated guide sort of suggests that an AI, you guys expect to pull back a little bit here from this strong result here in the first quarter, but one of the things that I noticed was repo was particularly robust in the quarter. Could you give a little color around what drove that strength and how sustainable it is and is some of that normalization embedded in your outlook? Thanks.

Brendan, it's Eric. There are a number of factors that drove the upswing in NII into the first quarter. The bulk of that was actually deposit balances coming in stronger than we had expected, both on the interest-bearing side across the stack and non-interest-bearing as well. That made up for the $30 million uptick in terms of our results relative to our expectation. The repo balances did tick up as well. you know, a small part, but worth in NII terms, about a percentage point of more NII than we had expected. And I think what we're seeing is that as the conditions in the economy continue to evolve, you know, clients are holding more cash on their balance sheets, than putting that into a variety of different instruments. Sometimes it's on deposits, sometimes it's on sweeps, and sometimes it's in repo. And that's also been, in particular on the repo side, been aided a bit by the reduction in the Fed's overnight repo operations. So it's really a mix of factors that we're seeing, which together, though, are driving a better NII performance, which we're pleased with.

Yeah, yeah, great, thank you. You also quantified the impact of the BlackRock transition, so thanks for that. It does seem as though maybe that impact is a little larger than your prior expectation. Do I have the right read on that? And maybe could you give us an update on where we stand as far as the ongoing impact goes?

Sure, Brennan, it's Eric again. The previously announced client transition that we had referenced is in line in terms of amounts that we had expected. If you recall, we had said it would be worth about two percentage points of servicing fees this year, which is about a percentage point of total fees. And remember, if you go back to our original disclosure over the last couple of years, we had described the total amount to be worth about two percentage points of total fees, and we're seeing about half of that come through on a year-on-year basis this quarter and for this year. And so, you know, in line, fully in line with what we had previously described.

Okay. Thanks for taking my questions.

Thank you. Next question will be from Glenn Shore at Evercore. Please go ahead.

Hello there. One quickie follow-up on the NII stuff, and thank you for all the details. The balance is coming into March. I know these things are really hard to predict, but is something happening with the client discussions and the overall profitability management that might give you confidence that those balances stick, or should we think of this as, you know, rates are higher, parking balances with a safe custodian?

Glenn, we've been heavily engaged with our clients over the last year, I'd say, year and a half, as we've seen, you know, quite a shift in the interest rate environment and, you know, the evolution of deposits in the banking system. I'd answer your question at a couple different levels. I think first, you know, going into this year, we had expected total client deposit balances in the you know, 200 to 210 billion. And we now see that in the 210 to 220 billion for this quarter. And to be honest, we expect that, that we continue at around that level. And a lot of that is both the engagement that we've had with clients, you know, they all have cash and we certainly encourage them to bring it to us. And part of that is the, you know, where we think about client relationships, client profitability, the client services that we can offer. And so I think some of what you're seeing here in the higher aggregate levels of deposits is due to our management action. You know, I think in addition to that, there are do tend to be somewhat higher deposits in the banking system. So the, you know, the tide has been gently rising, I'd say very gently. And, you know, that's been helpful. And we expect that to be, you know, relatively neutral going forward. But we'll obviously need to see based on, you know, the actions, the various actions at the Fed and how they evolve

Very cool. Appreciate that. One quickie. You can't comment on the specific, but I'm more talking the big picture. You were named in some stories, potential interest in some private credit manager. I'm more talking big picture of where theoretically that might fit in and just, I like the better flows on CNS SGA, but strategically, what are you focused on in terms of continuing growth across that franchise?

Yeah, Glenn, it's Ron. So we've tried to be quite clear about what we're doing over at SSGA. I mean, first is around continuing to grow the ETF franchise. As you know, our legacy strength is in the institutional business, where we continue to be quite strong. And we've focused a lot over the last several years on growing the low-cost ETF franchise. franchise, which tends to find its way into retail portfolios through intermediaries. That led to the repricing initiative that we did last year, which in retrospect has proven to be quite a smart move because the market share has gone up and those portfolios tend not to move. These are buy and hold investors. So ETFs would be one. Then we continue to grow the The active space, typically with working with very close partners of ours, and we see a lot of runway in active. And then finally, fixed income, particularly out, we have a strong fixed income offering here in the U.S., and we've built it out quite a bit in the last couple of years in Europe. And you're seeing lots of strength in the ETF ecosystem in Europe. Second area of growth is really trying to leverage the institutional client base because its legacy is the passive index business. If we have an institutional relationship, we tend to be the number one or number two manager on their platform. That gives you a seat at the table, and we believe it gives us an ability to potentially distribute other kinds of products and services. So that's where a lot of our focus is now on the institutional business. And then finally, continuing to deepen, we have a global franchise, but there's areas that we can deepen it more. You've heard us talk about Europe, and we're focused just as much on Asia Pacific as those markets continue to grow, and we're able to leverage the positions we have, but really focusing on deepening as opposed to broadening So that, in a nutshell, is how we're thinking about it, and we're pleased with how it's playing out. I appreciate that, Ron. Thanks.

Thank you. Next question will be from Ken Housden at Jefferies. Please go ahead.

Please go ahead, Ken. Your line is open. Could you please unmute?

No response. Moving on to Alex Blustein at Goldman Sachs. Please go ahead.

Hey, good morning, everybody. Thanks. Another one for NII. I guess good quarter, good guide for the second quarter as well, and that's sort of elevating your full-year NII guidance also. But similarly, I guess, to kind of what we saw in your guidance last quarter, the back of the year seems to have a pretty meaningful drop-off for the tune of maybe $100 million or so versus the quarterly run rate. Eric, given your comments on deposits being stable and higher rates are kind of where they are, you still get in the benefit of repricing on the securities portfolio, what sort of informs this sort of decline in NII towards the back of the year?

Alex, it's Eric. You know, we're going to continue to see some of the trends that we have been seeing, and it's just a matter of how the various pieces you know, partially or fully offset each other over time. You know, we're going to continue to see a tailwind from the level of rates, at least given the current forward curve, because that plays through the investment portfolio and gives us a tailwind, as does, you know, some continued growth in lending. The headwind that we've been navigating through, which I would describe comes in – in steps, and sometimes it's a step down, sometimes half a step back up, is around the deposit levels across the interest-bearing stack, where we're just seeing deposits, I think, at nice levels, to be honest, while we continue to see the grind down of non-interest-bearing deposits. We do expect another quarter of that, the non-interfering deposits to trend down, and then to flatten out in the second half of the year. I think, so you'll see those trends continue. I think you'll, we'll see where we come out, but if you take our guide together, we expect a modest step down into the second quarter. And then we see a leveling off in the third and fourth quarter of our NII. I think in the past we've talked about being in a range of, you know, 500 to 600 million a quarter. We're now seeing and expect to be comfortably above the $600 million per quarter range. But those, you know, it's those factors as headwinds and tailwinds that'll play through, that'll kind of dictate exactly where we come out. But I think, as I said earlier, the level of client engagement that we've had in terms of putting deposits with us, putting deposits at different price points with us, some of those are the core transactional deposits that need to support custody accounts, and some of those are the discretionary amount of deposits has been a real priority for the franchise, and I think one that we've shown some good success in. And that's really creating, I think, this better expectation than we had earlier signaled at the beginning of the year, and one that we think will endure and then provide the stability and over time upside in NII in the coming years.

Great. All right. That's helpful. My second question is around expenses. You talked about how consolidation of the GV, I guess, that took place recently in April here will create a new wave of optimization for next year, if I got that right. Can you just outline what that could mean in terms of incremental, you know, either re-engineering benefits or cost benefits, however you want to frame that, and what that means for maybe the overall kind of expense growth for the franchise. I know you're holding the line this year really well, but is there an opportunity to kind of continue that into 2025 as well?

Thanks. Yeah, Alex, it's Ron here. I think it's good to focus on what we said here because we've talked to you and your colleagues just about ongoing productivity improvement. We've been at it for years, and we do believe this, unlocks a potential, not a potential, but a new wave of productivity growth. And why is that? Well, firstly, almost by definition, if you're taking these ventures on, you're eliminating the margin that was in it. That was in our expenses. That now comes out, right? So you've got that as a near immediate tailwind. But more importantly, and more important for the long term, is that we can really complete and take advantage of true end-to-end process improvement and simplification. We had created through the JVs, which go back to the early days of our offshoring journey, we created a lot of complication. Unintentionally, we created a lot of complication. This enables us to get at that The work is already started. Our operations folks are spending a lot of time in India. They've done some recent hiring and brought on some great leaders there. So if you think about the importance of India to our operations and the amount of work that passes through there, between this end-to-end simplification, This ability to eliminate checkers of checkers of checkers and all those kinds of things. We see an enormous amount of opportunity to improve. And then finally, as we continue our technology investment, a lot of that will be directed there. It'll be directed at some of the things that, you know, in the past you would have said, well, let's take advantage of labor arbitrage. And now the technology is at a cost level where we can simply eliminate the labor and not have, particularly for some of these repetitive kinds of tasks between machines and other kinds of AI that you can use to replace labor. And you end up then with a lower labor cost, but more importantly, you've got job content that's very attractive to people and people want to make careers here as opposed to feeling like they're stuck in this dead-end repetitive task. So we are very optimistic about this.

Great. Thanks so much.

Thank you. Next question will be from Brian Bedell at Deutsche Bank. Please go ahead.

Great. Thanks. Good morning. Thanks for taking my questions. First, just a confirmation on the guidance you gave, Eric, on the 2Q fee revenue up 1% to 2%. nii down two to five percent expenses up two to two and a half percent is is that sequential for revenue and year over year for expenses uh no it was sequential uh for uh for every one of those uh as you uh

as you look forward. So it was all on a 1Q to 2Q basis.

2Q basis. Okay. So then going back to the NII guide, I think you also said down 2% to 5% versus the 716 in 2Q. And then did you say down again in 3Q and then flattening out or flattening out in 3Q?

What I described is a flatter second half of the year. And so there are different paths here, to be honest. And it really will just depend on the level of deposits, the level of interest rates, just how the tail of some of the climate deposit repricings that we've described. come through. We're at the back end of those. So I gave some, you know, a high-level view, but, Brian, I think there's a range of scenarios. What we do have some confidence in is the expectation that in aggregate, NII will be down 5 percent from a full-year basis, and that's quite a bit better than the down 10 percent that we had previously guided towards.

Right, yeah. If I use the flattish assumption, I'm more like flat for the year on that cadence. But would that be sort of a, as you said, a range, but a flat NII outcome year over year would be at the better end of your range, or is that sort of really difficult to achieve?

No, let me try to clarify. We expect total NII to be down 5%. on a year-on-year basis for the full year. What I did say is that we expect NII to be in 3Q and 4Q to be roughly the same, to be flattish between those two quarters. And so now the question is exactly how much does it come down in second quarter? And then from second quarter into the combination of third and fourth quarter, how much does that come down? And there's a range of different scenarios I think you're you know, you could foresee. But the reason we're trying not to over-spec the exact quarter by quarter by quarter by quarter expectation is there's just underlying volatility out there in the kind of macroeconomic conditions, in the risk-on, risk-off sentiment, in the central bank's actions, right? And then in our client... deposit levels and so hopefully that gives you enough context to go on.

That's super helpful and then maybe just on the private markets when it sounds like momentum is improving there maybe if you could just talk about what your pipeline is looking like in private markets alpha and kind of your expectations over the next one to two years.

Brian, it's Ron. I mean, we've talked about the private businesses being a, you know, a double-digit growth business. We stand by that. We see lots of potential growth. Private markets, Alpha, is developing nicely for us, largely for some of the, for many of the same reasons that Alpha itself has. It's an opportunity. As these firms become more complex, have complex operating and technology stacks, it's a way to not just lower some costs, but improve operations and future-proof operations. So it's developing well. So we remain optimistic about it.

Great. Thank you.

Thank you. Next question will be from David Smith at Autonomous Research. Please go ahead.

Good morning. Could you talk a little bit more about your capital priorities today? Your payout ratio in the first quarter was somewhat below your 100% full-year target.

David, it's Eric. We gave guidance at the beginning of the year on a full-year basis purposely, right, because each quarter there's going to be a different set of variables as we move as we navigate through. So we describe capital return in aggregate to be around total earnings for the year, and we reaffirm that in our prepared remarks. If you then go into the specifics of the first quarter, remember we had expected a normalization of the lower than usual RWA that came through in the fourth quarter. Some of that is just market factors playing through on the FX book. Some of that is equity markets upticking in the agency and securities financing space. And some of it, to be honest, is just putting capital to work with our clients where we're engaging with them and that's driving some of the fee revenue growth that you saw. At the same time, you know, our priority is to get capital back to shareholders. We continue our our dividend at pace as you'd expect. We had some buybacks this quarter. If you do the math, that buyback activity will increase going forward for the next few quarters. We also had the new information about the FDIC assessment. we had to accrue for that expense instead of returning capital to shareholders for this particular quarter. So anyway, just a way to describe, we're on track with our priority and, to be honest, our commitment to get capital back to shareholders in line with earnings this year. And it'll just, you know, every quarter is a little bit different, but I think you'll see that accelerate into the second quarter.

Thank you. And I think you gave the tax rate for the second quarter. Are you still expecting 21 to 22 percent for the full year?

I think I need to quickly go back to the January remarks, but we did not update those. So I think that's a good place, a good estimate to use for the full year, the one that you had back on the January call. Yeah, that's correct.

Okay. And just one last cleanup. The preferred dividends, they'll still be elevated in the 50 to 55 million range in the second quarter, but then it'll be kind of more like 40 million in the second half of the year?

Yeah. Yeah, that's correct. We're just kind of moving through this – this past quarter one and quarter two between the issuance and redemptions and then literally the tactical timing of some of the dividends, you've got it right. There's one more quarter of elevation in the 50 to 55 million range next quarter, meaning second quarter, and then it'll run at about 40 a quarter from third quarter onwards.

Thank you.

Thank you. Next question will be from Mike Mayo at Wells Fargo. Please go ahead.

Hi, can you hear me? We can.

Can you talk about the relationship between stock markets and revenues used to have for every hundred Every 10% change in the S&P 500, it impacts your services fees by X amount. Can you remind us what that is these days and how much of a lag there is with that? And along with that, I guess to your guidance for NII, instead of being down 10, it's down 5. What exactly changed last month or so?

Yeah, Mike, it's Eric. Let me answer those in reverse order. On NII, what happened in the first quarter was really higher deposit balances across the interest-bearing stack and even relative to our expectations on non-interest-bearing in March. So that changed in a positive way, created an uplift into the first quarter that we had not expected. The last time we gave full-year guidance on NII was back in January when we expected it to be down on a full-year basis 10% for the full year. And it's only today that we've reassessed that. We did not reassess that back at the beginning of March. We reassessed that today. And what we're factoring in is the higher step-off, the higher level of deposits with us generally, and the the fewer rate cuts that we're expecting from central banks around the world. And so that's what gets us to a better full-year guide on NII. If I then turn to the equity market question, how it factors through servicing fees, we need to be, we need to go through it in pieces. And so let me First, what matters to us is not just the S&P equity index because we're global, right? More than 40% of our revenues are abroad, including in emerging markets. And while the S&P is up year on year 28%, the all-world index is up only 18%. And that's what's more material to our financial statements given the international and global footprint that we have. With that 18%, we'd expect a substantial tailwind of servicing fees on a year-on-year basis in the up 4% to 5% range, typically. But it tends to move around. As you said, sometimes there's a bit of timing there. Sometimes there's a bit of mix there and so forth. What we did see that was a headwind to that this year were two things. One was the previously announced client transition. And that was worth about two points of servicing fee headwinds. And then we've continued to see a lower or I'll describe different level of client activity that was worth almost two percentage points of headwind this year, some of which we think is cyclical. Some of that is transactional activity that we've talked about that we tend to get paid for on a unit basis through our fee schedules. And then this quarter, we also referenced the shift to client cash and clash equivalents within the AUCA stack, which tends to come in at a much lower fee rate for custody and accounting services. And so those were the pieces that went against us.

And just one follow-up. You said more than expected deposits. Why was that?

I think the more than expected deposits is really driven by two factors. One is that there tends to be more cash in the system, in the banking system today. We think that's a mix of central bank actions, in particular in the U.S., the reduction in the overnight repo operation that the Fed's running. that comes back in a way into our clients or into the banking system. And that's been a, I think that's generally improved liquidity conditions or added to what is our very liquid conditions have made them even more liquid. And then the second factor, to be honest, is over the last year and a half, two years, we've been very engaged and I'd say increasingly engaged with clients on where they put their cash. Do they put their cash with us in deposits, in repo, in money market, in money market sweeps? Because every one of those areas, we offer services to our clients. And I think what we've done over time is sharpened our engagement with our clients, and that's resulted in more cash and deposits with us. in a way that we find is healthy, obviously, for our balance sheet. We're always delighted to keep cash, but also helps with earnings and margin and economically. Thank you.

Thank you. Next question will be from Rajiv Bhatia at Morningstar. Please go ahead.

Great. Good morning. Can you comment on how the pricing environment is for your servicing business? If inflation remains higher for longer, should we expect lower pricing headwinds? And as I understand it, about 60% of your servicing fees is asset-based. How do pricing headwinds compare in the asset-based bucket versus the non-asset-based bucket? Thanks.

You know, it's a broad question. We've been in an environment, I think, the last four years or so where we've seen, you know, pricing headwinds in the servicing business to be, you know, roughly in the, you know, 2% headwind level. And that's kind of, you know, that'll float around a bit by quarter. It'll float around on the margin a little bit by year, but it's substantially below what we had seen way back in 2019, which was, I'll describe, a bubble of repricing. I describe it that way because during this time, we've seen, to your point, a very accentuated rise in inflation. We've now seen a partial reduction in inflation, and that's not really had a large or substantial effect to our general fee rates or our servicing fees. And so it's been... I think it's not particularly determinative of that. In terms of our fee schedules, you're right. The fee schedules have several components. They have asset-based. There's an asset under custody basis for some of the fees, which is about half. There are some transactional fees. There are just some flat fees. There are some per account fees. And those usually end up being negotiated as a package. It's not that when we have negotiations that one particular part of that package is treated very differently. We have large, sophisticated clients. They think of it as a package. And to be honest, they're looking for a fair set of a fair amount of fees so that as a partnership, which lasts often 10, 15, 20, in some cases 30, 40 years, right, that they feel they're getting value and that they feel that we as a custodian, you know, can deliver on what their expectations are. And so it comes to be, you know, a reasonable accommodation, I think, in our minds and their minds.

Got it, thanks.

Thank you. Next question will be from Ken Oosden at Jefferies. Please go ahead, Ken.

Thanks, Ramanur. Sorry for that earlier. Just one follow-up on just the servicing fee algorithm. So with all the commentary you've made, and you show us the good detail about the business wins and the fees to come on, and we know about the headwinds, some cyclical, some due to the deconversion, do you have a line of sight when we can really start to see that back office line start to move up in a positive way. And I know we have to consider the middle office and the whole front office kit as a together thing, but that's still the biggest line and that's still kind of flattish on a year-over-year basis with all the things we talked about. But is there any path forward where you can kind of see some of those, you know, headwinds abating and some of the growth starting to come on and transitions that we can see a better growth rate overall? Thanks.

Ken, why don't I start here? You know, the transition, I know it feels like it's been going on forever, but that will basically abate. The effect of that will go away, more or less go away next year, assuming no other changes on the client side. So, you know, a headwind goes to zero. Secondly, and perhaps more importantly, you've seen You saw the sales performance last year. You're seeing the sales performance this year. That's building up the to-be-installed business. That still remains very, very high for us. Part of it is some complicated kinds of alpha clients that they will install. They are installing, they typically tend to install in waves and tranches. So we'll make progress against that. But I would note from failed performance last year and it continued in this quarter, there's a fair amount of back office in some of these recent sales, which just installs faster. And so we're quite optimistic about the opportunities here in fee revenue growth, particularly servicing fee revenue growth as you overcome headwinds, but more importantly, start to reap the benefits of what we've sold in alpha, what we've sold in back office, and get those installed.

And Ken and Tarek, I would just add that we've had these client activity headwinds that we described, which is a mix of kind of risk-off sentiment, which has led to lower transactions through the custodial accounts. And then we've described this shift towards a cash mix, right? We don't see those, you know, just continuing, you know, at the same pace. We see that as somewhat cyclical. You'd expect, I don't think we generally expect much more cash to be on hand with clients. You know, there are, I think there's a case we made that cash levels of clients should actually start to get deployed over the next year and could even be a neutral or a possible tailwind. So I think we've been going through a bit of a cyclical phase here on those environmental and activity type and mixed headwinds. And I think without those, you know, you could then see through to some of what Ron described around sales, installations, and the underlying growth of the franchise.

Okay. And thank you for all that. And one follow-up then is also, we can see the wins and what you put on and the yet to be installed to Ron's point. Can you just talk about just the pipeline? Is the pipeline... continuing to strengthen? Is it consistent? Have you now put more of that pipeline through? Where do we stand in that?

Ken, I mean, I think what you should have heard from us today is that we have a sales target that we talked about in January. We're standing by that sales target. That's significantly up from last year, which was significantly up from the year before. So, I mean, you get there because of the pipeline. So we're We're encouraged by our pipeline. Okay, great.

Thank you.

Thank you. And at this time, I would like to turn the call back over to Ron for closing remarks.

Well, thanks to all of you on the call for joining us.

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.

Thank you.