State Street Corporation

Good morning and welcome to State Street Corporation's fourth quarter and full year 2024 earnings conference call and webcast. Today's call will be hosted by Elizabeth Lin, Head of Investor Relations at State Street. We ask that you please hold all questions until the completion of the formal remarks, at which time you will be given instructions for the question and answer session. 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 hand the call over to elizabeth lynn good morning and thank you all for joining us with me today are state streets chief executive officer ron o'hannelly chief financial officer eric abeloff an investment services cfo and as we announced this morning incoming interim cfo mark keating on today's call ron will provide an overview on 2024 performance and milestones achieved Eric will then walk through the fourth quarter and full year 2024 earnings results in detail, and both Eric and Mark will provide our 2025 outlook, after which we'll be happy to take questions. Today's presentation is available on the investor relations section of our website, investors.statestreet.com. 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 presentation. In addition, today's call will contain forward-looking statements. Actual results may differ materially from those statements due to a variety of important factors, such as those referenced in our discussion today and in our SEC filings, including the risk factor section 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. With that, let me turn it over to Ron.

Thank you, Liz, and good morning, everyone. Before we begin, I want to acknowledge the terrible wildfires devastating parts of Los Angeles. Our thoughts are with all those impacted by this terrible event, including our colleagues and clients, as well as the brave first responders working to protect the impacted communities. Turning now to our quarterly investor presentation, our fourth quarter results represent a strong close to a strong year for State Street. We entered 2024 with a clear set of strategic priorities aimed at driving revenue growth, improving our sales performance, strengthening our market position, and enhancing our operating model. We executed well against these objectives, enabling us to serve our clients and deliver strong financial performance and continued business momentum for our shareholders. These results included both positive fee and full operating leverage, pre-tax margin expansion, and higher earnings growth, illustrating the power of our franchise and the effectiveness of our strategy. The foundation for our strong business performance in 2024 was laid in prior years, building upon the significant strategic investments we have made in our capabilities and our client value proposition to be our client's essential partner and lead with service excellence. These actions have positioned State Street to compete better and win. Turning to slide two and beginning with our financial highlights, I am particularly pleased with our improved revenue performance. Full year fee and total revenue increased 7% and 9% respectively. Excluding notable items, fee revenue, NII, and total revenue each increased by a solid 6% year over year in 2024. Year over year, each revenue line contributed positively, including double-digit growth in management fees, FX trading services, and front office software and data revenues, while we also delivered a second consecutive year of record NII. Full-year EPS was 8.21 as compared to 5.58 in 2023. Excluding notable items, EPS growth was up 13% year over year, Pre-tax marks expanded by more than 100 basis points, while full-year return on average tangible common equity was a robust 19%. Turning to our strong business momentum in 2024, our key business performance indicator, including wins, clearly illustrate the effectiveness of our strategy in positioning State Street to effectively serve our clients, compete better, and gain share. 2024 was an important year of business growth and significantly improved sales performance, which sets us up well as we look forward to drive further fee revenue growth in 2025 and beyond. In investment services, we generated very strong AUCA wins of over $2.3 trillion in 2024, including $1.1 trillion of wins in Q4. Full year new servicing fee revenue wins were $377 million, including 154 million in Q4. The strength of our sales performance in the fourth quarter was underpinned by a large strategic and multi-regional win with an APAC asset owner. With the strong fourth quarter sales performance, we achieved our goal of 350 to 400 million of new servicing fee revenue wins in 2024. State Street Alpha brings together the full depth and breadth of our servicing and software solutions and is a clear competitive advantage for State Street's investment services business. Our strong full-year sales performance in 2024 demonstrates the strength of this compelling value proposition. As a tangible proof point of the more than $2.3 trillion of new AUCA wins in 2024, Alpha accounted for approximately 50% of those wins. All told, we won seven new Alpha mandates in 2024, including two new mandates in Q4, achieving our goal of six to eight new alpha clients last year. Our investment management franchise had another strong year of strategic progress, with both 4Q and full-year management fees achieving record levels. We continue to strategically broaden Global Advisor's product and distribution capabilities, which has positioned the business for future growth and from which we are already realizing the early benefits of these strategic actions. We generated 146 billion of net new assets in 2024, including 64 billion in 4Q. This equates to over 3% organic AUM growth for the second year in a row, well above the 2% target we laid out early last year. ETF inflows were a record in 2024, with record flows in our strategically important U.S. low-cost ETF suite, as well as in the EMEA region, gaining market share in both. We also had the highest number of ETF launches in Global Advisors history last year and announced innovative partnerships with a number of market leaders aimed at leveraging our SPDR franchise to expand investor access to new investment opportunities. In addition, Global Advisors made a host of key strategic investments, most notably in InvestNet, the leading provider of integrated technology, data, and wealth solutions. This investment consistent with State Street's wealth services strategy, will enhance our access to the independent wealth advisory and high net worth distribution channels, driving future growth. Building on a record year of inflows in 2023, our cash business generated an aggregate $32 billion of full-year inflows, while our institutional business also has had a positive year of inflows. With U.S. defined contribution again continuing to drive inflows, with $28 billion in 2024. Turning to our markets and financing franchise, despite lower daily average FX volatility in 2024, FX trading services generated double-digit revenue growth supported by strong and growing client volumes. Turning to our balance sheet, our markets and financing franchise delivered strong loan growth in support of our clients. contributing to record NII performance in 2024 and supporting fee growth in private market servicing. Our strong balance sheet position enabled us to return $2.2 billion of capital to shareholders last year, including common share repurchases and a 10% increase in our quarterly common dividend per share. As we look ahead, we remain focused on consistently returning capital to our shareholders and are targeting a payout of about 80% of earnings in 2025, subject to market conditions and other factors. Finally, 2024 was also an important year for our transformation, as we continued to focus on core operating model improvements to enhance our client and colleague experience and generate increased productivity. We made a number of key investments in operational simplification, automation, and technology modernization. These actions contributed to the approximately $500 million of year-over-year productivity savings that we achieved in 2024, in line with our target. The majority of these savings are recurring and will enable us to continue to increase our investments in alpha, custody, private markets, and asset management distribution to drive the sales and momentum to power our next wave of growth. Further, excluding notable items, These transformation efforts supported the approximately 200 basis points of both positive fee and total operating leverage in 2024, even as underlying expenses increased by 4% year-over-year, driven in part by higher revenue-related costs. In summary, our fourth quarter results represent a strong close to a strong and important year for State Street. Good execution against a clear set of strategic priorities enabled us to support our clients better and deliver strong financial results. Our strategic actions have positioned State Street to compete better and win, as evidenced by the accelerating business momentum we generated from start to finish in 2024. As you know, last October, we announced that our CFO of eight years, Eric Avaloff, will be departing State Street in February. At that time, we launched a formal search process to identify a successor, which is progressing very well and as planned. This morning, we announced that Mark Heating, EVP and CFO for Investment Services, will serve as our interim CFO following Eric's departure next month, while our search for a permanent CFO continues. Mark is a 30-year State Street Finance veteran who has worked in almost every area of our business across three continents. As the executive finance leader within our largest segment, Mark has been instrumental in supporting our transformation efforts driving revenue growth initiatives, and he brings deep operational expertise, a partnership mindset, and team-building focus. Once again, I want to thank Eric for his leadership and wish him well in his new role. With that, let me hand the call over to Eric, who will take you through the quarter in more detail.

Thank you, Ron. Before I begin my review of our financial results, let me briefly discuss some of the notable items we recognize in the fourth quarter on the right panel of slide three. Fourth quarter notable items collectively totaled $58 million pre-tax or 14 cents a share and were largely driven by an acceleration of expenses associated with certain prior period deferred incentive compensation awards to allow our compensation program to be more competitive with peer practices. Notable items this quarter also included an FDIC special assessment release and some other small items. Our fourth quarter results are the culmination of the important work we accomplished throughout 2024 and reflect broad-based fee growth across the entire franchise, up 13%, higher NII, up 10%, and continued capital returns. As detailed on the left panel of the slide and excluding notable items, In the fourth quarter, we also achieved a pre-tax margin of about 30% and an ROE of over 13%, while year-on-year EPS growth was a robust 27%. On a full year 2024 basis and excluding notable items, we were pleased to deliver strong revenue growth of 6%, both positive fee and total operating leverage of about 200 basis points each. and a pre-tax margin of approximately 28%, contributing to strong UPS growth of 13% and an ROE of roughly 12% for the year. Our 2024 results demonstrate the strong momentum we are seeing across our various businesses and provide a strong step off as we move into 2025. Turning now to slide four, as detailed on the left panel of the slide, period end AUCA and AUM both increased nicely year-on-year in the fourth quarter, supported by the market tailwinds and positive client flows. On the right panel of the slide, we detail some of the key market indicators that impact our business. Most of the market drivers, global equity markets, bond markets, FX volatility, and industry flows are up year-on-year, which we have successfully monetized in the form of revenue growth this quarter. Turning to slide five, we saw good momentum continue in our investment services business this quarter with strong sales and strong installations. On a year-on-year basis, servicing fees increased 6%. The quarterly performance reflected higher average market levels and net new business, partially offset by pricing headwinds, lower client activity, and a previously disclosed client transition. The impact of that previously disclosed client transition was a headwind of roughly one percentage point to year-on-year growth, while lower client activity, including the asset mix shift into cash, was still a slight headwind to the year-on-year growth, though now abating as clients put more money to work. As Ron mentioned, we were pleased with the meaningful progress we achieved in our investment services business during 2024. With our strong performance in 4Q, we comfortably met our annual servicing fee sales goal of $350 to $400 million in 2024. In addition, our strategically important private markets business, which continues to be a key growth driver, increased 15% year-on-year in 4Q and represents approximately 9% of full-year 2024 servicing fees. Taken together, we are encouraged by the strategic progress we are making in our investment services business. Moving to slide six, in the fourth quarter, management fees increased 20% year-on-year to a record $576 million, primarily reflecting higher average market levels and quarterly net inflows of $64 billion. As Ron mentioned, in 2024, we delivered organic AUM growth of over 3% for a second year in a row as we continue to drive incremental net inflows through the expansion of our distribution and product capabilities. Product innovation continues to be a strategically important growth driver for global advisors. In the fourth quarter, we launched three new ETFs, bringing our full year total to 24 new launches. Efforts such as these broaden our product capabilities and have contributed to the strong organic AUM growth we have achieved. So taken together, we are quite pleased with the strong performance of our investment management business in the quarter, which generated a pre-tax margin of approximately 32%. Turning now to slide seven, fourth quarter FX trading revenues increased 17% year-on-year as investor confidence and increased FX volatility drove double-digit increases in client volumes across most of our trading venues. Securities finance revenues increased 22% year-on-year in 4Q, primarily driven by strong prime services performance, as we put another $2 billion of risk-weighted assets to work to support our clients. Agency lending volumes grew 25% year-on-year in 4Q as we continued to engage with our clients, even though U.S. equity specials activity and spreads remained muted. Moving on to software and processing fees, fourth quarter revenues were up 9% year-on-year, mainly driven by higher front office software and data revenue associated with CRD, which is described in greater detail on the following slide. Turning to slide eight now, front office software revenues increased 10% year on year in 4Q with our software enabled and professional services revenues up a robust 25%. We continue to have very solid momentum in the front office as evidenced by the record quarterly new bookings of 48 million in the quarter and over 70 million for the year. As Ron noted, we reported two additional alpha mandates and wins in the quarter, bringing our full year wins to seven. Importantly, all seven of these mandates either included the back office as a component of the mandate or were built upon an existing back office relationship, consistent with our goal of prioritizing our sales mix towards faster time to revenue products. State Street Alpha continues to be an important differentiator for our business, and in 2024, a substantial portion of servicing fee and AUCA wins were driven by Alpha. Moving to slide 9, 4Q NII increased 10% year on year to $749 million as higher investment portfolio yields and higher loan growth more than offset continued deposit rotation. On a sequential basis, NII increased 4%, primarily driven by higher deposit balances, with average non-interest bearing deposits increasing $2 billion, as well as healthy loan growth. As detailed on the right panel of the slide, we benefit benefited from very strong average deposit growth this quarter as we saw more cash in the banking system and higher assets under custody, as well as typical fourth quarter seasonality. In addition, our continued focus on client engagement also helped to contribute to this strong growth consistent with prior quarters. Average total deposits were up 15% year-on-year and 5% quarter-on-quarter. And 4Q marked our fifth consecutive quarter of sequential growth in average deposits. Our strong deposit performance, together with our targeted management actions throughout 2024, were the principal drivers of the improvement in our NII performance relative to our expectations at the beginning of last year. I'd also note that we modestly shortened our investment portfolio duration in the early part of the quarter in anticipation of rising long-end rates. and this mitigated the AOCI impact on our capital, which I'll come back to shortly. Turning to slide 10, as we calibrated our expense base to the more constructive revenue environment in the fourth quarter, we generated positive operating leverage of 4 percentage points, excluding noble items. And in 4Q, revenue-related costs, including performance-based incentive compensation, represented 3 percentage points of the 8% 8% year-on-year increase in total expenses, excluding notable items. Employee benefits contributed to another percentage point. As we continue to invest in our business for future growth, we remain intensely focused on maintaining expense discipline. Outside of performance-based incentive compensation and employee benefits expenses, our fourth quarter compensation expense was roughly flat year over year. And as detailed on the bottom left of the slide, our pro forma headcount actually fell by an additional 4% year on year as we continue to benefit from our ongoing organizational simplification and process improvement initiatives. We continue to drive sustained productivity improvements through the transformation of our operating model and other savings initiatives in 4Q, totaling approximately $500 million of productivity savings in 2024, thereby meeting the target we set at the beginning of the year. This allowed us to self-fund roughly $375 million in incremental business and technology investments, including those that will drive further revenue growth. Moving to slide 11, our capital levels remain well above regulatory minimums, allowing us to put our balance sheet to work in support of our clients. As of quarter end, our standardized set one ratio of 10.9% was down approximately 70 basis points quarter on quarter. RWA's increase, roughly $5 billion sequentially, largely due to the impact of the appreciating US dollar on our FX trading business. In addition, we saw good volumes and utilization in our lending and prime services businesses, which also contributed to the RWA increase. We were pleased to deliver another quarter of increased capital return with common share repurchases of $550 million, up from $450 million in the prior quarter. Part of this came from our strong earnings generation and part from our active AOCI management, which I mentioned earlier. In total, we returned $770 million of capital to our shareholders in the fourth quarter, equivalent to a total payout ratio of 106%. And for the full year, we returned $2.2 billion of capital to shareholders for a total payout ratio of 87%. Turning to slide 12, let me first share some of the macro assumptions underlying our current view for the full year. We expect global equity markets to be up 5% point to point in 2025, which equates to the daily average being up approximately 8% year on year. Our interest rate outlook for 2025 broadly aligns with the forward curve as of the end of 2024, which I would note continues to move. In addition, we expect to see a modest increase in volatility. With that as an economic backdrop, I'd like to turn the call over to Mark to walk through expectations for 2025.

Thank you Eric and Ron for the introduction and good morning everyone. It's a pleasure to be on the call today. I am excited by the opportunity ahead of us at State Street as we aim to build upon the strong results we achieved in 2024. Now turning back to slide 12. Based on the macro assumptions that Eric laid out for the full year and excluding notable items, we currently expect fee revenue will be up approximately three to five percent. This includes a headwind of nearly one percentage point to servicing fee revenue from the previously disclosed client transition weighted toward the second half of the year. Turning to NII, based on our current assumptions, we expect NII to be roughly flat for the full with a range from up low single digits to down by a similar amount in percentage terms. Of course, the path of NII is subject to global monetary policy and deposit mix and levels, which are difficult to predict. We currently expect that the 2025 expense growth rate will moderate relative to 2024, with expenses excluding notable items expected to be up approximately 2 to 3%. Importantly, we expect continued productivity savings will enable us to once again self fund incremental growth investments in our business this year. One final point with the outlook for a stronger US dollar, we expect currency translation to have an unfavorable impact on fee revenues, but a favorable impact on expenses worth roughly one percentage point each on fee revenues and expenses. So stepping back. Given our positive outlook for fee revenue growth together with continued expense discipline, we currently expect to achieve another year of positive fee operating leverage, excluding notable items. I would also note that we see a path to delivering positive total operating leverage, excluding notable items, in 2025, contingent mainly upon NII coming in roughly flat or slightly better, which is market dependent, and we will have more to say as we move through the year. Lastly, we expect an effective tax rate at or just above 22% for the full year. And with that, let me hand the call back to Eric.

Thank you, Mark. As this is my final earnings call, I want to take a moment once again to say how much I've enjoyed my eight years at State Street and that it's been a privilege to work with Ron, the leadership team, and the thousands of fellow employees that I've had the pleasure of collaborating with. At this point, I'm leaving things in the good hands of Mark and the whole finance team. And finally, I'd like to thank all of our analysts and shareholders. I've appreciated your engagement, your candor, and your support over the past eight years. And with that, let me hand the call back to Ron.

Thank you, Eric. As we look ahead to 2025, we are intensely focused on a set of strategic priorities to deliver for our clients, shareholders, and people. These are, one, driving revenue growth by sustaining the solid broad-based growth and momentum we are seeing across our businesses. Two, further advancing operational excellence to deliver enhanced productivity and client service. And three, continuing to develop an even higher performance culture, employee experience, and destination for talent. To conclude, we are encouraged by the strategic and financial progress we made in 2024 and we look forward to continuing that progress as we move into 2025. Operator, we can now open the call for questions.

Thank you. If you would like to ask the question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star 1 to ask the question And we'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from the line of Alex Blossom from Goldman Sachs. Your line is open.

Good morning, everybody. Thank you for the question. I was hoping we could start with a question around service and fee growth outlook. Your slide implies that you expect to see some growth there in 2025, given favorable market and organic growth. The favorable market point makes total sense, pretty reasonable, and organic growth feels right as well, given the momentum you see in the business. But maybe what are some of the other assumptions in terms of client retention or attrition rates? Pricing has always been a factor as well, so maybe just a little more granularity there on that, as well as what are your sales growth expectations for 2025 within servicing?

Thanks, Alex. This is Mark Keating. I'll take that and nice to meet you. Look forward to working with you. When I think about the momentum in our servicing fee business, I think it's important maybe if we go back a little bit and think through where we've come from, because this really has been a multiple year journey in how we're building our servicing fee business. About a year and a half ago, we laid out a plan on how we're going to power our sustainable growth in our servicing fee business. At that point, we knew we needed to perform better in our kind of core custody and servicing business. Our nearing history at that point in time, if you recall, and I think we've talked about this a couple of times, we had been doing sales of approximately $140 to $160 million a year in 2019 and 2020. We then took a step up in 2021 and 2022 to around $250 to $260 million a And at that point, we set a goal for ourselves, which is the target that we've been talking to and that you know now, which is around the 350 to 400 million range. We did 300 last year, and today we're announcing that we did nearly 380 million. And it's important to note, too, of that 380 million, about 85% of that is related to the back office, which, as you all know, brings NII, brings FX, brings securities finance, and a lot of other products that we can cross-sell. So when you think about it in that way, as I just laid out, we've really increased our servicing fee sales about 45% from 2022 and over 250% from 2020. And we did that by restructuring our sales teams, our RM teams, realigning incentives, focusing on service excellence, and importantly, as we've talked about, investing in our business, products and services, features and functionality. Eric mentioned our growth in private markets. I think it's a good example of that. And so we expect that to be the range right now for our business. And as we target that, the team knows that is the level that we need to achieve in order to grow the business. And when you talk about things like revenue retention, you mentioned, we tend to talk about our business around 97%. That's a target we've set for ourselves. That's consistent. And then also we tend to target about 2% of fee compression, which has been consistent. So that level of 350 to 400, Paul Cecala, Is in the equation that we need in order to provide sustainable growth. Paul Cecala, You know, one other thing I would you know one other way to think about the sustainability of our fee revenue growth servicing fees is to also take a look at the backlog. Paul Cecala, On that we've been now disclosing over the last several quarters, which is roughly 350 million at the end of 2024 if you go back and we've disclosed this you know that figure was roughly 200 million. at the end of Q3 2023. So that's an increase of nearly 75%, which I think is another good proof point, because that represents future revenue to come on our platform. And we expect that that needs to be in that range as we go forward to power sustainable growth. So those are the things that I think about in terms of gauging our ability to continue to drive our fee revenue growth. We laid out a plan. We reported on that plan. We continue to measure ourselves against it, and we are delivering on it. So hopefully that's a helpful, some helpful context.

Yep. No, that's great. Very helpful framework. I appreciate that. Yep. Go ahead, Ron.

Alex, what I would add to what Mark said is kind of why do we believe that this is sustainable? Because there were three things that enabled what Mark described. One was an intense focus on improving service quality, which had a lot to do with the technology investments that we we're starting to make back then. And now we've, uh, have come to fruition. We've got a few more that we want to make. Second was enhancing capabilities in areas such as core custody, private markets, um, as well as alpha broadly. And we've talked about alpha being a back office and servicing fee gathering machine. And then thirdly was just in a raw sales capabilities. There's been a significant, uh, buildup of those capabilities change out of some people. So that stuff is all in place and, therefore, gives us a lot of confidence as we look forward.

Great. Very helpful. Thank you both. My follow-up is around capital management. And, Ron, I heard you say 80% or 80% plus for 2025 payout. But given the fact that tier one leverage, I think, slipped a little bit at the end of the quarter, given the higher balance sheet, and the client activity component also seems to be a bit more out.

So in aggregate for the year, 80% return to our shareholders, a combination of dividends and buybacks. There is a seasonality to this. I mean, you saw what it was last year and probably should expect to see something similar this year. So starting out modestly and then continuing to progress.

Okay, great. And Mark, nice to meet you as well. And Eric, best of luck. All the best wishes.

Thank you.

Operator, we can take the next question.