State Street Corporation

Good morning and welcome to State Street Corporation's first quarter 2025 earnings conference call and webcast. Today's call will be hosted by Elizabeth Lynn, 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 .statestreet.com. This conference call is also being recorded for replay. State Street's conference call is copyrighted and all rights are reserved. This call may not be recorded for rebroadcast or distribution in whole or in part without the expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street website. Now I would like to hand the call over to Elizabeth Lynn.

Good morning and thank you all for joining us on our call today. Our CEO Ron O'Hanley will speak first. Then Mark Keating, our interim CFO, will take you through our first quarter 2025 earnings presentation, which is available for download on the investor relations section of our website .statestreet.com. Afterward, we'll be happy to take questions. 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 gap. Reconciliation of these non gap measures to the most directly comparable gap 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 of 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 should change. With that, let me turn it over to Ron.

Thank you, Liz and good morning everyone. At present, investors are contending with notable uncertainty. While much attention is focused on US trade policy, uncertainty is also arisen around other topics such as taxes, geopolitics, interest rates, deficits and deregulation. This wide range of uncertainties, some negative and others positive, is introduced significant volatility into global financial markets and investor sentiment. During times such as these, our purpose to create better outcomes for the world's investors and the people they serve is even more relevant. Our financial strength combined with our deep investment services, markets, software and asset management capabilities uniquely positions us to serve as our client's essential partner. Throughout its 230 year plus history, State Street has supported both clients and financial markets for many periods of uncertainty. By focusing on those things that we can control and preparing for those that we can't, State Street has developed a track record of financial and operational resilience and adaptability, which has enabled State Street and our clients to navigate through difficult periods. I believe as we progress through the current environment, we will strengthen our position with clients even further. Turning to slide two of our investor presentation, I will cover our first quarter highlights before Mark takes you through the quarter in more detail. During the turbulence experienced in financial, despite the turbulence experienced in financial markets in March, we delivered growth, solid financial performance and good business momentum in Q1. Year over year, fee revenue increased by 6%, while total revenue rose by a healthy 5%. We achieved both positive fee and total operating leverage, resulting in year over year margin expansion, excluding notable items, with State Street's pre-tax margin reaching 30% excluding seasonal expenses. Supported by capital return, EPS reached 204 as compared to 137 in Q1 last year, which included the impact of an FDIC special assessment, excluding notable items, year over year earnings per share growth was a very strong 21%. Turning to business performance, we generated new asset servicing AUCA wins of $182 billion within investment services in the first quarter. New servicing fee revenue wins totaled $55 million, with the majority coming from back office mandates in line with our strategic gain. We recorded one new State Street alpha mandate, demonstrating continued momentum in this unique value proposition. While the current environment presents some uncertainty, our existing pipeline and investment services is robust, and I am confident in our platform and the improvements we have made to our sales effectiveness. As a result, we are maintaining our goal of $350-400 million in new servicing fee revenue wins this year, while also being mindful of the potential for variability in the current environment. We continue to make significant strategic progress and growth in our investment management franchise, resulting from our focus on broadening global advisors product and distribution capabilities. This has better equipped GA to capitalize on growth opportunities. Management fees increased by 10% year over year. You once saw net outflows driven by an anticipated single client event within the institutional business. At the same time, the quarter was marked by a number of significant accomplishments. For example, the importance of our strategic focus on low cost ETFs is underscored by the fact that half of all ETF industry flows were directed towards the segment in Q1. Our SPDR US low cost ETF suite continued to expand its market share in this fast growing segment, capturing new flows in Q1 at a rate more than twice our industry AUM market share, with our low cost ETF AUM reaching a record $256 billion at quarter end. Importantly, we expanded share in the US low cost fixed income segment. Further, we saw strong ETF flows in EMEA, while the commodities ETF segment gained market share, benefiting from market volatility in our industry leading gold ETFs, which exceeded $100 billion of AUM for the first time. GA has a history of employing strategic partnerships to open new avenues for future growth. In Q1, we completed several important strategic growth initiatives, including the launch of the innovative ETFs leveraging our partnerships with both Apollo Global Management and Bridgewater Associates. We also announced the expansion of our partnership with the Saudi Arabia Public Investment Fund through the launch of the first Saudi Arabia fixed income USITS ETF in Europe. Finally, GA recently announced a strategic investment in partnership with Ethic, a leading technology provider that distinctively empowers wealth advisors to build tailored client portfolios at scale. This partnership will enable investment advisors to access our model portfolios and spider ETFs through Ethics platform, reinforcing our commitment to expanding investor access to our investment capabilities and strengthening our intermediary franchise. Turning to our markets franchise as a leading provider of trading research and lending solutions coupled with innovative platforms, financing and portfolio solutions. Our markets franchise is well equipped to support clients through this volatile period with deep liquidity and trading expertise, while also providing important diversification to our revenue profile. In Q1, FX trading services and securities finance revenues both grew strongly year over year, supported by notably higher FX client volumes and average assets on loans, which increased 14% and 19% respectively, positioning us well for future growth. Our balance sheet position is robust, providing us with a strong foundation to weather the current market environment. Time and again, our resilient balance sheet has been a proven stabilizing force for our clients and markets during periods of stress, such as in 2020 and early 23. In the first quarter, our strong capital position enabled us to return 320 million to shareholders for common share repurchases and dividends, while we also built upon our already strong liquidity position. Looking forward, we will continue to support our clients with our balance sheet while also returning significant capital to our shareholders as planned, subject to market conditions and other influencing factors. Turning to expenses, we tightly manage costs in the first quarter. Year over year, expenses increased by just 3%, excluding notable items, contributing to the strong fee and total operating leverage we delivered in Q1. We have established a track record of consistent expense discipline in recent years. As outlined in January, we have a comprehensive book of work underway focused on delivering significant new recurring productivity savings this year. As you would expect, we are well prepared as we look ahead with a detailed plan for a broad range of scenarios. We are laser focused on controlling expenses tightly and calibrating them in line with the revenue environment while also continuing to make client and capabilities investments consistent with our focus on our long term strategic priorities. Finally, I would like to provide an update on our search for a permanent CFO. The process is advanced and we expect to be in a position to make an announcement in the near term. To conclude my prepared remarks, we had a strong start to the year in Q1. However, the operating environment has changed dramatically since the end of the first quarter. As a result, the economy, financial markets and the world's investors are navigating for a period of uncertainty. Despite the hurdles this environment may present, we have strong conviction in our strategy and in our ability to serve our clients well, underpinned by our distinctive value proposition and financial strength. We are focused on being agile in the current environment and I firmly believe that we have the right strategy to deliver solid financial returns in both the near and long term for our shareholders. With that, let me hand the call over to Mark, who will take you through the quarter in more detail.

Thank you, Ron. Good morning, everyone. I'll begin my review of our first quarter financial results on slide three of the presentation. For the first quarter, we reported EPS of $2.04 with year over year EPS growth of 21%, excluding prior period notable items. Looking at results for the quarter, we demonstrated solid execution across the franchise and a strong start to the year with broad based fee revenue growth of 6% year over year. Our strong fee revenue performance combined with stable NII and well controlled expense growth of 3%, excluding notable items, enabled us to generate over 300 basis points of fee operating leverage and over 180 basis points of total operating leverage this quarter. While we've seen uncertainty weigh on global equity markets in recent weeks, our first quarter results demonstrate the strength of our business with a nearly two percentage point expansion of our pre-tax margin year over year, excluding notable items and an ROTC of over 16% for the quarter. Turning now to slide four. Period end AUCA and AUM increased 6% and 9% year over year respectively. The increases in both metrics reflect higher market levels as well as positive flows. Moving on to some of the key market indicators that impact our business. Though we saw rising economic uncertainty in the latter part of the quarter, daily average global equity market levels were roughly flat while daily average FX volatility declined slightly relative to the prior quarter. Turning to slide five. Servicing fees increased 4% year over year driven by higher average market levels, net new business and improved client activity, partially offset by normal pricing headwinds. The previously disclosed client transition was a headwind of just under one percentage point to year over year growth in one queue. Consistent execution against our growth objectives has been a key focus area for us and we were pleased with the solid business momentum across investment services in the first quarter. As Ron mentioned earlier, we reported one alpha mandate win with nearly half of the AUCA wins driven by alpha. New servicing fee wins were 55 million in one queue and nearly 370 million over the past four quarters. Importantly, the vast majority of these first quarter wins were in the back office, consistent with our goal of prioritizing our sales mix towards faster time to revenue products. I would also add that the pace of quarterly installations went as planned in one queue. Looking ahead to the second quarter, we are cognizant of the potential for variability that has been introduced into the operating environment. That said, our pipeline is healthy and we expect to see very good sales momentum in two queue as we continue to actively pursue opportunities in key regions as well as in strategically important growth areas such as private markets. And as Ron noted, we continue to target 350 to 400 million in new servicing fee revenue wins this year. Moving to slide six, management fees increased 10% year over year, largely reflecting higher average market levels and the benefit of prior period net inflows. For the quarter, net inflows, net outflows totaled 13 billion and were primarily driven by an anticipated client transition within our institutional business. ETF inflows were muted in one queue as market uncertainty led to outflows in our institutional oriented spy product. That said, global advisors continue to demonstrate solid underlying momentum within its ETF business. In one queue, we launched two ETFs leveraging our strategic partnerships with Apollo Global Management and Bridgewater Associates. And we generated strong inflows and market share gains in key product segments such as our US low cost offering. In addition, our global ETF surpassed 100 billion of AUM in the quarter as investors contended with rising global uncertainty. Taken together, we were pleased with the strong performance of our investment management business in the quarter, which generated a pre-tax margin of approximately 28%. Including seasonal compensation expense. Turning now to slide seven, FX trading revenue increased 9% year over year as the evolving geopolitical climate drove FX volatility higher, resulting in increased client volumes across most of our trading platforms. Securities finance revenues increased 19% year over year as continued client engagement resulted in higher balances and solid revenue performance in prime services. Moving on to slide eight. Software and processing fees increased 9% year over year in the first quarter, primarily driven by higher front office software and data revenue associated with Charles River. During the quarter, front office software continued to demonstrate solid growth, increasing 10% year over year to 158 million. With our software enabled and professional services revenues up 7%. The front office software market continues to represent an important growth area for State Street, strengthening client relationships and providing us with a valuable source of consistent key revenue. In the first quarter, annual recurring revenue grew by approximately 15% year over year to 373 million, driven by over 25 SaaS client conversions and implementations. Moving to slide nine. NII was relatively flat compared to the year ago period at 714 million as higher investment security yields and continued robust loan growth were offset by lower short end rates and changes in deposit mix. On a sequential basis, NII decreased 5%, primarily reflecting changes in deposit mix, lower short end rates and lower day count with two fewer days in the quarter. These factors, along with higher deposit balances to support business growth and to further enhance our already secure strong liquidity levels resulted in some net interest margin compression in one queue. As detailed on the right of the slide, average total deposits were up 11% year over year and 3% sequentially, marking the sixth consecutive quarter of growth and balances. As expected, non-interest bearing deposits moderated from the seasonally high levels observed in four queue. As we look ahead, we remain dedicated to supporting our clients during times of macroeconomic uncertainty and our strong, highly liquid balance sheet provides us with a solid foundation to meet their needs. Turning to slide 10. We remain acutely focused on continuing to manage our expense base with year over year expense growth limited to 3% in the first quarter, excluding notable items. At the same time, we continue to make targeted investments in technology and infrastructure, bolstering resiliency and product capabilities to ensure that we can meet the evolving needs of our clients. Continually driving productivity and other savings is what enables us to fund these investments. For the quarter, we generated savings of roughly 90 million and we continue to target 500 million of savings this year. Our ability to effectively manage our expense base has developed over a number of years and is ingrained in our culture. As a result, over time, we have been able to drive meaningful and consistent productivity savings while self-funding investments in our business. In an uncertain operating environment such as the one today, we are intensely focused on calibrating our expense base to a range of scenarios. Importantly, as we look ahead, we have a number of different levers to achieve that goal. Moving to slide 11. Our capital and liquidity levels remain strong and well in excess of regulatory minimums. As of quarter end, our standardized CET1 ratio of 11% was up approximately 10 basis points quarter over quarter. RWAs increased roughly 4 billion sequentially, in part driven by higher period end securities finance RWA along with increased loan balances. Our bank LCR was a robust 139% up from 134% in 4Q as we prudently managed our liquidity levels in a dynamic market environment. In the quarter, we were pleased to return 320 million to shareholders consisting of 100 million of common share repurchases.