State Street(STT)2024-10-15 19:28Financial Data and Key Metrics - Q3 2024 EPS reached a record high of $2 26, up from $1 25 in the year-ago period, reflecting a 17% YoY growth excluding notable items [10] - Q3 ROE was strong at 12%, with a return on tangible common equity exceeding 19% [19] - Fee revenue grew 7% YoY, while total revenue increased 9% YoY, driving margin expansion [10] - Net interest income (NII) increased 16% YoY to $723 million, supported by higher investment security yields and loan growth [25] - Capital return in Q3 totaled $670 million, including $450 million in share repurchases, with a total payout ratio of nearly 100% [29] Business Line Performance - Investment Services: AUC/A wins in Q3 totaled $466 billion, with $84 million in new servicing fee revenue, the highest quarter this year [12] - Global Advisors: Record quarterly net flows of $100 billion and AUM of $4 7 trillion, with positive flows in cash, ETFs, and institutional businesses [14] - Markets: FX trading revenue increased 15% YoY, and securities finance revenue grew 13% YoY, driven by higher client volumes [23] - Software and Processing Fees: Front-office software revenues increased 12% YoY, with software-enabled and professional services revenues up 21% [24] Market Performance - Global equity and fixed income markets saw notable gains, but investors faced risk-off events such as fears of a US recession and geopolitical tensions [9] - State Street expanded market share in key product areas and geographies, including institutional money market funds and ETFs in the US and EMEA regions [14] Strategic Direction and Industry Competition - State Street Alpha platform continues to be a competitive advantage, securing two new mandates in Q3 and deepening existing client relationships [12][13] - The company launched 20 new ETFs, including three actively-managed digital asset-focused ETFs, and announced a partnership with Apollo Global Management to expand access to private markets [14][15] - State Street is focused on innovation in digital assets, private markets, and fixed income solutions to meet evolving investor needs [22] Management Commentary on Operating Environment and Outlook - The operating environment in Q3 was dynamic, with market volatility driven by risk-off events, but markets stabilized due to dovish central bank actions and improved US economic data [9] - Management expects full-year fee revenue growth to be at or slightly above the high end of the 4%-5% range, with NII growth also revised upward to 4%-5% [31][32] - The company remains committed to delivering positive fee and total operating leverage for the full year, excluding notable items [33] Other Important Information - CFO Eric Aboaf announced his departure, with a formal search process underway for his replacement [16] - State Street achieved $125 million in productivity savings in Q3, with a year-to-date total of $350 million, on track to meet the $500 million target for 2024 [27] Q&A Session Summary Question: NII Guidance and Portfolio Repositioning - The $80 million loss from portfolio repositioning will reverse within the next five quarters, benefiting NII [36] - Repositioning focused on lower-coupon securities in the treasury and international sovereign space, with a payback period of approximately five quarters [36] Question: Succession Planning - The Board has a succession plan in place for CEO Ron O'Hanley, with ongoing discussions about leadership transitions [43] Question: Repo Activity and NII Outlook - Repo activity contributed 10%-12% of NII, with a 1 percentage point increase in Q3 due to higher client volumes [46] - NII is expected to stabilize and grow over the next few quarters, supported by lending, repo activity, and deposit engagement [58] Question: Profitability and Pre-Tax Margin Aspirations - State Street aims for 4%-5% revenue growth and a pre-tax margin target of 30% in the medium term, with these goals deeply embedded in the company's culture and incentives [54][55] Question: Deposit Behavior Post-Rate Cut - Deposit levels remained stable post-rate cut, with no significant changes in mix or pricing [78] Question: Servicing Fee Backlog - Approximately half of the servicing fee backlog is expected to be installed in Q4 and throughout next year, with AUC/A backlog installation projected over the next few years [80] Question: New Business Wins and Geographic Distribution - $380 billion of the $466 billion AUC/A wins in Q3 came from the Alpha platform, with significant wins from both US and non-US clients [85] Question: M&A Appetite - State Street views M&A as a tool to accelerate or implement strategy more efficiently, but the focus remains on organic growth and capital return to shareholders [88]