Release Date: July 16, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- State Street Corporation (STT, Financial) reported a 3% year-over-year revenue growth, driven by higher net interest income and fee revenues.
- The company achieved a return on equity of nearly 12% for the quarter.
- Management fees increased by 11% year over year, with assets under management (AUM) reaching a record $4.4 trillion.
- State Street Corporation (STT) announced a planned 10% increase in its quarterly common stock dividend, subject to Board approval.
- The company successfully consolidated its second operations joint venture in India, which is expected to unlock further productivity savings.
Negative Points
- Second quarter EPS was slightly lower at $2.15 compared to $2.17 in the year-ago period.
- Servicing fees declined 2% year on year due to pricing headwinds and lower client activity.
- The pace of quarterly installations tracked below expectations in the first and second quarters.
- Global Advisors experienced aggregate net outflows in the quarter, driven by client rebalancing.
- The financial market context was mixed, with fixed income markets struggling and gains in equity markets narrowly concentrated in a few names.
Q & A Highlights
Q: Question on Global Advisors. You had some institutional led outflows in the last two quarters despite the strong markets. I'm just curious how much of that is a function of rebalancing. And are we supposed to expect more going forward given the strong equity markets. And are you seeing similar trends in your custody base?
A: Glenn, it's Ron. You have it correct there. The most of it, the vast majority of it is around client rebalancing. In one case, an extremely large client that's rebalancing away from certain asset classes. So it's idiosyncratic. We don't expect it to continue. And we feel very comfortable with the trajectory that Global Advisors is on, both in the institutional business and in the ETF business.
Q: There has been several articles over the last year or so talking about a certain European bank potentially selling their servicing platform. You've been linked to it. As you said, you've been great in consolidating things in the past. So I'm not asking a comment on that, I am asking, as some shareholders just prefer buybacks, which you might think is near term, I'm curious on your thoughts conceptually on how you approach these things, if there were any lessons learned from the Brown Brothers Harriman saga and just conceptually how you're thinking about any consolidation opportunities in services.
A: Yes. So Glenn, I mean, we've been pretty consistent about this. We have a very, very strong market position. Now some of that in the past has been built by M&A., if you go back to the 2000s. But if you think about where we are now, it's very strong. And the vast majority of our activity is around organic build-out of our business. Some of that just in terms of focusing on clients within geographies and some of that focused on building capabilities and extending them to other geographies. That is by far what our focus is. To the extent -- and I've said this in the past, I mean, M&A is not a strategy, but if it can help us to effectively implement our strategy and it is superior to -- it passes the test of being superior to a return of capital to shareholders, then we'll consider it. But our focus is on building out organically, returning capital to shareholders at a reasonable pace, and continuing to excel at what we do.
Q: So great result on the NII, and we heard the updated outlook for slightly up this year now. Eric, just wondering if that would still imply a lower second half versus this really strong second quarter? And I know there's a lot of uncertainty still out there in the environment. So can you just help us think through what are you contemplating in terms of how deposits track from here? And what caveats should we continue to think in mind if, in fact, there is still a second half that comes off of the second quarter real strength? Thanks.
A: Ken, it's Eric. As you said, we're pleased with the second quarter results on NII. Some of that is the interest rate environment. But good portion of that is the management actions we've been taking in terms of engaging with our clients on deposits and really being there for them on both sides of the balance sheet as we lend and support their growth as well. This quarter was particularly strong. We had a nice tailwind from long-term rates during the quarter, that helped. You saw us build out our investment portfolio a little more. Deposits ticked up second half of June and towards the end, especially in noninterest-bearing. But what I find pleasing is that deposits are coming in stronger across the, what I'll call, the pricing stack, the transactional deposits, the exception price deposits and the initiatives. So across the spectrum. And that's really a testament to the engagement that we've had with our clients to be there. I think as we look forward into the third quarter and fourth quarter, we still see some of the headwinds and tailwinds that we've talked about. Short-term rates seem like they will start to trend down. That will be a little bit of a headwind. Deposits, we're still seeing some of that rotation from noninterest-bearing to interest-bearing, now that is slowing. That rotated out about $2 billion this past quarter, and that's been less than the prior quarters, but that still continues and still a little bit of pricing and mix shift that we're seeing in the interest-bearing deposit base. So that, we see is just playing out through the end of the year, but at a more modest pace. The offset to that are mix of long-term rates, the lending that we continue to do, lending is up double digits, and that's been purposeful to support our clients and to support NII and then tactically adjusting the investment portfolio. And so it's the net of those that probably will come in with some erosion over the next couple of quarters. But we're seeing a place where deposits could come in at a nice and robust level on our balance sheet, lending continues. And so we're getting to a point where we're going to start to see, I think, an inflection of NII and a bottoming, which is nice. And we can see that over the next few quarters. Hard to tell exactly when, but with the headwinds and tailwinds kind of, I'll say, equalizing over time, it gives us a good basis to look forward.
Q: You mentioned that you think that the kind of core fees growth should get better from here. And I just wanted to ask you to deepen on that a little bit. I mean, I know that you mentioned the onboardings and such, but we still have that deconversion working against, and you mentioned the episodic stuff and the ETF stuff. But like I think that's really people are looking for on the increment. So is that what drives that incrementally better fee guide for the second half is that we're finally going to see like that servicing and management fee line start to show a better rate of change?
A: Yes. So there's -- I think you largely have it, but let me go a little bit deeper, Ken, because if you think about -- let's talk about core servicing fees, what really drives it. First is retention. Second is the amount and rate of onboarding. And then third is new business and sales, and then rinse and repeat. And our retention levels, which they -- we've talked about them before at the time and we're continuing to track well against them, even coming a little bit higher than what we had planned. Second, onboardings. As Eric noted, they have been slower than expected this year, but we see lots of visibility going forward to that increasing. We've got a big book there to onboard and that will start to onboard and should start to onboard in an accelerating rate. And then third is sales, and there's two things going on there. One, the amounts, we upped it in '23, we upped it again in '24. We're on track for that increased servicing fee sales target, but we also have disproportionate focus on traditional back-office fees, either stand-alone or if they're associated
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
