Elizabeth Lynn:

Good morning, and thank you all for joining us. On our call today, our CEO, Ron O'Hanley will speak first; then, Eric Aboaf, our CFO, will take you through our second quarter 2024 earnings presentation, which is available for download on the Investor Relations section of our website, investors.statestreet.com. Afterwards, we will be happy to take questions. 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 presentation. 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 in our discussion today and in our SEC filings, including the Risk Factors 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 change. Now, let me turn it over to Ron.

Eric Aboaf:

Thank you, Ron, and good morning, everyone. Starting on Slide 3, we reported EPS of $2.15 for the quarter as compared to $2.17 in the second quarter a year ago. EPS was slightly lower year-on-year, but would have been positive growth were it not for an $80 million reserve release last year. As Ron noted, we delivered 3% revenue growth year-over-year reflecting both higher net interest income up 6% as well as higher fee revenues up 2%, which supported modestly positive total operating leverage in the quarter. The second quarter strong performance contributed to an encouraging first half of the year, with both positive fee and positive total operating leverage on a year-to-date basis, excluding notable items relative to the prior year period. Turning now to Slide 4, period end AUC/A and AUM again increased record levels largely supported by market tailwinds. As you can see on the right panel of the slide, market indicators related to our trading business remain challenging in the quarter that we were pleased to see improved client volumes across our FX trading venues, which I will discuss shortly. Turning to Slide 5, servicing fees declined 2% year-on-year, as higher average equity market levels and net new business excluding our previously disclosed client transition were more than offset by pricing headwinds, and lower client activity and adjustments, including the asset mix shift into lower earning cash and cash equivalents. The impact of the previously disclosed client transition with a headwind of approximately 2 percentage points to year-on-year growth, while lower client activity and adjustments including the asset mix shift into cash was a headwind of approximately 1 percentage point on year on year growth. In addition, we saw the pace of quarterly installations track below expectations in 1Q and 2Q. We do, however, anticipate a pickup over the next few quarters as our higher level of recent sales begin to onboard. Sequentially, servicing fees were up 1% reflecting higher average equity market levels and client activity as transaction volumes tick back up and we saw clients start to put cash back to work. We generated $72 million of servicing fee revenue wins in 2Q and more than $330 million over the last four quarters, with the vast majority in back office, consistent with our strategy to prioritize faster installing custody mandates. At period end, we had $276 million of servicing fee revenues to be installed and $2.4 trillion of AUC/A to be installed. Moving to Slide 6, management fees were up 11% year-on-year primarily reflecting our higher average market levels and net inflows from prior periods, partially offset by the impact of our strategic ETF repricing initiative, which we believe is starting to pay off in both volumes and revenues. Sequentially, the benefit of higher average market levels was offset by net flows and lower performance fees. We are pleased with the steady growth we are delivering in Global Advisors. In the second quarter, we continue to expand the breadth of our offerings with the launch of new funds as we continue to broaden our product range in geographies. Our investment management business had healthy pre-tax margin of 32% in the second quarter, up 3 percentage points year-on-year and up 8 percentage points quarter-on-quarter. Now turning to Slide 7, as I noted, we saw a very nice uptick in client activity in our markets business with higher volumes across our major FX venues. This helped to drive FX trading revenue growth of 11% year-on-year, though volatility remained muted with compressed margin. Securities finance revenues also benefit from higher balances on both agency lending and prime services. However, our U.S Specials activity was subdued in the quarter which impacted margins and contributed to the year-on-year decline in securities finance revenues. Moving to software and processing fees, second quarter performance continued to benefit from strong client engagement with CRD. Though the cadence of on-premise renewals negatively impacted year-on-year performance which is shown in greater detail on the following slides. On Slide 8, as you can see, software enabled and professional services revenues increased 17% in the quarter. And we expect these revenues to represent a greater proportion of our front office software and data business over time as we transition another 20 clients from on-premise to more durable SaaS model over the last year. As we outlined in May, we believe our software business can be a significant revenue growth driver for State Street, potentially reaching a $1 billion in annual revenues over the next 5 years. In addition, we were pleased with the continued momentum we're seeing in Alpha. We reported an additional Alpha mandate win and 2 mandates went live in 2Q, bringing the total number of live mandates to 23 at quarter end. As Ron mentioned, this quarter's Alpha win represents a brand new 10-year relationship with a large APAC client. We view long-term Alpha mandates like this are a key benefit of our differentiated Alpha strategy. Turning to Slide 9. NII was stronger-than-expected this quarter, up 6% year-on-year and up 3% sequentially to $735 million as higher investment portfolio yields and higher loan growth more than offset continued deposit mix shift in both periods. In addition, on a quarter-on-quarter basis, we proactively increased our investment portfolio balances at higher yields which benefited NII. Looking at the strong quarterly performance relative to our expectations in early June, we did see an inflow of valuable noninterest bearing deposits in mid June and again in late June as clients geared up for the holiday weekend, although I would note that we did see some reversal during the first week of July. Similarly, NII also benefited from higher interest bearing balances due to our client engagement efforts, as well as better spreads and volumes within our sponsored repo business as more clients join the program. Average deposits increased 7% year-on-year and 1% quarter-on-quarter. We would expect to continue to operate at this higher level of deposit balances as we look to the back half of the year. Turning to Slide 10, year-on-year expense growth was contained to less than 3%. In the second quarter, we continue to invest in the business while also delivering productivity benefits in two key areas. The first is associated with our decision to consolidate two operations joint ventures in India late last year and this quarter. The year-on-year savings associated with these two JV consolidations are approximately $20 million in the quarter, excluding integration costs. Second, we benefited from our ongoing organizational process improvements and initiatives, including streamlining and delayering staff [ph] functions to increase our management's span of control, which enabled us to lower our headcount on a pro forma basis, including the JVs by 5 percentage points year-on-year as detailed on the bottom left of the slide. Together, these actions helped to drive down compensation benefit costs by 2% year-on-year in the second quarter, and facilitate our ability to reinvest in our franchise. The combination of the JV consolidations, along with our ongoing initiatives serves as a catalyst and importantly gives us confidence as we continue to deliver on our strategy to simplify our global operating model with meaningful benefits expected to build over time, including more productivity saves, as well as an ability to better serve our clients and invest for the future. Moving to Slide 11, as you can see, our capital levels remained strong and comfortably above the regulatory minimums. As of quarter end, our standardized CET1 ratio of 11.2% was slightly higher from the prior quarter, as capital generated from earnings was partially offset by continued dividends and share repurchases, as well as higher RWAs as we support our clients, which in turn drove higher fees and NII. We returned over $300 million in the first quarter to shareholders, followed by $400 million through common share repurchases and dividends in the second quarter, as we've tried to strike the right balance between our capital return goals and the support of our clients. Looking ahead to the back half of the year, we have announced the plan 10% per share quarterly common dividend increase on the heels of a strong performance on this year's CCAR starting in 3Q and subject to Board approval. In addition, our attention is to accelerate the pace of quarterly buybacks relative to the first half of the year. However, given the more modest level of repurchase activity so far this year, the full year payout ratio for 2024 will likely be closer to the 80% to 90% range, in line with our medium term targets. In summary, we are pleased with our second quarter and first half results, which demonstrate our ability to execute against our strategy to drive sustained business momentum, while delivering positive total operating leverage excluding notable items. With that, let me cover our improved full year outlook, which I would highlight continues to have the potential for variability given the uncertain economic and political environment we're operating in. In terms of our current macro assumptions, as we stand here today, we are assuming global equity markets are flattered to second quarter end for the remainder of the year. Our rate outlook broadly aligns with the current forward curve as of quarter end, while we expect both FX market volatility and specials to remain needed. Given our strong start to the year and higher average market levels, we now expect that total fee revenue will likely be in the range of up 4% to 5% on a full year basis, somewhat better than our prior expectations for roughly 4% year-on-year growth. Turning to NII, given our 2Q performance, along with the continued benefit of management actions we have taken to support NII growth this year, we now expect full year NII will be up slightly year-over-year, which is also better than our previous guide of down roughly 5% on a full year basis. Finally, given these improved top line expectations, full year expenses are likely to be somewhat higher than our prior outlook of up 2.5% this year. We now expect expenses excluding notable items to be up about 3% this year, given the expected revenue related costs. Importantly, given this improved outlook, we now expect to deliver both positive fee operating leverage and positive total operating leverage for the full year excluding notable items. And with that, let me hand the call back to Ron.

Operator:

[Operator Instructions] Your first question comes from Glenn Schorr with Evercore ISI. Your line is open.

Ron O'Hanley:

Hi, 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 act -- 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 the institutional business and in ETF business.

Ron O'Hanley:

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 the -- what our focus is. To the extent and I've said this in the past, I mean, M&A is not a strategy, but it can help us to effectively implement our strategy and it is superior to 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 accelerate what we do.

Elizabeth Lynn:

Operator, can we move to the next question?

Ken Usdin:

Thanks. Good morning. So great results on the NII and we heard the updated outlook for slightly up this year now. Eric, just wondering, 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 second half comes off of this, the second quarter real strength? Thanks.

Ken Usdin:

Okay, got it. And then one -- Ron, one question. You mentioned that you think that core fees growth should get better from here, and just wanted to ask you to deepen on that a little bit. I mean, I know that you've mentioned the onboarding and such, but we still have that deconversion working against, and you mentioned the episodic stuff in 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 those that servicing and management fee line start to show a better rate of change?

Ken Usdin:

Great. Thanks, Ron.

Brennan Hawken:

Good morning. Thank you for taking my questions. I would like to start with euro deposits, the ECB cut rates this quarter. So I'm curious to hear I know, a euro I believe is your second biggest currency in your deposit base. So curious about what impact that you saw from that cut? Where was the beta on that cut? And was it roughly equivalent to the beta [ph] as you saw on the final increases? And based on that experience, how does that inform your expectation for only see cuts in the fed funds.

Brennan Hawken:

Got it. Thanks for that. Thanks for that. I appreciate it. On thinking about another factor that has been a bit more robust recently repo has been pretty strong in recent quarters. Do you think based on what's been happening in the marketplace, that strength is sustainable? And it seems as though the NII story is playing out better than you had originally anticipated, obvious given you brought up guidance, but is that another x factor that could allow for the back half of the year to maybe see less of a pronounced step down, then your improved guidance seems to continue to embed?

Brennan Hawken:

Thanks for taking my questions.

James Mitchell:

Hey, good morning. Eric, maybe just following up a little bit on the NII story, you talk about potentially an inflection coming. Can you discuss maybe the timing of that? And then when I look at your asset yields, the HTM book is still weighing that down. Can you talk about maybe the pace of maturity on that HTM book that's yielding a little over 2%? And how much -- how long it takes to kind of get that back -- coming back in? Is that a big part of your inflection story next year? Thanks.

James Mitchell:

Okay. That's really helpful. And maybe just to your point on deposit growth being a key driver, now that we're looking at rate cuts, Q2 [ph] is less. Do you feel like rate cuts can be a catalyst for growth based on historical experience? How do you think about getting back to kind of more normal growth levels in deposits? What do we need to say?

James Mitchell:

Got it. Very helpful. Thanks. Thanks, Eric.

Betsy Graseck:

Oh, hi. Good morning.

Betsy Graseck:

I did just want to key off of the last comment around the sales. And to your point $350 million to $400 million is the goal for this year. Obviously, on Page 5, you show us what the rev wins are for 1Q and 2Q, 67 and 72. So that leaves us with an expectation that you're going to be able to bump that up pretty aggressively towards the 105 level for each of 3Q and 4Q. And so it gets to my question of what gives you the confidence in that? Is that a function of these are already sales that are in contract, and it's just the installation of the new wins that hits this page. And so that gives you a lot of confidence that you can generate that 105 level in each of the next two quarters.

Betsy Graseck:

Right.

Betsy Graseck:

Got it. Perfect. Yes, and I can see in last year, the second half was 3x 2Q. So, history, obviously shows that that should happen. So that's great. Okay, so then the follow-up …

Betsy Graseck:

Okay.

Betsy Graseck:

Okay. Appreciate it. Thank you. And then the follow-up just on the buyback. I understand you've got the opportunity for increasing buybacks and I'm expecting that you're going to be flexing that versus your SLR [ph] constraint is that fair? And with SLR at 6.3 and the minimum is 5, that feels like you've got a lot of room. So just want to understand how you're thinking about what the -- what level of SLR you want to hold regulatory minimum is 5, what kind of buffer should we expect that you're anticipating holding on top of that, just as we're working through our models on how much buybacks we estimate for you. Thank you.

Betsy Graseck:

Right. Okay. That's great. And then when we're thinking about the pace in accelerating from here, is that total dollars? Or is that the pace of up a 100 Q-on-Q? How should we think about which pace you're talking about?

Betsy Graseck:

Thank you so much. I really appreciate it.

Betsy Graseck:

Yes, I appreciate and I appreciate the conceptual chart. Thanks so much.

Operator:

Your next question comes from Mike Mayo with Wells Fargo Securities. Your line is open.

Ron O'Hanley:

Hi, Mike.

Eric Aboaf:

Mike, it's Eric. With regard to NII and noninterest bearing deposits, I said the next few quarters. So, I'm giving myself a little bit of room to be honest, because it's hard to predict perfectly. And so I'll stick with a few quarters. I think that kind of works and that certainly covers your range, and maybe a little bit more. So, we just want to live through this. But we can see I think over the horizon here in a way and that's what we wanted to communicate. On the client deconversion, if you recall, we said this would be the largest year on a year-on-year basis. It was originally worth about 2 percentage points of total fees. We said about a percentage point year-on-year this year, half a point year-on-year last year, and about half a point year-on-year next year. So by the end of this year, we'll be through, I'll call it, three quarters of the effect, but they'll still be a piece of that coming through next year, and then it'll be behind us.

Eric Aboaf:

Mike, it's Eric again. I think we talked about pricing pressure because just part of the natural course of events, right, we get a market, we get pricing increasing -- increases from market upticks. And then with clients they ask for a part of that back. That's just how the business has operated, as you say, for the last 30 years. This quarter and last quarter and this year, and for the rest of the year, we expect pricing headwinds to be in line with the previous years and guidance. We've said pricing headwinds of about 2% per year. We're not seeing any more or any less of that. It tends to be a little more geared towards the asset manager segment, because those are the -- that is the group of clients that has mutual funds and some mutual fund versus ETF shifting. But it's not -- we're not seeing anything out of the ordinary or anything that is unexpected at this point.

Ron O'Hanley:

Mike, it's Ron. Let me take that. I mean, I think that the -- as you would know as well as anybody, the business continues to change. And we've seen the continued move from the mutual fund to the ETF to the FMA. But you're also seeing these firms, particularly the well managed ones respond, and they're responding in a couple of ways. I mean, one new product types are -- I mean, even the most traditional mutual fund companies now have pretty interesting ETF lines. Most of -- they're involved in the DC 401(k) business, they've got a mutual fund offering, but they've got a collective trust offering too. So they're responding to that market pressure. Most of them are figuring out ways to participate in the wealth business, and we continue to respond and support them in that. So the nature of the business is changing. In some cases, some things were more lucrative than others. And so what you're also finding in those businesses, they're very focused on their cost base. Their technology stack, their operating stack, and again, that presses in our favor as we think about the Alpha front to back solution, we are the largest middle office provider by far in the industry and we've gotten quite good at that. So the -- we describe ourselves as an essential partner to our clients, and I think that plays through both in supporting them in their revenue and product activities as well as their cost and operations.

Operator:

Your next question comes from Vivek Juneja with J.P. Morgan. Your line is open.

Eric Aboaf:

Vivek, it's Eric. It's -- I would describe that as just part of the normal volatility that we'll see in deposits. I mean we run such a large franchise and our clients transactional activity tends to vary over time. But we're seeing healthy levels of deposits across dollars, across euros. And so we didn't -- we haven't seen anything, particularly surprising in one area or another. I think, total U.S interest bearing deposits, if you look at our addendum are up slightly, euros are up slightly and so on and so forth. So -- and to the extent that there are some movements, not driven by our pricing actions, per se. In truth, clients need a certain amount of transactional deposits to fund their custody accounts. And the pricing tends to be something that we have negotiated and is well understood now, given where we are in the cycle and isn't the determinant [ph] of the of movements at this point.

Operator:

Your next question comes from Gerard Cassidy with RBC. Your line is open.

Ron O'Hanley:

Well, I'll start, but Eric, [indiscernible]. But I think if -- what caused it, I mean, there's been really remarkably low dollar volatility. And I think some of the things that have been driving that

Gerard Cassidy:

Very good. Thank you for that color. And circling back, you both touched on onboarding was slower-than-expected in the first half of the year, but you're expected to pick up as we go forward. What cause the slower-than-expected onboarding in the earlier part of this year?

Gerard Cassidy:

Great. Thank you.

Ron O'Hanley:

Well, thanks, everybody for joining us.

Ilene Fiszel Bieler:

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 Aboaf, 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.statestreet.com. Afterwards, we will be happy to take questions. During the Q&A, please limit yourself to two questions and then requeue. 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 on the IR section of our Web site. 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.

Eric Aboaf:

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 $0.32 EPS 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 a 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%, 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 AUC/A increase by 17% on a year-on-year basis and 5% sequentially to a record level. Year-on-year, the increase in AUC/A 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 with an estimated 1 to 2 percentage points of total AUC/A versus a year ago. Quarter-on-quarter, AUC/A increased primarily due to higher period end 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 end market levels and net inflows, and up 5% sequentially, primarily due to higher period end 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 2 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 2 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 AUC/A to be installed at period end. Turning now to slide seven, 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. Related 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 4Q ‘23, our investment management franchise remains well positioned with momentum across each of its businesses. In ETFs, the overall flows were relatively flat in first quarter. Our spider 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' finance 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%, primarily 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 occur. Moving to slide nine, 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 mix shift 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 this 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-balanced 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 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 for 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 and 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 cost 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 1. 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 both 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're 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 makeshift 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% year-on-year, which is better than our previous guide of down approximately 11%. On expenses, we expect full-year expenses, ex-notables, will be roughly in line with our prior guide of 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:

Thank you. [Operator Instructions] And your first question will be from Brennan Hawken at UBS. Please go ahead.

Eric Aboaf:

Brennan, it's Eric. You know, 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 the -- in terms of our results relative to our expectation. The repo balances did tick up as well. They were 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, clients are holding more cash on their balance sheets, or then 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 feds overnight repo operation. 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.

Eric Aboaf:

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 2 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 2 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, fully in line with what we had previously described.

Eric Aboaf:

Sure.

Glenn Schorr:

Hello there. One quick follow-up on the NII stuff, and thank you for all the details. The balance is coming in, in 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 rates are higher, parking balances with a safe custodian?

Glenn Schorr:

Very cool. Appreciate that. One quickie, you can't comment on the specifics, 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, SSGA, but strategically what are you focused on in terms of continuing growth across that franchise?

Glenn Schorr:

I appreciate that, Ron. Thanks.

Alex Blostein:

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 half of the year seems to have a pretty meaningful drop off for the tune of maybe $100 million bucks or so versus the quarterly run rate. Eric, I guess given your comments on deposits being stable and higher rates are kind of are 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 Blostein:

Great. All right. I think, 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, either rejuvenating 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.

Alex Blostein:

Thanks so much.

Brian Bedell:

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 2% to 5%, expenses up 2% to 2.5%. Is that sequential for revenue and year-over-year for expenses?

Brian Bedell:

2Q basis, okay. So then going back to the NII guide, I think you also said down 2% to 5% versus the 7% to 16% in 2Q and then did you say down again in 3Q and then flattening out or flattening out in 3Q?

Brian Bedell:

Right, yes. Then if I just get -- 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?

Brian Bedell:

That's super helpful. And then maybe just on the private markets wins, 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 Bedell:

Okay, great. Thank you.

David Smith:

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 Smith:

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

David Smith:

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

David Smith:

Thank you.

Mike Mayo:

Can you hear me?

Mike Mayo:

Can you talk about the relationship between stock markets and revenues you used to have for every 10% change the S&P 500, it impacts your servicing 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 your guidance for NII instead of being down 10% to down 5%. What exactly changed the last kind of month or so?

Mike Mayo:

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

Mike Mayo:

Thank you.

Rajiv Bhatia:

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 then as I understand it, about 60% of your service fees is asset-based. How do pricing headwinds compare in the asset-based bucket versus the non-asset-based bucket? Thanks.

Rajiv Bhatia:

Got it, thanks.

Ken Usdin:

Thanks, Ron, Eric, sorry for that earlier. 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 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 headwinds abating and some of the growth starting to come on and transitions that we can see a better growth rate overall? Thanks.

Eric Aboaf:

And Ken, it's Eric. I would just add that we've had these client activity headwinds that we described, which is a mix 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 just continuing 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. There are -- I think there's a case to be made that cash levels of client should actually start to get deployed over the next year and could even be 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 mix headwinds. And I think without those, you could then see through to some of what Ron described around sales, installation and the underlying growth of the franchise.

Ron O’Hanley:

Yes. 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 encouraged by our pipeline.

Operator:

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

Operator:

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.

Ilene Fiszel Bieler:

Good morning, and thank you all for joining us. On our call today, our CEO, Ron O'Hanley will speak first; then, Eric Aboaf, our CFO, will take you through our fourth quarter and full year 2023 earnings slide presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.com. Afterwards, we will be happy to take questions. During the Q&A, please limit yourself to two questions and then requeue. 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 on the IR section of our Web site. 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.

Eric Aboaf:

Thank you, Ron, and good morning, everyone. Before I begin my review of our fourth quarter and full year 2023 results, let me briefly discuss the notable items we recognized in the quarter on Slide 5, which collectively totaled $620 million pretax or $1.49 of EPS. First, we recognized an FDIC special assessment of $387 million, which is reflected in other expenses. Second, we recognized $203 million of net repositioning charges to enable the next phase of our productivity program. As we had indicated in December, the bulk of this action primarily relates to severance of around 1,500 employees. Our initiative to streamline and delayer our operations, technology and staff functions and improve efficiency will allow us to sustainably reduce expenses. We expect these actions collectively to have a payback of roughly six quarters and begin this quarter with roughly two-thirds of the benefit occurring in 2024. These actions and the related savings will contribute to our fee operating leverage goal for 2024 and in subsequent years. Turning to Slide 6. I will begin my review of both our fourth quarter and full year 2023 financial results. As you can see on the table, total fee revenue was flattish for all periods of comparison quarter-on-quarter, the year-on-year quarter and for the full year. The slight market appreciation, notwithstanding the combination of muted volatility, central bank pivot and geopolitical concerns, pushed investors to the sidelines for much of the year. In terms of our more durable revenues, we continue to benefit from strong momentum in our front office software and data business, which was up 5% on a full year basis and 13% on the year-on-year quarter. In terms of areas that have begun to rebound, management fee performance was down for the full year at minus 3%, but has begun to rebound with an up 5% result for the year-on-year quarter as flows picked up and we gained share. Back office servicing fees was challenged for much of the year as the client's transactional activity was muted but has started to turn positive and is up 1% this quarter as we've seen a recent lift in equity markets. And of course, we continue to be affected by industry wide headwinds in our global markets businesses, given the low levels of volatility in the FX markets and specials activity in agency lending throughout the year. NII has been tough to predict and surprise to the part of this quarter compared to third quarter. I'll turn to that in a few minutes. Expenses were well controlled in the quarter as we continue to thoughtfully allocate resources across the franchise and to areas where we see the greatest opportunities for top line growth. Relative to the year ago, total expenses ex-notables were up 2% year-on-year and reflect intensifying cost management in a tough environment as the year progressed. This expense control, coupled with the repositioning actions I just mentioned, prepare us to deliver productivity savings and positive fee operating leverage in 2024. Finally, despite a dynamic and challenging operating environment, we delivered full year 2023 EPS growth of 3% excluding notable items. This was supported by share repurchases, a record level of NII and the growth for our front office software and data business, which is less exposed to macroeconomic conditions. Turning now to Slide 7. We saw period end AUC/A increase by 14% on a year-on-year basis and 4% sequentially. Year-on-year, the increase in AUC/A was largely driven by higher period end market levels and net new business. Quarter-on-quarter, AUC/A increased primarily due to higher period end market levels. At Global Advisors, period end AUM increased 19% year-on-year and was up 12% sequentially, largely reflecting higher period end market levels and strong net inflows. Notably, as Ron mentioned earlier and I'll describe momentarily, in fourth quarter, GA recorded the best ever quarter of aggregate net flows of $103 billion, which sets us up well for 2024. At the center right, we've also added a table of market volatility indices, which we believe can be useful indicators of client transactional activity that drives servicing fees, specials activity in agency lending and flows in margins and FX trading. On Slide 8 now. On the left side of the page, you'll see fourth quarter total servicing fees up 1% year-on-year, primarily from higher average equity markets, partially offset by pricing headwinds, lower client activity and adjustments and a previously disclosed client transition. Sequentially, total servicing fees were down 2%, primarily as a result of the pricing headwinds and a previously disclosed net client transition, partially offset by higher client activity and adjustments, which was nice to see as clients started to come off the sidelines. On the bottom left of the slide, we summarize some of the key performance indicators of our servicing business. We were quite pleased to see new servicing fee revenue wins of $103 million this quarter, the highest in many recent years, primarily reflecting the enhancements to our sales processes and product offerings, including in North America where we saw strong outcomes after a period of underperformance. These servicing wins contributed to the total full year fee revenue wins of $301 million and underscores the progress we're making towards stronger sales performance. Recall, our goal for 2024 is even higher at $350 million to $400 million in servicing fee sales for the year. Finally, we had $270 million of servicing fee revenue to be installed at quarter end, up $57 million year-on-year and $15 million quarter-on-quarter. We expect about half of this to install in 2024. We also had $2.3 trillion of AUC/A to be installed at period end. Turning to Slide 9. Fourth quarter management fees were $479 million, up 5% year-on-year, primarily reflecting higher average equity market levels and some performance fees, partially offset by a previously described shift of certain management fees into NII and the impact of a strategic product suite repricing initiative that has aided ETF flows. Relative to the third quarter, management fees were flat, mainly driven by higher performance fees, offset by a previously described shift of certain management fees into NII and the impacts of the strategic ETF product suite repricing initiatives. As you can see on the bottom right of the slide, our investment management franchise remains well positioned with very strong and broad based business momentum across each of its businesses. In ETF, we had record quarterly net inflows of $68 billion, driven by record net inflows into SPY as well as the SPDR portfolio US low cost suite experiencing consistent market share gains. In our institutional business, we saw quarterly net flows of $6 billion, primarily driven by defined contribution products. And lastly, across our cash franchise, we saw quarterly cash net inflows of $29 billion, primarily into money market funds, which contributed to the record total full year 2023 cash net inflows of $76 billion and institutional money market fund market share gains. Turning now to Slide 10. Fourth quarter FX trading services revenue was down 11% year-on-year ex-notables and 2% sequentially. Relative to the period a year ago, the decrease was mainly due to lower FX spreads from muted market volatility offset by slightly higher volumes. Quarter-on-quarter, the decrease primarily reflects lower direct FX revenues from muted volatility. Fourth quarter securities finance revenues were down 6% year-on-year due to lower agency balances, partially offset by higher agency spreads, higher specials activity and prime services revenue. Moving on to software and processing revenues. Fourth quarter fees were up 10% year-on-year and 26% sequentially, largely driven by CRD, which I'll turn to shortly. Finally, other fee revenue for the quarter increased $15 million year-on-year, primarily due to a midyear tax credit investment accounting change, partially offset by the impact associated with the devaluation of the Argentinian peso. Moving to Slide 11. You'll see on the left panel that fourth quarter front office software and data revenue increased 13% year-on-year, primarily as a result of the continued SaaS implementations and conversion, driving software enabled and professional services revenue growth. Sequentially, front office software and data revenue was up 38%, primarily driven by higher on premise renewals and go live implementations. Turning to some of the Alpha business metrics on the right panel. We’re pleased to report four more Alpha mandate wins in the quarter, which means seven wins for the full year 2023. State Street Alpha continues to be an important differentiator of our business and creates an attractive value proposition for our clients with contractual terms usually covering five to seven, to 10 years. We’ve also gone live with three more Alpha clients which brings us to six for the year, which sets us up well for 2024, and added significant new functionality for fixed income portfolio managers. Fourth quarter ARR increased 16% year-over-year, driven by 20 plus SaaS client implementations and conversions, and we had a record quarter for front office new bookings at $32 million. Turning to Slide 12. Fourth quarter NII increased 14% year-on-year but increased 9% sequentially to $678 million. The year-on-year decrease was largely due to lower average deposit balances and deposit mix shift, partially offset by the impact of higher interest rates. Sequentially, the increase in NII performance was primarily driven by the impact of interest rates and the full quarter impact of the third quarter investment portfolio repositioning, as well as higher deposits and loan balances. The NII results on a sequential quarter basis were better than we had previously expected, as both interest bearing and non-interest bearing deposits increased and certain client repricings were further delayed. Some of the higher deposit balances may have been seasonal but the Fed's quantitative tightening appears to have been offset by the reduction of the Fed's Reverse repo operation, which seems to have resulted in clients leaving higher bank deposit balances. It's hard to know how deposits will trend but we are pleased with this higher step-off going into the first quarter of 2024. On the right side of the slide, we show our average balance sheet during fourth quarter. Average deposits increased 4% quarter-on-quarter with non-interest bearing deposits up 3% for the quarter. Turning to Slide 13. Fourth quarter expenses, excluding notable items, increased 2% year-on-year or 1% ex-FX. Sequentially, fourth quarter expenses were up only 1% as we actively managed expenses and continued our productivity and optimization savings efforts, all while carefully investing in strategic elements of the company, including Alpha, Private Markets, Core Custody and tech and ops process improvements and automation. On a line-by-line basis and year-over-year, ex-notables, compensation employee benefits increased 1%, primarily driven by higher salaries and employee benefits, partially offset by lower contractor spend and performance based incentive comp. Information systems and communications expenses increased 4%, mainly due to higher technology and infrastructure investments, partially offset by the benefits from ongoing optimization efforts in sourcing and vendor credits. Transaction processing increased 1%, mainly reflecting higher brokerage costs. Occupancy increased 24%, largely due to the absence of an episodic sale leaseback transaction in the prior period. And other expenses were up 3% sequentially, flat year-on-year, mainly reflecting higher marketing spend and professional fees. Lastly, let me spend a moment on headcount. As we discussed in the third quarter, as part of our ongoing transformation and productivity initiatives, we have streamlined our operating model in India and have now assumed full ownership of one of our operations joint ventures, and we recently announced that we intend a similar undertaking with a second consolidation in the country this spring. This consolidation continues the transformation of State Street's global operations and will enable us to unlock productivity savings, which we expect to start this quarter through a reduction in contractor services and in the years ahead as we simplify our fragmented operating model. As you would expect, consolidating the first joint venture increased our FTE headcount roughly 4,400 in the quarter as we in sourced global capabilities. However, these costs were already in our expense base and reported historically under the comp and benefits line. These actions are contributing to our higher productivity savings targets for 2024. Moving to Slide 14. On the left side of the slide, we show 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, we continue to navigate the operating environment with very strong capital levels, which came in above both our internal targets and our regulatory minimums. As of quarter end, our standardized CET1 ratio of 11.6% was up 60 basis points quarter-on-quarter, largely driven by episodically lower RWA and improvement in AOCI, partially offset by the continuation of common share repurchases. The decrease in interest rates during December after the completion of our buyback contributed about 20 basis points to our CET1 ratios. And some market factors over the last week of December conveniently contributed roughly another 50 basis points to the RWA end of period print. Going forward, I would expect RWA to run at higher levels to support our various businesses. Our LCR for State Street Corporation was a healthy 106% and 122% for State Street Bank & Trust. In the quarter, we were quite pleased to return over $700 million to shareholders, consisting of $500 million of common share repurchases over $200 million in common stock dividends. Lastly, as we announced earlier today, our Board authorized a new multiyear common equity repurchase program of up to $5 billion with no expiration date. Turning to Slide 15. Before I start, let me first share some of the assumptions and underlying our current views for the full year. Let me cover our full year 2024 outlook, as well as provide some thoughts on the first quarter, both of which have more potential for variability than usual given the macroeconomic environment we're operating in. In terms of our current macro expectations, as we stand here today, we expect global equity markets to be flat point to point in 2024, which equates to the daily average being up about 10% year-over-year. Our interest rate outlook for 2024 largely aligns with the forward curve as of year end 2023, which I would note continues to move. We expect to see modest increase in FX and equity volatility, which should support slightly higher FX trading services fees this year, but we are still seeing muted volatility in the first quarter. And we expect currency translation to have less than 0.5 percentage point impact on revenues and expenses due to dollar depreciation. And I would remind you that a weaker US dollar has a favorable impact on revenues and an unfavorable impact on expenses. So we currently expect that full year total fee revenue will be up approximately 3% to 4% ex-notable items with servicing fee and management fee growth driven by higher market levels and continued business momentum and continued strong growth in front office software and data. This includes a headwind of a little less than 1 percentage point to fee growth from the expected previously disclosed client transition. Regarding the first quarter of 2024, we currently expect fee revenue to be up 2% on a year-over-year basis with servicing fees expected to be up 1%, management fees up 7% to 8% and front office software and data expected to be up over 20%, largely due to increased SaaS new business and conversions and on-premise renewals. We expect full year 2024 NII to be down about 10% on a year-over-year basis compared to a record 2023. This is dependent on the outcome of global rate cuts and deposit mix and levels, which are obviously difficult to predict. Regarding the first quarter of 2024, after a significant step up in 4Q '23, we expect 1Q '24 NII to be flat to down 3% on a sequential quarter basis given current deposit mix expectations. Turning to expenses. As you can see on the walk on Page 16, we expect full year expenses ex-notables will be up about 2.5% on a nominal basis in 2023, driven largely by our continued investment in the business, which we expect to largely offset through greater productivity savings worth $0.5 billion, which is approximately 1.7 times last year's gross savings level. Regarding the first quarter of 2024, we expect expenses ex-notable items to be up 1% to 1.5% on a year-over-year basis, keeping in mind that seasonal expenses usually occur in the first quarter. As a reminder, we expect to achieve positive fee operating leverage, excluding notable items for full year 2024, given the projected growth in fee revenue and well controlled expenses. Finally, we expect taxes should be in the 21% to 22% range for 2024. And with that, let me hand the call back to Ron.

Operator:

[Operator Instructions] Your first question comes from Alex Blostein with Goldman Sachs.

Eric Aboaf:

Let me share with you the texture we have. But I'll just say deposits and deposit levels continue to be volatile, they surprise to the upside. And in particular, we saw a nice uptick in deposits into September, October, we actually saw, on the NIB side, a downtick in November and then a large uptick again in December. So the averages came in up for the quarter, which made a big difference. $1 billion of NIB for a month is worth $5 million and you kind of multiply through and that quickly adds up as we had a spread in December of $5 billion, $6 billion relative to our expectations. And at the same time, we also saw interest bearing deposits up. Now some of that is just our regular way engagement with clients, some of that is there leaving more deposits with us. And I think you did see, in the Fed reports, the banking system deposits are up 1%, 2% quarter-on-quarter from third quarter to fourth quarter. So it does seem like there's something happening in the market that's creating a little more stability, a little bit of buoyancy. There's some amount of seasonality that we always tend to see at the end of the year as folks accumulate cash, sometimes to pay dividends and ETFs in the next year. So it's just hard to read but that's what played out. And it played out better through the quarter and through the end. If I then try to look forward, it's very hard to look forward for the year. And we'd like to operate and expect to operate in the deposit range of $200 billion to $210 billion, that's our kind of goal. A lot of that is just client engagement and helping put their cash to work. And sometimes they put cash to work in deposits, in repo, in money market sweeps. But there's a category -- each one of those is an important category and outlet for clients. And what we're seeing is clients using all the, I'll call it, all the above, right, including just holding treasury securities. So that we expect to continue and we think deposits will be roughly in this zone in the first quarter. What's a little harder to read is just how noninterest bearing deposits play out. We do expect those to continue to float downward. They tend to float downward for our clients with the largest funds, those are the ones that have been floating down over the last two years. So we continue to see that expectation. There continues to be a little bit of repricing that plays out into the first quarter too as well. And that's why I guided on an NII basis to flat to down 3% for the first quarter, just to give you a little bit of an indication, but we expect that to be roughly on flattish deposits.

Eric Aboaf:

Alex, it's an important topic, because it's how we interact with our clients, it's how we price our products, it's how the industry has operated in for many years. I think you know that our deposit betas on a cumulative basis have climbed quite a bit in the US. They're 75% or so cumulatively since the start of the cycle. In euros, it's around 60% cumulatively in pound sterling, closer to 30% to 35%. So they're clearly moved up. What certainly happens as, and I'll say when, if and when rates fall, is the deposits -- beta is reverse, there's some amount of symmetry. Now they reverse instantaneously, we want to be careful with our clients, we want to be fair. But we do think that over multiple quarters and certainly over any realistic time frame, the Fed cuts and there's got to be an adjustment. Now part of that happens because we have a good bit of our deposits that are indexed to market, they're indexed to market indicators. There are quite a few that are indexed with a spread and then there are a small amount now that has a transactional kind of, I'll call it, administered feature. But you'll generally see a broad amount of symmetry in deposits down versus up. I think what you do need to keep in mind is that our asset sensitivity and liability sensitivity, though, are somewhat different between international markets and in the US, right? In international markets, because those cumulative betas are still in the 30% to 60% range, we're still asset sensitive. So we make more money with increases in rates. And we actually -- NII will trim down with decreases in rates. And that's where we're most -- that's our interest rate sensitivity today. On the US, we have a slight positive bias towards being liability sensitive, but it's still relatively slight. I'd almost call it neutral. So part of what we're doing is just navigating this interest rate environment. It's not exactly clear when the rates come, it's not clear whether the US cuts before Europe or vice versa. And part of what we'll do is actively manage our portfolios to try to take advantage of what's coming. At the same time, we'll price our deposits fairly and prudently.

Brennan Hawken:

I think maybe some of what you just said on the non-US side might explain this. But when we think about triangulating the minus 10% to the fact that 1Q is either going to be flat, it’s only down a little on NII, it sort of suggests that your exit rate by the time you get to the 4Q '24 based on what you can see today, it's probably going to be rather low. Am I reading correctly in thinking that it's that non-US piece and that's going to drive some of that weakness? And am I extrapolating the comments correctly to think that we could see a little bit more back end weighted decline for NII?

Brennan Hawken:

And by the way, I apologize for background noise that is here. Second question, a bit more strategic. So we saw a flurry of Bitcoin ETF launches here recently. It didn't seem like you all actually landed any of those servicing opportunities. So I want to confirm whether my early read on that is right. And given the magnitude of the investment and the focus you've made on digital assets, what did you learn if you guys missed on that? And is that what led to the restructuring of the digital asset group, and what should we see as a change from that restructuring?

Brennan Hawken:

Ron, thanks for clarifying pure custody versus the servicing, Very, very helpful.

Operator:

Your next question comes from Glenn Schorr with Evercore.

Ron O'Hanley:

So there are a number of things going on there in the fourth quarter, Glenn, and throughout 2023. I think as we've noted and certainly, you all would have observed, there was -- it was most of the year with some episodic exceptions, it was a risk-off environment that changed in fourth quarter somewhat as predicted once investors got a sense of where interest rates were going, as they did when the Fed communicated in the third quarter more or less a pause. I think that started activity going. So much of the activity late in the year would have been the kind of classic risk on, let's put positions on quickly, benefiting the highly liquid SPDR Core SPY in the sector ETFs. But underlying it and throughout the year, the low cost ETFs, which represent different investors, these would be -- the ultimate holders here tend to be individuals. They're often advised by an intermediary like an RIA, so they’re -- it's very sticky. And we have continued to build share there, both in equity and fixed income, low cost. Across the board, fixed income is seeing a dramatic growth. I think there's increasing acceptance, both by retail investors and institutional investors that the ETF is a good vehicle to hold fixed income and you're just seeing that asset allocation moving that way. And then finally, active ETFs of all sort, you're seeing growth in. And it's been a long time coming. As you know, it's been over a decade on how is this actually going to play out. And it's ironic how it's playing out and that everybody is just taking their standard investment strategy and putting it in active ETF. We benefit from some of that on the GA side in terms of what they're doing in fixed income, but we benefit from it greatly on the servicing side, because we're very, very -- not to overuse the word, active in the active ETF servicing space. And we believe you'll see a lot more growth there as core funds and core offerings of well known asset managers either get converted to ETFs or launched as ETFs. So we're really pleased on the GA side. In terms of what drove it, I think it was the next part of your question. I mean, part of it was much more focused and resources dedicated to the various intermediary channels. I mean our roots are in the institutional channels, but the lots of the growth is in the intermediary channel. So that's part of it. And then as we talked about, I believe, last quarter, we took a hard look at pricing, particularly in the so called low cost ETFs and recognizing their durability, felt that it was worth the investment to reprice them to continue to gain market share because they tend to be very, very sticky.

Ron O'Hanley:

No, no, it's both. To answer the last part of it first, Glenn, it's certainly not one client. I mean, this is a space that we've invested in and we're well known in. And we see a secular trend here where it's -- so many of these operations are held inside firms are highly bespoke often sitting in very expensive locations. And as the product sets have become more complicated, I mean, it's following a path that the active long only industry followed 10, 15 years ago. It was fine to do all this stuff inside when it was just a couple of products that are fairly straightforward, that's not what's happening now, products are more complicated. As you start to think about the structures that enable high net worth individuals to participate in it, you've got that added complexity. And then oftentimes, there's side investments that are permitted, et cetera. So it's very complicated. It lends itself to outsourcing. It's still very much an in-sourced business. So we see lots of potential growth in it. Its fee characteristics are different, positive in the sense that the fees are higher, but also the fees get fully recognized when the fund is fully invested. So part that we pay a lot of attention to is what's the expected actual, one, money raised and then draw down and how do we do our best to match our expenses to that. But we're very excited about the business. Much of the new investment, product investments that Eric talked about in the 2024 guide includes further strengthening of our position there. There's innovation in there and our goal is to continue to set moats around us so we can continue to excel at it.

Ron O'Hanley:

Yes, as well as, Glenn, it's not just private equity, it's private equity -- private credit is booming. And for every bank that complaints about what's going to happen with regulation and the fact that it's pushing activity out of the banking system that's going right into the private credit area, and we should be the beneficiary of that growth.

Gerard Cassidy:

Eric, can you share with us -- I know you and Ron were in the State Street 10 years ago, but your comments about the net interest income outlook and just how volatile it is due to what's going on in the bond market with the Federal Reserve and their balance sheet. Are there any indicators you're monitoring that we could look at that might be able to give us a better insight to when net interest income for State Street might be more predictable on a go forward basis?

Gerard Cassidy:

Ron, in your prepared remarks, you talked about the success and the momentum you're having with the Alpha product in the servicing business -- in the Investment Services business, I should say. Is there any capacity constraints that you've got to be careful about if the momentum continues, or is it almost now when you got plenty of bandwidth to handle future growth?

Operator:

Your next question comes from Jim Mitchell with Seaport Global.

Ron O'Hanley:

I mean, it's no one thing, but a lot of really important things across the board to ramp up our execution. Where we're seeing it, to answer the first part of your question, is the core Investment Managers segment still remains strong and active for us. And as some of those firms are facing the same kind of market that everybody else is, they're more interested in actually trying to do more with us and do different things with us, a little bit of a resurgence in the asset owner marketplace and in particular, amongst asset owners that aren't just pure asset allocators, meaning they're managing some assets themselves or truly actively asset allocating, doing not just listening to a consultant telling them what to do, but either managing money or at a strategic and tactical level, allocating assets, which again requires support. But in all cases, what we're doing is we're really focused on ensuring that the back office part of all this comes with it, and comes with it in a timely fashion, right? Because as I was saying earlier when I was talking to Gerard, the thing that takes a long time or a longer time to onboard would be the middle office, the outsourcing element of it. Onboarding back office is pretty easy, pretty straightforward. And it, in almost all instances, comes down in a pretty healthy incremental margin given the scale activities to it. And then finally, just to talk about regions. We have invested heavily in the capabilities in all of our regions where you see probably the most impact from that over the last couple of years, has been just the very good growth that we're seeing in Asia Pacific and really, all parts of Asia Pacific from Australia north to Japan and everything in between. The US, we've talked about in the past, we were not pleased with where we were in this past year, particularly the second half of the year. We're actually reasonably pleased with how we've done. Europe has always been strong to us. It was a little softer in 2023, but again, a very strong pipeline. But that regional focus where we're actually pushing accountability down into the country and regional level and making sure that it's very clear who is responsible for what, sharing, obviously, not just the technology and the product but the best practices in how you move these things forward, but very much decentralizing the accountability.

Eric Aboaf:

The way I’d describe it is we've got a natural roll-off in that portfolio. It's about $5 billion a year. So it sort of plays out and that's related to the maturity in the latter, so that will come down over the next couple of years. As that happens, because as you say, it's at a lower coupon relative to our average, right? Our average portfolio yields are in the 3.5 range. There's real pickup that comes through that line. At least for the next couple of quarters, I guess, is probably for the next couple of years even, because once rates stabilize, we do think that we'll also get some steepness in the yield curve and that will help through. So there are some benefits coming that way. It's also a portfolio that obviously will insulate us from rate moves. I don't think in the next few years, this is the last down cycle versus up cycle then that we'll see and so it will serve its purpose then as well.

Steven Chubak:

So Eric, I wanted to start off with a question just on the fee guidance, and benchmarking your historical fee performance versus the guidance. You've struggled to at least meet or exceed the guide in the absence of significant equity market gains. Can you guys hear me okay?

Steven Chubak:

So you have a conservative market assumption embedded in the fee guide for the coming year. And just given that historical experience, I was hoping you could just provide additional granularity in terms of growth across the different fee lines that's underpinning that 3% to 4% growth assumption for this year?

Steven Chubak:

Just one quick follow-up from me. What's the assumed timing for the large client transition? Just wanted to get a sense as to whether that's reflected in the 1Q servicing fee guide or you're expecting that later in the year?

Operator:

Your next question comes from Ebrahim Poonawala with Bank of America.

Eric Aboaf:

No, what I said is that we think we'll operate in the $200 billion to $210 billion range in the first quarter, second, through the year. We expect that to be where we land. I think in fourth quarter on average, right? Remember, we also, I think, talked a little bit about the months, we talked there's end of period data, which is very volatile. But on average, we ended up at, I think, around $207 billion for the quarter in 4Q. And so we think roughly flattish deposits into 1Q. It's just hard to tell, there's seasonality at year end, there tends to be a low point in February, and then you've got cash building for tax purposes into March. But I'd call it flattish in the scheme of things but with a range around that.

Eric Aboaf:

My instinct on this is NIB will begin to stabilize sometime in 2024, we think sometime in the by the middle of the year or third quarter. You've kind of, at that point, I'll call it, burn through the largest accounts, those are the ones that kind of on a -- since its peak are down 75% in NIB. The smallest accounts are down by about 25% since the peak and those were seeing stabilize more and more. So I think we'll see some stability in NIB because clients and funds and fund boards have made their decisions, especially the ones that have $1 million or $2 million in an account, some of them just don't want to deal with the tax reporting, and so you'll get to some stabilization. So we think that will kind of stabilize. I think the broader question on NII will then come with how, what -- well, and at that point, I think deposit betas kind of tend to stabilize as well. So I think at that point, in the second half of next year, the real question is what is the direction of interest rates on the front end. So very important question, which is what's going to -- where is the long end going to go? And where is the long end going to go in the US versus in the international markets. And that is particularly important to the banking sector because with some amount of steepness in the yield curve, and it's hard to remember when we've had steepness, it's been a while, some amount of steepness in the yield curve is quite accretive to NII, and you expect in a good economy to have some. And so that will be a feature. So there's a series of elements that will come through, and it's hard to I think, to, as a result, predict too precisely.

Ryan Kenny:

Just a follow-up on the capital side. So you had an 11.6% CET1 ratio that was a nice improvement sequentially, it looks like that was driven mostly by $6 billion of lower RWA. Can you just help us impact the RWA dynamics a bit, what drove the optimization? And then you also mentioned RWA could be higher this year to support various businesses. Does that mean that the optimization was just temporary?

Operator:

Your next question comes from Mike Brown with KBW.

Ron O'Hanley:

Mike, it's a good question and one we think about all the time. So part of way we've attracted more money market funds going back to one of my prior answers is we just have a broader client base, and that helps. We've gained market share, not just in terms of assets, but we've just attracted more clients. And once you have them, whether the balances go up or down, typically you have them. I think historically, what's happened in terms -- and you've got to look back in history now, because we haven't had this kind of a marketplace. But the really sophisticated holders of institutional money market funds tend to hang on, because the fund itself, depending on its duration, and there is a little bit of duration in it, actually lags. So it's usually the opposite -- when rates are rising, the very sophisticated holders are toggling in and out depending on whether they see opportunities to go direct. Just given the nature of our client base, we don't see a lot of that activity. So we expect to keep them and it really will be around where do their balances go and do they need it for some other reasons, or do they see more attractive investment opportunities. I would expect that we would see, if indeed, we see a continued risk on environment that itself will cause a little bit of reallocation of institutional money market funds, because saying that everybody -- what everybody is talking about that there's so much parked on the sidelines while a lot of it is parked here. But I would go back to where I began the answer, which is it really is about establishing more client relationships, servicing them very well and then continue to grow the number of clients based on that track record.

Eric Aboaf:

The background here is that the industry has evolved, I would say, pre-CCAR, which is a long time ago, there used to be open ended authorizations in the banking sector. Once we got into CCAR, remember, there was a very defined annual amount of buybacks that you had to submit. In fact, you had to submit the first year and the second year and there was a lot of -- making sure that what you submitted within the Fed CCAR process was actually what you did, because wanted to keep consistency with that. And so the industry moved towards quite a bit of disclosure on a one year basis as a result. And if you recall, a lot of those one year disclosures happened right after CCAR was announced at the -- either at the end of June or in the second quarter earnings in July. What we've seen as we've scanned at least the banking, our peer banks, the G-SIBs, the large US regionals is now that CCAR is -- it's still an annual process, but it's really with the SCB and some of the refinements to it, it's really an ongoing process. And what we've realized is that I'd say more than three quarters of our peers, you probably know, have actually moved to open ended programs over the last year, year and a half. And so we just wanted to conform to that. As a result, this one is multiyear, it's open ended and we'll take it from there.

Mike Mayo:

Well, no good deed goes unpunished $5 billion buyback to that last question. But are you assuming that Basel III gets modified? And if Basel III didn't exist, how much higher would that $5 billion number be? And at what price do you say buybacks don't make so much sense anymore?

Mike Mayo:

So where your base case, what is the RWA inflation, the most recent updates, we've gotten a few changes here during earnings season due to Basel III?

Operator:

Your next question comes from Brian Bedell with Deutsche Bank.

Eric Aboaf:

It's something that we continue to think about. I think every bank continues to think about, we included. We're just continuing to just work through how do we feel about the rate levels that we're at, in particular up on the curve. We are conscious of that, both in the US and in the international areas. We've got positions in pounds sterling and euros and so forth. So we'll just continue to evaluate it. I think as you indicated from your question, part of the reason we repositioned last year in the third quarter was around rate position. We thought it was a very good entry point. In retrospect, we timed that quite well. So we were quite pleased. And I think we felt like we came out ahead economically with the trade because we remember, we took out some bonds but also reinvested both in the belly of the curve and overnight. So that was constructive. And we'll also keep an eye on -- we don't have a lot of capital intensive securities, we've always had a very vanilla book. So there's not an enormous capital motivation, but we'll selectively look at it and see if it might make sense. But I think we're like many others, it's one of the things we keep an eye on.

Rob Wildhack:

I wanted to ask about the fee operating leverage target for this year. Hypothetically, let's say, fees come in better than you expect. Would you anticipate dropping that down to the bottom line or reinvesting it? And maybe the same question in reverse, fees come in lower than expected. What kind of room is there on the expense side to preserve your fee operating leverage target?

Eric Aboaf:

I would just add that we've got a pretty industrial productivity plan for this year. Part of that was the repositioning that we announced, but two thirds of the roles impacted are really around delayering and simplifying State Street. We're actually taking our spans of control in some areas like operations from 5:1 to 8:1. We're taking standard controls in the business and staff functions in some cases from 3:1 to 5:1. And the benefit of that is it actually brings our teams, our client teams and operational teams even closer to our clients. And some of what we're doing with the joint venture consolidation is a catalyst for that because, in some cases, we had too many hand offs and now we can simplify processes and again, bring them closer to our clients. So there's some real structural changes there. And what we do want to do is make sure we see those through. As Ron mentioned, there's always a little more, we'll look at on the margin but we want to be careful. We want to do this right. But on the margin, you continue to work on vendors and so forth, you look at performance based incentive compensation, there are always other smaller levers. But we're pretty -- I think we've got a nice work set out and a lot to do. And I think we've got real confidence that this is, I think, year probably five. I don't think we name our programs with annual versions. But this is probably a year five of productivity program and should really deliver quite a bit.

Ron O'Hanley:

From the FDIC, I didn't see this, Rob. Curious as to the FDIC's role in index funds. I wonder what Vanguard has to say about that. So I'm just not familiar with it, Rob.

Eric Aboaf:

Why don't we follow up off-line, Rob, just send it through to Ilene and the team.

Operator:

There are no further questions at this time. Please proceed.

Operator:

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Ilene Fiszel Bieler:

Good morning, and thank you all for joining us. On our call today, our CEO, Ron O'Hanley will speak first; then, Eric Aboaf, our CFO will take you through our third quarter 2023 earnings slide presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.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 on the IR section of our website. In addition, today's presentation will contain forward-looking statements. Actual results may vary -- 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.

Eric Aboaf:

Thank you, Ron, and good morning everyone. I'll begin my review of our third quarter results on Slide 4. We reported EPS of $1.25, which was down year-on-year due to the impact of the $294 million loss on sale in connection with the repositioning of our investment portfolio, which will benefit NII in the future periods. EPS was up year-on-year at $1.93, excluding the repositioning, which you can see on the right-hand side of the page. Turning to the core business, as you can see on the left panel of the slide, total fee revenue grew by 3% year-on-year, driven by growth in our front, middle and back office investment services business, as well as solid management fee performance at Global Advisors. This performance enabled us to offset some of the industry-wide headwinds we saw in our Global Markets business as well as lower NII, given the mixed macroeconomic backdrop in the quarter. Lastly, we remain focused on managing costs in the current operating environment, limiting expense growth to just 3% this quarter and achieving productivity savings as part of our plan to deliver positive fee operating leverage in 2024. Turning now to Slide 5. We see -- we saw a period-end AUC/A increase by 12% on a year-on-year basis and 1% sequentially. Year-on-year, the increase in AUC/A was largely driven by higher period-end equity market levels and net new business. Quarter-on-quarter AUC/A increased primarily due to client flows and net new business. While net new business was positive, long-term flows in the asset management industry has been muted, as you can see on the bottom right of the slide. This risk-off sentiment leads to the current headwind across the servicing industry. At Global Advisors, period-end AUM increased 13% year-on-year and was down 3% sequentially. Relative to the period a year ago, the increase was primarily driven by higher quarter end market levels and inflows of $10 billion. Notably in the quarter, our cash franchise continued to perform strongly, generating a record $41 billion of net inflows, as our competitive performance contributed to market share gains. Quarter-on-quarter AUM increase mainly due to lower quarter-end market level. Turning to Slide 6. On the left side of the page, you'll see third-quarter servicing fees up 1% year-on-year, primarily from higher average equity markets, net new business and the impact of currency translation, partially offset by lower client activity and adjustments, normal pricing headwinds and a previously disclosed client transition. Sequentially, total servicing fees were down 2% primarily as a result of lower client activity and adjustments in previously -- in a previously disclosed client transition, partially offset by higher average equity markets. As I've mentioned over the past year, we continue to see lower levels of client activity inflows, all of which impact transactional volumes, leading to a 2 percentage point to 3 percentage point headwind on servicing fees year-to-date. Part of this is the cyclical nature of the servicing business. The full-year effect has ranged from minus 2% -- minus 2% to plus 1 percentage point impact over the last five years. Within servicing fees, back office services were generally consistent in total servicing fee -- fees. Middle office services, which is part of the Alpha proposition had another quarter of good growth. On a year-over-year basis, middle office fees were up 3% and up 1% sequentially, largely driven by net new business. On the bottom panel of this page, we highlight the business momentum we saw in the quarter. We won $149 billion of new AUC/A. We onboarded roughly $250 billion of AUC/A in the quarter, primarily in the asset management client segment. And importantly, as Ron mentioned, we achieved new annual servicing fee revenue wins of $91 million this quarter, which will be recognized in future periods. These servicing wins underscore the progress we're making towards stronger sales performance. While we've historically only described wins in AUC/A terms, we recently expanded our disclosure to indicate that a healthy level of annual servicing sales is in $300 million range this year. You can measure us against this benchmark. We now have about $2.3 trillion of assets to be installed and about $255 million of servicing fee revenue to be installed as well. Turning to Slide 7, third-quarter management fees were $479 million, up 1% year-on-year, primarily reflecting higher average equity market levels, partially offset by a previously described shift of certain management fees into NII. Quarter-on-quarter, management fees were up 4% as a result of higher equity market levels and record quarterly cash net inflows. As you can see on the bottom-right of the slide, our investment management franchise remains well-positioned with very strong and broad-based business momentum across each of its businesses. In ETFs, we had neutral overall flows, but saw positive net inflows and consistent market share gains in the SPDR portfolio low-cost suite. As you know, we strategically dropped the fees on about a third of our low-cost suite of products and expect more growth in the coming quarters from this action. In our institutional business, notwithstanding net outflows of $30 billion in the quarter, which were primarily driven by client in-sourcing, both our Defined Contribution and Index Fixed Income products continue to drive strategic momentum. Lastly, across our client franchise, we saw record quarterly cash net inflows of $41 billion as we captured some of the cyclical movement of cash in the financial system. I'll just remind you that cash flows can be volatile quarter-to-quarter. Turning now to Slide 8. Third quarter FX trading services revenue was down 2% year-on-year, while up 3% sequentially. Relative to the period a year ago, the decrease was mainly due to lower direct FX spreads and lower FX volatility, partially offset by higher volumes. Quarter-on-quarter, the growth primarily reflects higher volumes. Industry volatility is down 25% to 40% across developed markets and emerging markets relative to the period a year ago, and down 5% to 10% sequentially, which is presenting fewer trading opportunities and lower spreads. Securities finance revenues were down 6% year-on-year due to lower specials activity and lower agency balances. Sequentially, revenues were down 12%, primarily as a result of seasonally lower activity and the recent industry drop-off of US Equity shoring activity and specials. Third quarter software and processing fees were up 2% year-on-year, but down 15% sequentially, largely driven by CRD, which I'll turn to shortly. Other fee revenue increased $49 million year-on-year, primarily due to the tax credit investment accounting change and the absence of negative market related adjustments. Moving to Slide 9, you'll see on the left panel that front office software and data revenue increased 2% year-on-year, primarily as a result of higher growth in our more durable software-enabled and professional services revenue, as we continue to convert and implant more clients to the SaaS environment, which now accounts for about 60% of our clients, partially offset by fewer on-premise renewals. Sequentially, front office software and data revenue was down 20%, primarily driven by lower on-premise renewals, partially offset by higher software-enabled revenues. Our sales pipeline continues to grow and remain strong for our Charles River Development Front office solutions products. Turning to some of the other Alpha business metrics in the right panel, we are pleased, we had two more mandate wins in the quarter for Alpha. Most notably, we also had our first Alpha for Private Markets win. We also meaningfully advance CRD's institutional fixed income capabilities. Turning to Slide 10, third quarter NII decreased 5% year-on-year and 10% sequentially to $624 million. The year-on-year decrease was largely due to the continued mix-shift from non-interest-bearing deposits to interest-bearing, and lower average deposit balances, partially offset by higher interest rates. Sequentially, the decline in NII performance was primarily driven by lower average deposit balances and the deposit mix-shift, partially offset by the benefit of higher interest rates, including international central bank hike and our investment portfolio repositioning. The NII results were somewhat better-than-expected due to non-interest-bearing deposit levels coming down slightly less-than-expected, and the portfolio repositioning, partially offset by client repricing, some of which will be delayed and will impact the fourth quarter instead. On the right of the slide, we showed our average balance sheet during the third quarter, with average deposits declining 4% quarter-on-quarter. Cumulative US dollar client deposit betas were 73% since the start of this recent cycle, while cumulative foreign currency deposit betas for the same period continued to be much lower in the 25% to 50% range. Finally, as I mentioned earlier, last month, we executed an NII accretive and capital accretive investment portfolio repositioning exercise to take advantage of both higher yields and spreads, which all else equal, should drive NII towards the higher end of the previously disclosed range of $550 million to $600 million per quarter next year. Turning to Slide 11. Third-quarter expenses excluding notable items increased 4% year-on-year. Sequentially, third-quarter expenses were down 1% as we actively managed expenses and continued our productivity and optimization savings efforts, all while carefully investing in the strategic elements of the company including Alpha, Private Markets and Technology, and Operations Automation. On a line-by-line basis, year-on-year compensation and employee benefits increased 4% primarily driven by salary increases associated with wage inflation, higher headcount, and the impact of currency translation. Sequentially, however, we brought headcounts down and we also reduced incentive compensation this quarter, in line with our year-to-date performance. Information systems and communications expenses increased 3%, mainly due to higher technology and infrastructure investments, partially offset by the benefits from ongoing optimization efforts, insourcing, and vendor savings initiatives. Transaction processing increased 6%, mainly reflecting higher sub-custody vendor costs. Occupancy increased 4% as we relocated our headquarters building, and other expenses were up 4%, mainly reflecting higher marketing spend and professional fees. Moving to Slide 12. On the left side of the slide, we show the evolution of our CET1 and Tier 1 leverage ratios, followed by our capital trends on the right side of the slide. As you can see, we continue to navigate the operating environment with very strong capital levels, which remain above both our internal targets and the regulatory minimum. As of quarter end, our standardized CET1 ratio of 11% was down 80 basis points quarter-on-quarter, largely driven by the continuation of our share repurchases and modestly higher RWA, partially offset by retained earnings. Our LCR for State Street Corporation was a healthy 109% and 120% for the State Street Bank and Trust. In the quarter, we were quite pleased to return roughly $1.2 billion to shareholders, consistent -- consisting of just over $1 billion of common share repurchases and over $200 million in common stock dividends. Over the last year ending September 30th, we repurchased approximately 12% of shares outstanding. Finally, a few brief closing thoughts before turning to outlook. Our third-quarter performance was solid with fee revenue growth of 3% year-on-year. We executed on our plan to improve sales capacity and reported $91 million in new servicing fee wins in the quarter, as we look towards our goal of $350 million to $400 million in servicing fee wins in 2024. And as you've seen us do for the last four years, we again demonstrate expense discipline, while continuing to invest in the business. Next, I'd like to provide our current thinking regarding the fourth quarter. At a macro level, our interest rate outlook is broadly in line with the current forwards. We currently assume global equity markets will remain flat from now to quarter end, which implies the daily averages down about 3% quarter-on-quarter, bond markets are also expected to be down about 3% on average quarter-on-quarter. Regarding fee revenue in 4Q on a year-over-year basis, we expect overall fee revenue to be flat to up 1% year-over-year, with servicing fees approximately flat, and management fees to also be flattish. As we expect the year-on-year business drivers, similar to what we saw this quarter. We do expect fourth quarter sales momentum to be similar to the strong sales performance we saw in the third quarter. We also expect that our market businesses will be down modestly year-over-year, given lower volatility. We expect software and processing fees to be up 10% to 12%, largely due to the timing of on-prem renewals and the expected new SaaS installations, and we expect the other revenue line to come in at around $30 million to $40 million in the fourth quarter. Regarding NII, we now expect 3Q NII -- we now expect 4Q NII to be towards the middle of the $550 million to $600 million range we previously mentioned. This includes continued expected rotation of about $3 billion to $4 billion out of non-interest-bearing deposits and the impact of deposit pricing, which we previously noted, but with more stability in the total deposit averages. Turning to expenses, we remain focused on controlling costs in this environment and expect to maintain relatively flat expenses in 4Q quarter-over-quarter. As always, this is on an ex-notables basis, and in this regard, we are keeping an eye on the likely FDIC assessment. And we expect our adjusted effective tax rate for 4Q will be around 22%. And with that, let me hand the call back to Ron.

Operator:

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session [Operator Instructions]. Your first question comes from Mr. Alex Bostein from Golden -- Goldman Sachs, sorry. Your line is open.

Ronald P. O’Hanley:

Yeah, Alex, it's Ron. I mean we're basing that comment largely on two things. One is, we feel like we've got quite good visibility around what we're doing from a cost perspective. So we feel like, we've got a series of initiatives underway that will continue into 2024 on managing our costs, while also continuing the investment program that we've got in place. That investment program includes some investments that will drive revenues in 2024 and beyond. But also the second thing it's based on is some of the actions we've taken around strengthening our sales and sales effectiveness and just pointing to the results we had in Q3, the note that Eric just made to you in terms of the visibility we have on 2024. So those two things, our confidence in expenses and what we believe is a nicely developing pipeline, and it's a set of sales capabilities and processes. I mean, obviously, markets could turn everything upside down, but based on a reasonable market forecast and not necessarily one that's going to be necessarily a tailwind, we do believe we can achieve positive fee operating leverage.

Eric Aboaf:

Alex, it's Eric. Let me answer that from a couple of different directions to give you some texture, because as we think about go-forward fee revenues, right? Part of what matters is installing the backlog. Part of what matters is new sales, right? Sort of maintaining the third quarter momentum to the fourth quarter and into next year, because some of those sales actually come through in the subsequent few quarters. And then, as we talked about back in September, making sure that we're very effective on our retention activities. So every one of those matters. In terms of the backlog, we said there's about $255 million of revenues in the backlog on the -- on servicing fees and north of $2 trillion on an AUC/A basis. The implementation is a little bit different in each of the regards. In terms of revenues, we think about 5%, 10% of that will come through, specifically in the fourth quarter, so that's included in our guide. We expect 50% to 60% of that $255 million to come through next year, and then the balance in 2025. So it's kind of a good mix and aligned with what we'd like. The AUC/A implementation is a little more -- is little quicker. Just sometimes that happens, it's quicker, sometimes slower, that's a little closer to 30% in fourth quarter and around 60% next year, but those will move around as they play out. But we've got good visibility now. And what we've been particularly pleased with on our third quarter sales in particular was that, a lot of that was around back office services. And back office services as you know, are one of the fastest to onboard and implement, and that's going to provide some momentum into the first half of 2024.

Operator:

Thank you. And your next question comes from Mr. Ken Usdin from Jefferies. Your line is open.

Eric Aboaf:

Yeah, Ken, it's Eric. As you surmised, there are a number of factors that matters, especially at this point in the cycle. As we transition from declining NII to some level of stabilization, and we see a good rationale for some uptick from fourth quarter into the first quarter of next year. So let me just go through them, right? There is a continued amount of rotation of NIB, non-interest-bearing deposits. We still expect some in the fourth quarter, but we expect that that starts to flatten out at the beginning of next year. We'll see exactly how much and when. It's hard to call and it moves around. We've got quite a bit of visibility into our repricing, especially for our largest and most sophisticated clients, I described that last year. And then we're through a good bit of that. We have -- we execute on some more of it in the third quarter, we expect and we have very good visibility into fourth quarter. And so, the kind of the repricing effects and the catch-up is kind of a bubble that works its way through. On the tailwind side, we then have the investment portfolio rolling through. And the investment portfolio matures $4 billion, $5 billion bonds quarter, you've got the new bonds come on roughly at 200 basis points, sometimes 300 basis points higher than the ones that are maturing. And so, that's what's giving us a positive trajectory. And so it's really those three factors, plus a little bit of lending growth and some of our other actions that we can control that we think starts to shape, a stabilization of NII as we get from fourth quarter to the first quarter, but, it'll depend. There'll be some movements and as you know we update all of you as frequently as we are in public and we'll continue to do that, but those are the trajectories and our expectations at this point.

Ronald P. O’Hanley:

Yes, Ken, it's Ron. I mean there's a number of initiatives underway, as we I think always talked about. We've really got an ongoing productivity that have actions underway, that is comprehensively looking throughout the organization. Some of the things that are underway now. We mentioned what's going on in India. And this India JV bringing that inside and this JV goes back to our early days in India, before we had our own Center of Excellence there. It's going to enable us to eliminate redundancy and eliminate a lot of oversight activities. So we'll be able to take down costs there, take down repetitive costs. We've got a comprehensive look at operating model throughout the business, which is, will start to yield results into next year. We're looking at some -- where work gets done throughout the world and are there places where we can move and combine things, create more end-to-end. So it's a series of things. Some of them -- you know a lot of the easy work has already been done. So some of these things have been -- the work's been underway for a while and we'll start to realize the benefits of it. But we see visibility such that we can make the statements that we are that notwithstanding that, we continue to make significant investments in the business that we feel we can keep our cost in reasonable check.

Ronald P. O’Hanley:

Yes. Ken, what I would add to this, I think what we're talking about now is a continuation of what we started going back to 2019, that was rudely interrupted by COVID and everything that occurred coming out of COVID, the disruption, the great resignation, the issues that arose out of that with service quality and where we needed to overinvest to make up for some of the turnover that we were seeing that led to the kind of cost increase that you saw. That's all been normalized. Service quality has stabilized. And so, I would say that we're back on the path that we started back in 2019, and overcome what we saw in the kind of 2021-2022 period.

Operator:

Thank you. And your next question comes from Brennan Hawken from UBS. Please go ahead.

Eric Aboaf:

Brennan, it's Eric. Yes, broadly, but with the asterisks of the seasonality that we've seen, it has moved around a bit, sometimes a little stronger, sometimes it's a little weaker than typical. So we do see a bit of an uptick in a normalization in total deposits. And so we'll -- we've guided to stabilization, maybe we'll see an uptick, we'll see. But -- this is based on really quite deep analysis of our client deposit base. Remember, we managed it on the US dollar, we managed on each of the foreign currencies. We have just an NIB, for example, I think we have 30,000 accounts, the average account size is $1 million. We've seen the trends in the largest, most sophisticated client and largest accounts come down quite a bit. The smaller ones tend to have a flatter line and evolution. So the guide is based on that plus a little bit of the seasonality, and we'll just update as we go. But I think we've started to see some amount of inflection here. But we want to be careful, right? There's still some amount of rotation playing out. There's some amount of balances and pricing coming through. A good bit of which we have a visibility into, but it'll take a little time to just work through it in the next few months and quarters.

Eric Aboaf:

Brennan, it's early to do that. You know, we -- I think what gives us confidence and actually the feel of necessity on fee operating leverage is, we need to run the business in a way that is healthy for our shareholders and our various stakeholders at the same time and we need to find a way through that. We certainly have gone through a strategic planning exercise. We do that through the summer, July, August, and September, and we have -- we've got our path forward. We believe both on the top-line and on expenses, it's a little soon to get into that. But we're working through that and part of what we're doing now is actually making sure that we have detailed plans, business-by-business, function-by-function. We run alternative scenarios. We even develop contingency plans and we are also -- we are careful about metering out our spend next year, where we do add to spend, we're going to do that with stage gate. So there's a lot going on right now and we'll come back with kind of a full set of guide -- guidelines and guidance in January. But I think -- we're confident that we've got a path forward here that'll be healthy and fee operating leverage is very good way for us to think about it and I think for you guys as well.

Operator:

Thank you. The next question comes from Glenn Schorr from Evercore. Please go ahead.

Ronald P. O’Hanley:

Hey, Glenn, it's Ron. Obviously, you know the kind of growth that the private markets have seen, whether it's private equity and more recently private credit infrastructure and we see none of that abating. Private equity may be taking a bit of a pause, but all of the fundamentals point to those industries increasing, and in fact many of the large -- if you look at some of the large multi-asset managers, a lot of their growth is actually coming from privates. Much of that business today remains in sourced and there's very few standards in the business, a lot of it gets serviced in very expensive locations and is not a very good experience for the ultimate LP investors. So it's a very fast growth area for us. And it becomes more important for the sponsors, for the actual firms to actually get their arms around this, because the average ticket size is going down. 10, 15 years ago, the LP investors, typical LP investor was an institution, it was a pension fund, a sovereign wealth gun fund. Today, the average investor is some affluent person that's in some kind of a pooled fund. And so, getting this all right is actually quite important, and the demand is very high for us. We're investing a lot in it, a lot of technology in it. And increasingly, as these firms become multi asset, not just focused on -- in one area, the idea of an Alpha front to back kind of thing and all that's associated with it -- with data becomes very important, both as providers, but also as investors. So the opportunity here is not just the big private providers, but also the big private investors, the sovereign wealth funds and asset owners here. So yes, we see it as a very significant opportunity for us.

Glenn Schorr:

Maybe just one follow-up to all that good detail. You were early on the -- lot of the offshore outsourcing. You were early on hedge fund outsourcing and it helps you on your growth rate over time. Do you have a sense that you're early here, do you think you have a head start and competitive edge on this private front? We just don't see the same competitive landscape, so curious on your thoughts? Thanks.

Glenn Schorr:

Okay, thank you for all that.

Ryan Kenny:

Hi, thanks for taking my question. So the industry has been seeing servicing fee rate pressure for a while. Can you update us on what you're currently seeing in terms of fee rate repricing? And are the newer wins coming in at a lower fee rate than your existing contracts or at a higher fee rate?

Ryan Kenny:

Thanks, that's helpful. And if we look at the quarter, it looks like the servicing fee rate over average AUC/A did come down a bit. Was there anything driving that? Is that just a function of lower volatility and timing, or is there anything else in that number that we should think about?

Ryan Kenny:

All right, great. Thank you.

Brian Bedell:

Great, thanks. Thanks very much for taking my question. Just actually to follow on that last one, Eric. And just doing the math, just -- and if you can confirm if I'm correct on this, the $91 million over the $149 billion is the appropriate way to look at that and that would be 6 basis points as opposed to the $255 million of servicing revenue to be installed over the $2.3 trillion, representing more than -- just like a basis point or so. So, I guess, first of all, is that -- are we -- am I looking at that correctly and is it all characterized as servicing fee revenue and I guess is what's driving that -- is that differential sort of a sustainable type of new revenue win run rate for, I guess Private Markets sector business?

Brian Bedell:

Okay, that's super helpful. And then the follow-up would be on the deposit beta, the differentials between the US and non-US, and we've heard this from the other custodians as well, in terms of non-US deposit betas being significantly lower than US, and just maybe some thoughts on as we move into this -- into 2024 and potentially Europe, maybe even higher for longer versus US potentially. And should we see more aggressive or I say more incremental deposit beta moving through the non-US markets to sort of almost catch up to US or not so much?

Brian Bedell:

Thanks very much. That's great color. Thanks.

Ebrahim Poonawala:

Hey, I guess, good afternoon. Just a couple of quick follow-ups. One, on capital, I think I heard you regarding competing up to $4.5 billion in buybacks for the year. Can you give us a sense with the CET1 at 11% close to your target, how are you thinking about capital management going into next year? Would you rather operate with some amount of excess capital as you look forward to some of the macro uncertainties, relative to just continuing buybacks and paying out any excess?

Ebrahim Poonawala:

That's helpful. Thanks for walking through that, Eric. And just a follow-up, quick question around NII, I guess, as you're thinking about [Alco] (ph) management. Is there -- as things reprice on the asset side within the securities book, are we kind of holding duration relative to where the back book is? Will at any point the thought process evolve to adding duration? I'm just wondering, how you're thinking about this cycle, the environment we might be for the next few years, and how that informs the duration you're willing to take on.

Ebrahim Poonawala:

Got it. Thank you.

Steven Chubak:

Hey, good afternoon. Thank you so much. Good afternoon. Eric, I want to ask a follow-up on the new revenue disclosure. In the past, you spoke about the level of gross asset flows that would be needed to offset natural attrition in the business. In a similar vein, I was hoping you could frame the level of gross revenue wins that are required to offset natural attrition, recognizing per, I think it was Brian's earlier question that, fee rates will certainly vary depending on new wins, but any way you could frame it in that context would be really helpful?

Steven Chubak:

No, thanks for that color, Eric. And if I could just squeeze in one more clarifying question. There was a lot to unpack in the response to Ebrahim around Capital Management. It does appear, given the 4Q buyback level, assuming you execute on the $4.5 billion in its entirety, you'll be at the lower end of that 10% to 11% range of CET 1, recognizing there'll be a pull-to-par benefit. But should we be anchoring to the 80% to 100% payout that you guys have managed to in the past, just recognizing that there's not as much excess if you're going to run at those levels?

Steven Chubak:

Really helpful, Eric. Thanks for taking my questions.

Michael Brown:

Hey, great. Thank you for squeezing me in. So, multi-part question on the asset management business. So, first, it was just great to see the money fund flows come in this quarter and you mentioned that you believe there were some market share gains there. Can you just touch on what contributed to those gains and maybe some thoughts on the coming quarters? And then I look at the equity side, and consistent with the industry, there was pressure there on the flows. What's your thoughts on maybe when investor sentiment could improve and flex there? And then just last part here, when you take a step back and you look at SSGA today, is there anything strategically that could be interesting to you from an M&A perspective to help bolster the asset mix or accelerate some of the future growth potential in the business? Thank you.

Michael Brown:

Okay. Great. Thank you. I'll leave it there.

Michael Mayo:

Hi. Well, it's been a long journey for you guys to get the Front to Back solutions and Alpha. And I'm just trying to figure out how much traction that has and where we're seeing that in the financial results. I hear your excitement, and you have alternatives now as part of that program, and you're guiding for positive 2024 fee operating leverage, and you have all these new mandates. On the other hand, I look at the fee growth this quarter and it wasn't that great, right? And so, are we seeing evidence of the Front to Back momentum in the results? Is it something that you expect to see, or is it simply such a long sales cycle that we should be thinking two, three, four years out? Thanks.

Eric Aboaf:

And Mike, it's Eric. On the financials, it's a very fair question. I just remind you the context for the current year, because there are some other large movements on servicing fees. So if you think about it, we recorded a 1% growth in overall servicing fees, but there were tailwinds and headwinds away from the kind of organic new business creation -- that -- that's important that we need to demonstrate year after year. The market tailwind for year-on-year for this quarter was about 4 percentage points of servicing fees. So you'd say, hey, where is that? Part of that was about 3 percentage points of headwind came from lower client volumes and activity, right? A little bit of what we described as, we've seen less trading activity out there, which comes and goes, and tends to be cyclical. And then the other thing we did see this year and this quarter is that previously disclosed client exit was worth almost 2 percentage points as well. So there are -- I think, some larger headwinds and tailwinds in particular flowing through the financials, net new business, right? If we just want to take a look at that, was a positive 2 percentage points, year-on-year this quarter and that's where we'd like to see the value of Alpha, the value of traditional servicing fee sales, the value of private servicing fee sales. And part of the reason why we're adding to our disclosure is to make that more apparent to everyone over time.

Eric Aboaf:

Yeah, on the previously disclosed client, we're about 30% through that very roughly. The bulk of that will come through next year and then there's another -- there is just because of how year-on-year comparisons work, you'll get a tail into 2025.

Michael Mayo:

Yeah, my initial question was fees aren't growing that much and Eric identified some headwinds to that. But you talked about the financial benefits from Alpha, the increased activity to result in accelerating revenue growth. I was just wondering a timeframe around that statement that revenue growth should accelerate due to the benefits of Alpha?

Michael Mayo:

Okay. Thank you.

Michael Mayo:

All right. Thank you.

Gerard Cassidy:

Thank you. Hi, Eric. Hi, Ron. Eric, can you share with us, I know -- I'm not asking to go into details on your budget for the upcoming year, but could you frame out for us though, the outside factors that influence the budgeting process on expenses such as wage inflation or other types of inflation? Do you feel that there's less pressure going into 2024 versus this time last year when you were doing your 2023 budget?

Gerard Cassidy:

Very good. And then as a follow-up, obviously, our industry, the world has gone through incredible turmoil in the last three or four years with the pandemic and such. And now we're in this interest rate environment that we have not seen since prior to the financial crisis. And if we assume that the Fed is higher for longer, let's say it's 4% to 5% for an extended period of time versus the 0 to 25 bps that you all had to operate and the industry operated on post-financial crisis going into where we are today. How is that -- or is it changing some of the strategies you may pursue, now that the rate environment is not -- possibly not going back to the 50 basis points that we are accustomed to? Does that change the way you approach the business or approach your customers that you couldn't do because rates were at this level three or four years ago?

Gerard Cassidy:

Great. Appreciate the color. Thank you.

Ronald P. O'Hanley:

Well, thank you, operator. And thanks to all on the call for joining us.

Ilene Fiszel Bieler:

Good morning and thank you all for joining us. On our call today, our CEO, Ron O'Hanley will speak first then Eric Aboaf, our CFO will take you through our second quarter 2023 earnings slide presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.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 measures 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.

Eric Aboaf:

Thank you, Ron, and good morning, everyone. I'll begin my review of our second quarter results on slide four. We reported EPS of $2.17 for the quarter, an increase of 14% relative to the second quarter a year ago. As you can see on the left panel of this slide, revenue grew by 5% year-on-year, driven by the expansion in our front-office solutions area, where we are an industry leader, continued momentum in securities finance business as well as strong growth in net interest income. This growth enabled us to offset some of the headwinds we saw in other fee areas given the relatively mixed macroeconomic backdrop. We also had the benefit of an accounting change for tax credit investments, which simplifies our reporting going forward. While our overall year-on-year fee growth was less than we would have liked to deliver, we did see sequential quarter revenue momentum and a step up in the sales pipeline, which we expect to build upon in the coming quarters and which I'll discuss later in today's presentation. As we drive growth, we continue to prudently invest in the business while remaining focused on managing costs given the current operating environment, and we stand ready to further intervene on expenses should the softness in the global environment persists. Turning now to slide five. We saw period-end AUC/A increased by 4% on a year-on-year basis and 5% sequentially. Year-on-year, the increase in AUC/A was largely driven by higher period-end equity market levels and client net inflows. Quarter-on-quarter, AUC/A increased as a result of the significant trillion-dollar Alpha installation and higher period-end market levels. At Global Advisors, we saw similar positive dynamics play out in the quarter. Period-end AUM increased 9% year-on-year and 5% sequentially. The year-on-year increase in AUM was largely driven by higher period-end market levels. Quarter-on-quarter, the increase in AUM was also due to higher period-end market levels as well as strong sequential net inflows. Turning to slide six. On the left side of the page, you'll see second quarter total servicing fees down 3% year-on-year as net-new business in the quarter was more than offset by lower client activities and adjustments largely due to lower custody and transaction volume and better than usual pricing headwinds. Positive year-on-year equity markets were offset by the negative impact of fixed-income markets. Sequentially, total servicing fees were up 3% primarily as a result of higher average market levels and net-new business slightly offset by better-than-usual pricing headwinds this quarter. We had a more constructive market environment relative to the first quarter as well as a significant onboarding of $1.2 trillion of AUC/A related to an Alpha client in the asset manager client segment, which comes at a modest fee rate, but with services are expected to be added in the coming years. Within servicing fees, back-office servicing fees were generally consistent with total servicing fees and largely driven by the factors I just described. Middle office services fees performance was meaningfully more positive for the quarter. On a year-on-year basis, fees were up 3% primarily reflecting net-new business and up 10% sequentially, largely driven by the installation that I just mentioned. On the bottom panel of this page, we've again included some sales performance indicators which highlight the business momentum we saw in the quarter. While total AUC/A wins in the second quarter were not as robust in volume terms, client engagement remained healthy and we saw wins across strategic segments, including mandates and asset owners, official institutions and alternatives, which are key growth areas for us as we previously mentioned. The wins including those in the alternatives segment, which are more complex to service come with above-average fee rates. We have also seen a healthy uptick in our pipeline this quarter. Turning to slide seven. Second quarter management fees were $461 million, down 6% year-on-year, primarily reflecting the impact of net outflows from prior periods, a shift of certain management fees into NII as previously described and some pricing headwinds, partially offset by higher average market levels. Quarter-on-quarter, management fees were up 1% as a result of higher market levels and cash net inflows. As you can see on the bottom-right of the slide, our investment management franchise remains well-positioned with very strong and broad-based business momentum across each of our three lines of business. In ETFs, we saw very strong net inflows of $27 billion into SPY and our sector suite of ETFs as well as our SPDR portfolio low-cost suite. In our institutional business, we saw net inflows with continued momentum in our well-established index fixed-income and defined contribution franchises. Across our cash franchise, we continue to see strong demand for our money market funds. We recorded net inflows of $10 billion. Turning to slide eight. Relative to the period a year ago, second quarter FX trading services revenue was down 8% year-on-year and 11% sequentially, primarily reflecting lower client FX volumes and lower industry FX volatility. Relative to the period a year-ago, both volumes and volatility were more muted as the start of the war in Europe last year caused unusually high FX trading activity in the first half of 2022. Many clients were also risk-off during the debt ceiling discussions in April and May, with a rebound in June and client volumes falling its resolution. Altogether 2Q is muted. We are optimistic about 3Q, but it's hard to predict. Securities finance performed well in the second quarter with revenues up 9% year-on-year, driven by higher agency spreads. Sequentially, revenues were up 7%, again mainly driven by higher agency spreads as well as higher prime services or enhanced custody revenues from deeper client engagement and specials activity, partially offset by lower balances. Moving on to software and processing fees. Second quarter software and processing fees were up 18% year-on-year and 34% sequentially, primarily driven by higher front office software and data revenue associated with CRD which I will turn to shortly. Lending fees for the quarter were down 5% year-on-year, primarily due to changes in product mix, but up 5% sequentially, mainly driven by strong client demand for lines of credit. Finally, other fee revenue increased $101 million year-on-year, primarily due to a tax credit investment accounting change and the absence of negative market-related adjustments. This includes the impact of the new accounting adoption. Moving to slide nine, you'll see on the left panel that front office software and data revenue increased 29% year-on-year, primarily as a result of higher on-premise renewals and continued growth in our more durable software-enabled and professional services revenue as we continue to convert and implant more clients over to our SaaS environment. About 60% of our clients are now on our SaaS platform. Sequentially, front office software and data revenue was up nearly 50%. About two-thirds of this uptick was driven by wealth management mandates that are becoming an increasingly important growth segment for us. Our sales pipeline continues to grow and remains strong for our Charles River development front office solutions products. Turning to some of the other Alpha business metrics on the right panel, we were pleased, we had three more Alpha mandates go live, which brings our total live Alpha clients to 15, and as I previously mentioned, we installed a significant portion of assets related to Alpha this quarter. We expect to provide more services related to these assets in the future, helping us increase the share of our client's wallet. Now turning to slide 10. Second quarter NII increased 18% year-on-year, but declined 10% sequentially to $691 million. The year-on-year increase was largely due to higher short-term rates and increase in long-term rates and proactive balance sheet positioning, partially offset by lower average deposits. Sequentially, the decline in NII performance was primarily driven by our continued rotation of non-interest-bearing deposit balances and rate pressure in the US back-book, partially offset by higher short-term market rates from international central bank hikes. On the right side of the slide, we show our average balance sheet during the second quarter. Average deposits declined 2% quarter-on-quarter in line with industry total deposit trends, which also fell by 2% in the second quarter and reflect client preferences to shift some cash to other products during periods of rising rates. Our operational deposits as a percentage of total deposits remained consistent at approximately 75%. Our global floating-rate loan book provides upside at this stage in the cycle and our investment portfolio positioning provides a tailwind as long rates roll through. We now also have the opportunity to selectively add some duration across the curve, as we see good entry points, which could enhance NII over time. Sequentially, US dollar client deposit betas were 100% during the second quarter, leading again to some sequential NII compression. We are now at the point in the US rate cycle where we expect to adjust back-book pricing to accommodate our larger clients, but do so in a disciplined manner and usually as part of a broader relationship discussion, a balancing trade for fee opportunities. Foreign currency deposit betas for the quarter continued to be much lower in the 45% to 50% range. We've also included a new slide in the appendix, page 16 that shows our NII trends over the past few rate cycles. I think it will be -- it will put the larger NII increases and decreases in context, which are driven by many factors, including changes in interest rates, the pacing of hikes, deposit levels and mix, Fed balance sheet changes as well as equity markets. You can see from that page that our recent quarters have come with a much higher than usual level of NII and we are now normalizing to a more typical level of NII that is inherent in our business activities. Turning to slide 11. Second quarter expenses excluding notable items increased 6% year-on-year. Sequentially, excluding seasonal expenses, second quarter expenses increased just over 1% as we actively manage the expenses and continued our productivity and optimization savings efforts, all while carefully investing in strategic elements of the company, including Alpha, private markets, technology and operations, automation. On a line-by-line basis year-on-year, compensation employee benefits increased 7%, primarily driven by salary increases associated with wage inflation and higher headcount attributable primarily to operational staff for growth areas, technology staff, insourcing and some lower attrition, lower than expected attrition rate. Sequentially, however, we have managed the headcount to be flat. Information systems and communications expenses increased 3%, mainly due to higher technology and infrastructure investments, partially offset by benefits from ongoing optimization efforts in sourcing and credits related to vendor savings initiative. Transaction processing decreased 2%, mainly reflecting lower sub-custody costs from vendor credits. Occupancy increased 7% as we relocated our headquarters building temporarily resulting in overlapping costs and other expenses were up 7%, mainly reflecting higher professional fees. Moving to slide 12. On the left side of the slide, we show the evolution of our CET1 and Tier 1 leverage ratios, followed by our capital trends on the right side of the slide. As you can see, we continue to navigate our operating environment with very strong capital levels, which remained well above both our internal targets and the regulatory minimums. As of quarter end, our standardized CET1 ratio of 11.8% was down 30 basis points quarter-on-quarter, largely driven by the continuation of our share repurchases and modestly higher RWA, partially offset by retained earnings. Our LCR for State Street Corporation was flat quarter-on-quarter at 108% and decreased four percentage points quarter-on-quarter, but still quite high at 120% for State Street Bank and Trust. We're also very happy with our performance on this year's CCAR with the calculated stress capital buffer well above the 2.5% minimum, resulting in a continued preliminary SCB at the floor. This demonstrates we have one of the strongest balance sheets in the industry. In keeping with our results, in June, we announced the planned 10% increase for our 3Q '23 quarterly common stock dividend, subject to Board approval and it remains our intention to continue common share repurchases under our current authorization of up to a total of $4.5 billion in 2023, subject to market conditions and other factors. We plan another $1 billion buyback in third quarter. Lastly, we are quite pleased to return roughly $1.3 billion to shareholders in the second quarter '23, consisting of just over $1 billion of common share repurchases and over $200 million in common stock dividends. Turning to slide 13, which provides the summary of our second quarter results. While there is certainly still work to do, we are pleased with the durability of our business this quarter against a mixed and divergent backdrop. Robust expansion of our front office solutions area and continued momentum in securities finance as well as strong growth in net interest income enables us to offset some of the headwinds we saw in the other fee areas highlighting the resiliency of the franchise. Next I'd like to provide our current thinking regarding our third quarter. At a macro-level, while we know that rate expectations have been moving, our rate outlook is broadly in line with the current forwards, which suggest that the Fed, the ECB and the BOE will all continue to hike in 3Q to varying degrees. In terms of average equity markets, we currently expect US equity markets to be up about 5% quarter-on-quarter as we are expecting equity markets to remain flat from now to quarter-end, and we expect international equity markets to be flattish on average. Regarding fee revenue in 3Q, on a sequential-quarter basis, we expect overall fee revenue to be down approximately 1% to 1.5%, with servicing fees down 1% to 2% as the below-average fee repricing headwinds we saw this past quarter is expected to normalize in 3Q. This will also include a revenue headwind from the previously disclosed client exit. We expect management fees to be up around 0.5% to 1.5%. We expect front office software and data quarter-on-quarter to be down 7%, as we do not expect the level of on-premise renewals in 3Q that we saw this quarter. We expect the other fee revenue line to come in around $30 million to $35 million in 3Q which is higher than prior years but down post the accounting change impact in 2Q. Regarding NII, after three double-digit sequential increases in NII last year, we now expect NII to decrease 12% to 18% on a sequential-quarter basis, driven by lower deposit levels and continued rotation as rate hikes continue into 3Q. Our outlook assumes that average non-interest-bearing deposits declined by approximately $5 billion from 2Q to 3Q. As we look forward to 4Q, we do expect to see some moderation to the amount of deposit rotation as we work through most of our back-book and most central banks begin to pause. With that context, we expect that 4Q NII decline to be much less somewhere in the range of down 2% to 6% versus 3Q, and we expect NII to then stabilize around those levels, but it will depend on market conditions. And our expectation is that 4Q declines in non-interest-bearing deposits will be small as well likely in the down to a $3 billion range versus 3Q. Turning to expenses, we remain focused on controlling costs in this environment, and we expect to take action in 3Q to bend the cost curve. As such, we expect that expenses will be down 0.5% to 1% on a sequential-quarter basis and intend to continue to actively manage expenses. As always, this is on an ex-notables basis and we're keeping an eye on the FDIC assessment, which could be a 3Q notable item. And as I noted previously, given the accounting changes we adopted this quarter, we expect our effective tax rate to be between 21% and 22% for third quarter. With that let me hand the call back to Ron.

Operator:

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Brennan Hawken from UBS. Your line is now open.

Eric Aboaf:

Brennan, sure. Let me start on the on the betas that we saw in particularly on the US book because we are at a period in the interest-rate cycle where we've now had multiple 50 basis points moved. It's been a very strong signal to our clients that rates are much, much higher and much more quickly and much more visibly. And at the same time, they now have because of that highly inverted yield curve, they have real substitute alternatives that they used to not have in the past, whether it's treasuries, whether it's money market, whether it's repo. There's a range of what they can invest in. And what we found is that our larger clients and you know we primarily have large sophisticated clients are quite active and thinking about their alternatives and then that has been accelerated by the swiftness of this cycle and the place that we've come to and the speed. If we think about the US deposit betas, they were in the 80% to 90% range last couple of quarters. This quarter we saw 100% and, yes, we expect next quarter we'll be well over 100% and what's driving that is really a catch-up in the back-book. We have clients coming to us as you'd expect, just like it happens with retail deposits for retail banks, but we have sophisticated large clients coming back and saying, look, some of our lower transactional rate levels or mid-tier rate levels are something that they like us to adjust. And in a way, what I think we -- has played out is that while spreads widened for us on the deposit, but for some period of time, we're now seeing a convergence back to where they would have been. And that's coming through and so what we have in the cycle is actually a number of quarters of below 100% betas, then we get to a 100% beta and then we are going to have a quarter where betas are well-above that 100% level. And it's really a catch-up in the back-book and that's what's playing through. It is what is beginning to drive this higher reduction in NII this quarter, the 10% quarter-on-quarter that you saw. You saw in my outlook, we are expecting 12% to 18% reduction in NII this coming quarter. And if you peel that apart, some of that is the continued rotation out of non-interest-bearing, but some of it and in good part of it is this catch-up in the back-book that's playing through. We do think that over time, we've seen the bulk of that and that will begin to moderate and I'm certainly happy to go into that and some of our perspective as we drill down deeply into our areas, but that's the context. On your other question on euros, we should probably follow up. I think we see betas quarter-on-quarter of about 50%, but we should probably just follow up offline because I think that's deep in the supplement and probably do that with you and the IR team.

Eric Aboaf:

Yeah, I think the broader context, as you recall, Brennan, is that we disclosed that large client deconversion was going to happen over multiple years. We announced it well over a year ago and we described it in our K at about 1.7% of fee revenue. So you can calculate that through. I think in our fourth quarter earnings call in January, I described that we had seen about $20 million on a run-rate come out, but I can reconfirm that. In the next quarter third -- this coming third quarter we'll see about $20 million come out sequentially. And then in the fourth quarter, there's another piece of about another $15 million that will come out as well. And then after that, it's several more quarters before we see the later and final installments. But that's incorporated into our guide.

Operator:

Your next question comes from Alex Blostein from Goldman Sachs. Please go ahead.

Eric Aboaf:

Alex, it's a good question. I mean, we're clearly navigating and living through an interesting environment that we've not seen in two decades, right? You've got to go back pre-crisis before you see 5% prevailing rates. I think if you -- if you also think about how swiftly we've gotten to where we are, that's why we created -- we put some of this information back on page 16 in our materials. You see this cycle has moved twice as far in terms of the uptick in rates in half the time of the last cycle. And so what plays out as that happens is that we always have clients that, as rates move up, they begin discussing with us and engaging with us on what would be appropriate maybe putting in place multiple balance tiers, having discussions about their expectations, we negotiate and so forth. And you can imagine large client discussions occur over three, six, sometimes even nine-month periods. And so if you kind of turn back the clock and say, when did some of those discussions occur, some of them early ones may have started second quarter of last year, third quarter of last year, fourth quarter of last year because there was also a perspective among our clients and us for that matter, that rates might continue to 5%, but they might have gone to 4% or 3%, which would have put us and our clients in a different position from a NIM and NII and rate-setting perspective. So I think it's really the speed of this that has played out and on one hand. And on the other, the inverted yield curve gives clients and the prevalence of the money funds and treasuries and so forth, give clients an alternative, right, that's more vivid, I'd say, than in some of the past cycles. And so that's the kind of client behavior. What we have seen is that if you decompose our book, some of this activity is in the non-interest-bearing deposits, which have come down. And some of it is in the interest-bearing back-book because some clients with non-interest-bearing deposits come to us and say, look, can you make them now interest-bearing at a certain rate. And what we've seen is some real segmentation of that book. As an example, the average account in non-interest-bearing, there's about 30,000 accounts. The average account is barely over $1 million. What you can do in some of the analytic work we've done is separate out the higher balance non-interest-bearing clients and client accounts from lower balance ones. Not surprisingly, the higher balance accounts are down year-over-year in balance terms by 70%, right. The large number of smaller accounts are down by 15%. And so this is where what we're starting to work through with the -- what I'll describe is the burn down. How much of the larger deposits and non-interest-bearing have migrated to interest-bearing, right, at what rate. And our perspective is that we are now working through, I'll describe as a catch-up on the back-book. Some of that is non-interest-bearing deposits moving to interest-bearing and some of that is interest-bearing being priced up. And as we think about it, we think that the peak of that catch-up will play out in third quarter as we scan the deposit types, the larger, more sophisticated clients versus the smaller clients. And that's why we expect both the catch-up to continue into the third quarter and likely peak in the third quarter and then begin to moderate in the fourth quarter and to burn down.

Eric Aboaf:

I think it's -- I've not calculated directly on a cost versus rate basis, on a NIM basis, but I guess we could back into it if it'd be helpful to you. As we think about the long range view of NII on our book, I've given some guidance for 3Q NII, for 4Q NII. I think our instinct is that NII will settle in this $550 million to $600 million range per quarter. And if it's helpful, we can try to calculate that back into spread on assets or a spread or a cost of funds on deposits and follow up with you.

Ronald P. O'Hanley:

Yes. Alex, I mean, where we start with is, I mean, because what you're describing is outcomes of the productivity efforts where we've -- and these are not new, these are ongoing. We really start with how do we create more scale in our business. How do we increase speed, lower error rates, increase client satisfaction, take out manual interventions. So the measures that we're using would be the traditional productivity measures and this has been underway now for several years. You've been seeing the results in our -- and we've been able to manage costs certainly relative to others. But in terms of how we think about the business going forward, particularly given that NII is no longer a tailwind in terms of an outcome basis, we really think about the operating leverage, I think, is the key outcome we're managing to, if that's the question you're asking.

Ronald P. O'Hanley:

Thanks.

Rob Wildhack:

Good morning, guys. Just trying to ask about the asset side and the securities book quickly. Decent uplift in yield again plus 21 basis points. Can you give some color, some numbers around the front book, back-book difference there? And how much repricing can sort of assist NII going forward?

Rob Wildhack:

Thanks, Eric. And then one more just on the operational deposits. If I use the numbers on page 10, operational or excuse me overall deposits are down -- operational deposits are down as a percentage of the mix. Conceptually, what would be driving that? I guess I'm confused as to why operational deposits would be down year-over-year more than non-operational deposits.

Rob Wildhack:

Okay. Thanks, Eric.

Operator:

Your next question comes from Glenn Schorr from Evercore. Please go ahead.

Eric Aboaf:

Yes. Let me start there, Glenn, and I think Ron will weigh in as well because a number of us have these engaging conversations with clients. I think from a burn down standpoint, let me first take it from that angle is if you think about our $200 billion of deposits, we've got deposits at a number of different price tiers and we have kind of very large sophisticated clients and then kind of that large tail of small and midsized clients. Of the $200 billion, we think there's about $50 billion that we've been very focused on and continue to be focused on. So about a quarter of our total deposits are with these clients that as we've talked about the last couple of questions, there's been a real catch-up on the back book. I described that because of that $50 billion, which is either a very low price or zero price for our larger and most sophisticated clients, where we have these engaging and balance of trade discussions, right? We've around -- we've got about $25 billion that's behind us, where largely, we've repriced those deposits. We've had those discussions and some of those have come with some balance of trade improvements or some commitments on stability on fees, and those are behind us. Included in the outlook that I provide beyond the $25 billion, there's another $15 billion that's underway right now. That's included in my third quarter outlook, right? So that gets us to $35 billion, almost $40 billion of the $50 million. And then there's a trail that we'll still have. And so I think from a client discussion and negotiation standpoint, the third quarter we expect to be the peak. I think what you'll find is that each of these questions on deposits, certainly, rates goes through a pricing committee from a balance sheet management standpoint. But very quickly, those go to the most senior client executives and all the way up to our C-suite because those are large. They're very large and that's where we engage. And I think what you'll see over time is some of that we'll come back through in FX revenues and sec lending revenues and the absence of fee rate reductions in the future, right, on one hand. And on the other hand, some of what we do here is also work with clients on expanding the range of what we do for them when it comes to managing their cash, right? I think some of the reason you're seeing the uptick in cash with in our asset management business because some of those clients say, look, I'd like to be in a cash money market sweep until we've been doing that. You see our repo business continues to do very, very well is actually an add to -- it's a stabilizer to NII or an add to NII on a year-on-year basis and stabilizing and it's a stable source of NII income quarter-on-quarter because we've been able to shift some of the client cash to those areas. So there are some offsets as well there. But that's a bit of a start.

Glenn Schorr:

Thanks for all that color.

Sharon Leung:

Hi. Good morning. This is actually Sharon Leung filling in for Steven. Just on the deposits, outside of the rotation out of NIB, can you talk about the overall trajectory of total deposits, particularly because it looks like more recent liquidity drawdown has come out of RRP instead of deposits. So just wanted to get your thoughts on the expectations for the trajectory on deposits from here in the context of QT treasury issuance, et cetera?

Sharon Leung:

Thanks for that. And as a follow-up, just on some of the updated capital rules that are coming. I understand you probably won't be able to give much color because we haven't seen a proposal yet. But just in terms of like expected ways you might be able to mitigate some of that impact and which businesses might be more impacted for you guys?

Sharon Leung:

Great. Thank you.

Brian Bedell:

Great. Thanks for taking my question. Amidst Ron, I guess I wanted to come back to your comments on the, basically, the overall revenue per client, if I can sort of summarize it that way. Obviously, there are different components of how clients, the asset servicing clients pay for the business, and there are many different ways aside from the core fees that they can do that. So as you think about that across the client base, I know you have looked at this more holistically across clients over many, many years. But with the deposit beta going up, is that sort of revenue per client going down? Or do you think you're able to actually be able to improve the fee rate given that they aren't paying as much on the compensating balances?

Brian Bedell:

That's great color. And then maybe just on the expense side, Eric, you mentioned the expense levers. Are they more tactical in nature? Or do you see sort of an ability to reengineer -- continue to reengineer the cost base. You've already done a great job in reducing costs structurally over the last several years. I don't know if we're like mostly through that and when you do have the cost saves you reinvest them in growth initiatives? Or is there an ability to sort of reduce the overall cost structure?

Eric Aboaf:

And just to round that out, we've got to pay for performance. So when we have larger -- we deliver larger sales, we'll pay for that when it's a little lighter. As you saw, we'll reign that in, and that's part of the execution mines that we have. We've also just given some of the evolution on salary increases and that we've all worked through over the last couple of quarters over the last year. We also feel like it's time where we have enough staff and so we've put in place a hiring freeze because we need to contain our staffing costs. So we need to make sure as we reengineer, we actually redeploy our folks to, say, new business areas or to growth areas and actually pair down others. And the way to do that in a more emphatic way tactically, right, is to be particularly disciplined on hiring, and freeze that or just limit it. And so given the short-term performance, we're doing that as well, which gives you a sense for our willingness to bend the cost curve.

Operator:

There are no further questions at this time. I would like to turn the call back over to Ron O'Hanley for closing remarks.

Operator:

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect at this time.

Ilene Fiszel Bieler:

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 Aboaf, our CFO will take you through our first quarter 2023 earnings slide presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.com. Afterwards, we'll be happy to take questions. During the Q&A, please limit yourself to two questions and then requeue. 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 on 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.

Eric Aboaf:

Thank you, Ron, and good morning, everyone. I'll begin my review of our first quarter results on Slide 4. We reported earnings per share of $1.52 for the quarter, which included a $20 million -- a $29 million provision or $0.06 of EPS impact associated with the expansion of liquidity for U.S. financial institution, as we participated in an industry consortium supporting the banking system. We were pleased to do our part. On the left panel of the slide, you can see that our first quarter '23 results reflected the year-on-year decline in both equity and fixed income markets, but was more than offset by strength in net interest income and strong momentum in our securities finance business. EPS was down just 3% as another quarter of significant buybacks reduced the number of shares outstanding. Against this challenging backdrop, we again held total expense growth to just 2% year-on-year, even as we continued to thoughtfully invest in product and client growth initiatives. Turning now to Slide 5. During the quarter, we saw period end AUC/A decrease by 10% on a year-on-year basis, but increased 2% sequentially. Year-on-year, the decrease of AUC/A was largely driven by lower period end market levels across both equity and fixed income markets globally, which were both down in the 10% range. Quarter-on-quarter, AUC/A increased as a result of higher period end market levels and client flows. At Global Advisors, we saw similar dynamics play out. Overall, our first quarter AUM was negatively impacted by volatile markets. Period end AUM decreased 10% year-on-year, but increased 4% sequentially. The year-on-year decline in AUM was largely driven by lower period end market levels and net outflows. Quarter-on-quarter, the increase in AUM was primarily driven by higher quarter end market levels, partially offset by some outflows. Turning to Slide 6. On the left side of the page, you'll see first quarter total servicing fees down 11% year-on-year, largely driven by lower average market levels, client activity and adjustments, and normal pricing headwinds, partially offset by net new business. Excluding the impact of currency translation, servicing fees were down 10% year-on-year. Sequentially, total servicing fees were up 1%, primarily as a result of higher average equity market levels, partially offset by lower client activity and adjustments. On the bottom panel of this page, we've included some sales performance indicators, which highlight the good business momentum we again saw in the quarter. AUC/A wins in the first quarter totaled $112 billion with about half driven by wins across the growing Alternatives segment, especially in private markets. The fee rate on these alternative wins are generally more than 4 times the total servicing fee average, which makes this a strong win quarter from a projected revenue standpoint. At quarter end, AUC/A won, but yet to be installed totaled $3.6 trillion with Alpha representing a healthy portion, which, again, reflects the unique value proposition of our strategy. Given the planning and preparation since these deals were announced, we expect significant onboardings of this uninstalled AUC/A next quarter. Turning to Slide 7. First quarter management fees were $457 million, down 12% year-on-year, primarily reflecting lower average market levels and a previously reported client specific pricing adjustment. Quarter-on-quarter, management fees were flat as higher market levels were partially offset by outflows and day count. As you can see on the bottom right of the slide, notwithstanding the difficult macroeconomic backdrop in the quarter, our franchise remains well positioned, as evidenced by our continued strong business momentum. In ETFs, we continued to build on strategic growth segments, which is reflected in net flows in our SPDR portfolio low cost equity and fixed income suites. In our institutional business, we saw net outflows while sustaining continued momentum in defined contribution with the Target Date franchise recording inflows of $6 billion. Across our cash franchise, consistent with industry trends late in the first quarter, we saw a flight to quality with significant net inflows worth 7% of cash AUM into SSGA money market funds since the week ending March 10th, which largely reversed the seasonal outflows experienced earlier in the quarter. Turning now to Slide 8. Relative to the period a year ago, first quarter FX trading services revenue was down 5%, primarily reflecting lower client FX volumes partially offset by higher spreads. As a reminder, the start of the war in Europe last year caused some unusually high FX trading activity in 1Q '22. Sequentially, FX trading services revenue ex-notables was down 1% with lower spreads offset by 6% higher client volumes. And consistent with the significant increases into industry wide money market flows, our GlobalLink franchise experienced an increase of $20 billion or 13% into its money market cash sweep program during the last three weeks of March. Securities finance performed well in the first quarter with revenues up 14% year-on-year, driven by higher specials activity and an active focus on business returns, partially offset by lower balances, which was consistent with the industry. Sequentially, revenues were up 6%, again mainly driven by higher specials activity, which was consistent with the market and securities lending industry environment. Moving onto software and processing fees. First quarter software and processing fees were down 18% year-on-year and 24% sequentially, primarily driven by lumpy on-premise renewals in the front-office software revenues, which I'll turn to shortly. Lending fees for the quarter were down both year-on-year and sequentially, primarily due to a shift away from products with higher fees, but lower returns. Finally, other fee revenue increased $16 million year-on-year, primarily due to positive market-related adjustments and $27 million sequentially, largely due to fair value adjustments on equity investments. Moving to Slide 9. You'll see on the left panel that front office software and data revenue declined year-on-year, primarily as a result of lower on-premise renewals, partially offset by continued growth in software enabled revenue. Timing of installations will vary quarter-on-quarter based on the size and scope of prior business wins and we expect several SaaS conversions and several on-premise renewals to come through in the second quarter. Year-on-year, our annualized recurring revenue was 16%. Our software enabled revenue was up 11% year-on-year, but down sequentially due to the absence of an accounting true-up in fourth quarter. Turning to some of the other Alpha business metrics on the right panel. We were pleased to report another Alpha mandate win in the asset owner client segment. In addition to the reported win this quarter, we expect significant middle-office installations in 2Q as we've completed the preparations to begin to onboard a portion of a large mandate won back in 2021. Turning to Slide 10. First quarter NII increased 50% year-on-year, but declined 3% sequentially to $766 million. The year-on-year increase was largely due to higher short-term rates and proactive balance sheet positioning, partially offset by lower deposits. Sequentially, the decline in NII performance was primarily driven by additional client rotation out of non-interest bearing deposit balances, partially offset by higher short term market rates from central bank hikes. On the right of the slide, we show our average balance sheet during the first quarter. Year-on-year average assets declined 6% and 2% sequentially. Average deposits declined 3% quarter-on-quarter, which is relatively consistent with our expectation for first quarter seasonality and client pricing preferences during periods of rising rates. Of note, average weekly deposit levels at quarter end increased 5% as we compare with week -- with the week ended March 10. The stress in the regional bank space primarily affected consumer and corporate depositors rather than the institutional asset manager and asset owners that we serve. We, in contrast, saw some risk off deposit inflows at the end of the quarter. Our operational deposits as a percentage of total deposits remain consistent at 75%. These are determined by regulatory guidance. U.S. dollar client deposit betas were 80% to 90% during the quarter, as expected. Foreign currency deposit betas for the quarter continued to be much lower, in the 30% to 45% range, depending on currency. Our international footprint continues to be an advantage. Turning to Slide 11. Our first quarter expenses excluding notable items increased just 2% year-on-year or up approximately 4% adjusted for currency translation. In the light of the current revenue environment, we're actively managing expenses, while continuing to carefully invest in strategic elements of the company, including Alpha, private markets, technology and operations automation. Compensation and employee benefits increased 5% year-on-year, primarily driven by higher salary increases associated with the wage inflation and higher headcount attributable to lower attrition rates and in-sourcing. Total non-compensation expenses, on the other hand, decreased 1% year-on-year as continued productivity and optimization savings more than offset increases in certain variable costs and professional services. On a line-by-line basis for non-compensation expenses, information systems and communications expenses were down 2% due to benefits from ongoing optimization efforts, partially offset by technology and infrastructure investments. Transaction processing was down 9%, mainly reflecting lower sub-custody costs from declining market levels as well as lower broker fees. And other expenses were up 9%, mainly reflecting the higher professional fees, travel, and marketing costs. Moving to Slide 12. On the left side of the slide, we show 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, we continue to navigate the operating environment with extremely strong capital levels, which are well above our targets, let alone the regulatory minimums. As of quarter end, our standardized CET1 ratio was up slightly year-on-year, but down 1.5 percentage points quarter-on-quarter to 12.1%, which was largely driven by the continuation of our share repurchase program and the expected normalization of RWAs that we discussed last quarter. Tier 1 leverage ratio was flattish at 5.9%. Our LCR for State Street Corporation increased a couple of percentage points quarter-on-quarter to 108% and 4 percentage points quarter-on-quarter to 124% for State Street Bank and Trust where most of our businesses transacted. We were quite pleased to return $1.5 billion of capital to our shareholders in the first quarter, consisting of $1.25 billion of common share repurchases and $212 million in common stock dividends. Lastly, given the high level of capital across every measure, positive pull-to-par in AOCI and our strong earnings trajectory, we continue to expect to return up to $4.5 billion of capital in the form of buybacks at pace this year, subject to market conditions of course. Turning to Slide 13, which provides a summary of our first quarter results. While there is certainly still work to do, we are pleased with the durability of our business this quarter against a very challenging backdrop and the continued competitive strength of our global franchise. Next, I'd like to provide our current thinking regarding the second quarter. At a macro level, our rate outlook is broadly in line with the current forwards, which suggest the Fed, ECB and Bank of England, all continue to hike to varying degrees in 2Q. In terms of markets, we currently expect average U.S. equity and global bond markets to be up about 1% to 2% quarter-on-quarter and international equity markets to be flattish. Regarding fee revenue in 2Q and on a sequential quarter basis, we expect overall fee revenue to be up 4% to 5% with servicing fees up 1% to 2% and management fees approximately flat to up 1%. We expect to see a significant increase in front office software and data revenues as we have line of sight to a number of on-premise renewals and SaaS conversions in 2Q. In our other fee revenue line, which we know is difficult to forecast, we intend to adopt in 2Q the new accounting guidance recently issued regarding renewable energy investments. We would expect to see a sequential quarter uptick in total other revenues of between $5 million to $15 million, but this estimate always depends on market levels. As we adopt this accounting change, our effective tax rate for 2Q '23 is expected to be approximately 21%. The adoption will be roughly neutral to EPS. Regarding NII, we now expect NII in the second quarter to decrease 5% to 10% sequentially, primarily driven by the non-interest bearing deposit rotation and interest-bearing deposit betas as quantitative tightening and rate hikes continue into 2Q. Turning to expenses. We remain focused on driving productivity and controlling costs in this environment. We expect that second quarter expenses will be flat on a sequential quarter basis, excluding the 1Q seasonal compensation cost of $181 million. Overall, we will offset some of the 2Q NII trends with higher fee revenues as business momentum builds in 2Q and through the year and we continue to actively manage expenses. And with that, let me hand the call back to Ron.

Operator:

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question comes from Ken Usdin of Jefferies. Please go ahead.

Eric Aboaf:

Yeah, Ken. It's Eric. The largest driver of our NII trends right now, whether it's the fourth quarter to the first quarter or first quarter to second quarter is really the level of non-interest-bearing deposits. Those came down this past quarter about $5 billion. We had expected them to come down about $3.5 billion. And we do a fair amount of forecasting on this. We think about January, February. March, it usually comes through in a U shape and we actually had a -- had some of the opposite play through in March. And so that's what's been driving some of the change in NII. And in contrast, we've actually seen good flows in interest-bearing deposits at the same time. So there is a fair amount going on under the surface. As we look into second quarter, we expect this pace of non-interest-bearing deposits to continue to rotate. So if you step back, last year, we had periods where non-interest-bearing deposits were up $1 billion; then down $2 billion; then down $4 billion; then down $2 billion, right? It's been quite volatile. And right now we're expecting non-interest-bearing deposits probably to come down another $4 billion, $5 billion into the second quarter. And if you think about it, when you earn 5% or more for those kinds of deposits on the asset side and then pay zero, that can be a significant -- that's a significant amount of NII, right? Every $1 billion is worth $12 million, sometimes $15 million per quarter. And so that's what we are seeing flowing through. The hard work we're trying to do from a forecasting standpoint, and forecasting is always hard, is where does the trend -- how does that trend play out and we do some of what you probably do, which is we've looked at the last peak and the last low of non-interest-bearing deposits. The peak was 22%; the last low was 18%. On the other hand, in dollar terms, the last peak was $50 billion, and the last low was about $30 billion, and right now, we're sitting at about $39 billion. And so that's what's really playing through the NII forecast. And then as we play that out, we expect to see some of that non-interest-bearing deposit rotate into interest-bearing deposits, but to be honest, some of our clients who are sophisticated institutions are also looking at some of the other strong rates that they can get either in treasuries or money market funds. And so, at this point in the cycle, with the high level of prevailing rates, we expect deposits probably to trend down another few billion into the second quarter, but this is all kind of dependent on client behavior and activity as we take a look at our forecast.

Eric Aboaf:

Yeah. I think clients are -- the clients (ph) are making a variety of different decisions here. And I think part of what - why we're seeing, what we're seeing is that we've not lived in an environment where interest rates are at 5%, whether you put that at the Fed or in three and six-month treasuries, right? And so clients have a fair amount of alternatives and they're thinking about how to deploy, how to maximize interest and yields for their own clients, especially the kind of clients we have who are -- over time will always be price-sensitive. When it comes to the operational nature of the deposits, you can see from our disclosure and we added some of this, clients are incredibly sticky and stable from an operational standpoint. Operational deposit balances were steady and the operational percentages continue to be very -- in a very narrow band. You have clients with several billions of dollars each often, but they typically have hundreds, if not thousands of individual accounts with very significant transactional and payment flows, and that's why they're categorized as operational in nature. And so that behavior hasn't changed. What we -- that behavior of core custodial deposits is deeply ingrained in the structure of those accounts, the processing we do for them, the avoidance of overdrafts that they always try to -- that they don't want to -- that they don't want. I think what we're seeing instead is clients on the margin will find, for their discretionary, the last dollar of $100 of deposits, they're going to be rate-seeking. And at these prevailing rates, there is -- they're going to look here and there. Now sometimes, we match them with those rates. So we'll offer deposits at exception rates. Sometimes we help them with their sweeps or some of their treasury repo interest. And so there is a variety of different ways we serve our clients and we'll continue to do that. But clearly, at this point in the rate cycle, you kind of have some of the patterns that you and we would expect to have.

Operator:

Thank you. The next question comes from Brennan Hawken of UBS. Please go ahead.

Eric Aboaf:

Thanks for the question. I think we'll continue to see a range of behaviors across the geographies. I mean, I think the way I would describe them is in the U.S., with prevailing rates at where they are, you have this non-interest-bearing to interest-bearing rotation on one hand. And then you have clients nudging on pricing in general. And we're kind of at that point where clients now have incentives, just like we do, to find a place to settle at with us. I think in Europe and pound sterling, it's still new, right? We've just been at the kind of the first, maybe half, two-thirds of the rate increases. And there, the betas continue to be in that 20%, 30%, 40%, 50% range and are quite attractive for us. They're good for clients because the clients tend to have somewhat fewer alternatives in those international jurisdictions relative to the U.S. on one hand. On the other, there tends to be a more -- there tends to be less price sensitivity on the deposits. And we do expect that to continue. And I think with more rate increases flowing through in the international jurisdictions, that allow us to continue to lag modestly the deposit rates that we offer to see those play through.

Eric Aboaf:

Yeah. Good question, and it's something that we've been very deliberate and thoughtful about. You can imagine, as we saw the events in March unfold, we've been thinking daily and weekly about how stable is the broader banking system. The starting point for us is we've got an incredibly strong balance sheet, right? Our capital ratios are in the 12% range. That's 100 basis points above the top end of our range, 200 basis points higher than the bottom of our range. It's 400 basis points above the regulatory requirements. And you know many run much thinner in terms of regulatory requirements. And we've always chosen to run with this kind of -- with a healthy buffer. So I think on one hand, the starting point for us is important in our ongoing decisioning around capital return, and we're conscious of that. On the other hand, just like you say, we assess the market conditions and the environment, not for us, because this is not about us. This is about what's happened in some of the other parts of the banking system. We assess those. And if we would had economic and banking conditions like they were at the beginning of March, I think we'd have a -- we'd make different statements around our capital buyback. And so we feel like there has been a fair amount of healing since the beginning, middle of March, and we think that gives us -- that factors into our thinking. And then what we'll do is we'll continue to evaluate conditions, right, if market conditions and systemic conditions get more concerning for the system, we'll -- we may pace these differently if they continue to be at these levels of stability that we're at, we feel confident that, that we can and should continue to proceed. But it will be a week-by-week reassessment. Our buybacks aren't once and done. They're done over the course of the next eight to 10 weeks. And this is one of those quarters where you do them more linearly than not. And so we'll evaluate. But our position of strength is just quite -- I think quite high and gives us a fair amount of latitude.

Operator:

Thank you. The next question comes from Betsy Graseck of Morgan Stanley. Please go ahead.

Ronald P. O'Hanley:

Hi, Betsy.

Eric Aboaf:

Betsy, there is a couple of different ways we look at this. And clearly, we're one quarter into the year. We've started to give some outlook for second quarter, and we need to see how the conditions and the environment plays out because equity markets up or down, bond markets up or down by more than a percentage point or 2 is going to impact our revenues. And so I think it's still early in the year. We set out this year to drive positive operating leverage and continue to look for ways to do that, but we need more information about the external conditions to really see that. I think as we think about the opportunities here though, NII will trend positively for the year, but not as positively as we would have expected. So that's a consideration. You saw that we took up our fee guide for the second quarter, and so that gives us a little more ballast or breathing room or momentum, to be honest. And we'll continue to manage expenses quite actively. I would say in the last year and a half, as NII was up 20%, 30%, 40%, 50%, right, we didn't spend that on the expense line, right? We were quite conscious of continuing to drive investment, but also productivity and calibrate it in our expense growth. And so as we look forward, we'll continue to do that, but obviously, with a -- we'll keep track of the direction of revenues and obviously try to adapt where we can.

Eric Aboaf:

Yeah. It's -- the revenue impact on that line is a little bit of both, and we're still discerning all the specifics in doing the forecasting. In second quarter, we have -- we need to do a year-to-date catch-up. That's how the accounting guidance is written. And then there will be some additional revenues in the third and fourth quarter, not as much as there would be from the second quarter catch-up. So we're trying to map that out. And as the quarter proceeds, we'll try to get a little more guidance out. But that line will tend to have -- instead of kind of being centered around zero, will be centered around a slightly higher number in the coming quarters, and we'll try to get some guidance out on that as we go through all the forecasts.

Operator:

Thank you. The next question comes from Gerard Cassidy of RBC. Please go ahead.

Eric Aboaf:

Gerard, it's Eric. We're -- we've been quite careful over the years of running a portfolio with a modest amount of duration. I think it's typically in the two and a half to 2.8 years in that -- that provides us some amount of benefit from what historically has been steepness in the yield curve. It's also given us some ability to create some amount of stabilization in NII without forsaking the opportunity to benefit from interest rate rises, which is what we've been able to do over the last two years. We like that amount of duration because it also protects the income statement as rates fall, and we'll see if that -- if there is -- if there are rate cuts late in the year or next year or the year after that. So that gives us some stability as well. I think what I'd tell you though is, we spend as much time on duration curve shape as we do on carefully also running some MBS portfolios where there is some additional yield pickup, but you've got to be careful in terms of the level of convexity risk that you take. And then because of our deposit franchise, as was mentioned earlier, we're doing this around the globe. We've got about a third of our balance sheets in international jurisdictions, and that gives us real opportunities in pound sterling, euro, Canadian, Aussie dollars et cetera to invest. And we may run somewhat different duration levels in those different currencies. We might be shorter in one, longer in other, partly to reflect our views on the rate cycle and where each of those are. So there is a range of kind of approaches that we take there, and we find that our flexibility gives us some opportunities to deliver some good yields in NII, but obviously being careful. We don't want to stretch for duration. We don't want to stretch for yield. We want to continue to run a conservative portfolio like we have for many, many years.

Eric Aboaf:

Yeah. Let me do that in reverse order. The operational accounts are sometimes interest-bearing, sometimes non-interest-bearing. So there is a wide variety of different pricing structures, but they tend to be -- remember -- and these are thousands of accounts oftentimes for each of our -- for each of the asset managers or asset owners that we custody for. And it's less about the pricing in those accounts than about the nature of the accounts and the payment transactions that clients are funding in effect with the deposits that they leave with us. In terms of non-interest-bearing deposits, I do think we'll continue to see a trend downwards. We saw a $5 billion trend this past quarter, which was $1 billion or $2 billion more than we had expected even back at that early -- even back when we last gave guidance. We expect probably another $4 billion, $5 billion will come out in the second quarter. And then I think we do believe that there is going to begin to be some stabilization. I'd be inclined to think that we'll get to that $30 billion probably later this year, but this is where there is no amount of crystal-balling that we can provide. It's hard to really be sure it could be at that level, it could be around that level. There is -- we've seen movements in non-interest-bearing month by month that are plus/minus $4 billion or $5 billion. Even in April, as an example, we've had days where non-interest bearings were in the $44 billion level, so $5 billion above the recent average and days when they were at the $34 billion level. So it's that kind of range and volatility that we're trying to forecast through, but clearly, the trend's here, and I think the last benchmark of that -- around that $30 billion level may be one that we approach potentially later this year.

Eric Aboaf:

Okay. Yeah.

James Mitchell:

Hey. Good morning. Maybe just a little bit on the fee income story. You talked about a pretty hefty sequential growth, but not necessarily coming from the servicing line, so -- but you talked about great momentum in servicing and onboarding. So how do we think about the trajectory on the servicing fee line as you onboard? Is it more of a back half story and how are you thinking about full year with servicing fees?

Eric Aboaf:

And Jim, it's Eric. Just to round that out, Ron's covered servicing fees. Management fees should give us some lift as well as we have some equity market appreciation -- equity and bond market appreciation into the second quarter. I think if you go through the trading lines, second quarter is usually good. We'll have to see just how much volumes play through in spread, so -- but you've seen we've been making nice headway given the market volatility with specials and sec finance that will likely continue. In the software and processing line, we had one of the lowest on-premise renewal quarters this -- in 1Q. And that one just varies. If you just you look at some of the materials in the deck, that could be $6 million, it could be $60 million. That was literally the swing from fourth quarter to first quarter. We expect, as we had said, some sizable upticks there as well. So there is a range of areas. And in effect, from a management standpoint, we're focused on every one of the opportunities and businesses and harnessing the client momentum that we've been seeing.

Eric Aboaf:

Yeah. No, I understand the perspective. I think what I will remind you on software and processing, we had an unusually low print in the first quarter. So the first part of the follow up (ph) in second quarter is rebound and then continuation. On-premise revenues have averaged about $30 million a quarter, for example. That's a reasonable kind of average that one could expect, but we printed $6 million this past quarter. So it's that kind of, I think, rebound we're expecting in the second quarter and then it should stay within the averages. And then beyond that, to your point, there are the more annuity-like areas, whether it's the software enabled, the SaaS revenues in software, whether it's some of the -- we have very flow-oriented FX and securities finance books. And then as Ron mentioned, we're seeing increasing momentum in servicing fees and management fees, and the servicing fee momentum is spread as we've mentioned, both in terms of back office and in middle office, which gives us additional diversity. It's hard for us to predict the second half of the year, and I'll hesitate every April to re-estimate the full year, but I think we'll know more as we get to June and July, and I'll certainly give -- be able to give you an indication. But we've -- we're certainly seeing momentum of activity with clients and expect some of these onboardings to come through. And we think that provides a step-up and then there should be some continuation beyond second quarter that will be positive.

Eric Aboaf:

Yeah.

Sharon Leung:

Hey. Good morning. This is actually Sharon Leung on for Steven. For NII, I know you noted that you -- it will still be up, but maybe not as meaningfully as the 20% you had guided to previously. Is there any numbers you can put around that, for example, assuming that the NIB rotation continues as expected and you get to that $30 billion number sometime in the year?

Sharon Leung:

Great. Thank you very much.

Ebrahim Poonawala:

Good morning. I guess just a couple of quick follow-ups, Eric. One on NII. I heard all your comments on the -- in the Q&A. Just trying to make sense of, is the customer behavior that surprised you today versus January given that you probably assumed that rates were going a little bit higher than where we were back in Jan, or is it the events of the last month that have changed customer behavior and increased the intensity of repricing?

Ebrahim Poonawala:

Got it. And just a separate question. I know it's small for you, but the other element that your provision is higher, the credit portfolio rating, remind us of the credit sensitivity that we should expect from the balance sheet from an economic downturn, if there are more rating agency downgrades, like what that means from a credit cost provisioning perspective as we look forward.

Ebrahim Poonawala:

Got it. Thank you.

Michael Mayo:

Hi. As you know, the markets that’s a little generations (ph) Silicon Valley. And can you just make it crystal clear? I mean, I think I know the answer, but I need you to really explain why this is an earnings issue and not a liquidity issue. And on the earnings issue, just to make sure I heard you correctly, your non-interest-bearing deposits went from $44 billion down to $39 billion. You think base case, it might go down to $34 billion, but the low end of the range, which is possible later this year would be $30 billion. That would be going maybe non-interest-bearing deposits from $44 billion down to $30 billion, that would be $14 billion less than free money. You said it was $12 million to $15 million per $1 billion. So just taking the worst case, you go down to the $30 billion, it hurts you $15 million, we're talking about $200 million of earnings lost which might be around 7% or 8% of your EPS, if you look at kind of a run rate sort of thing. So first, is my math correct there that that is the earnings issue? And then reassure if it's appropriate, that this is not a liquidity issue.

Michael Mayo:

And then a follow-up to that. You said you're not changing your buyback. So you have $4.5 billion for the year. You've done $1.25 billion. So you have $3.25 billion left. With the current market decline, that would be 14% of your market cap. So to the extent you see this as a step down, but not life-threatening, what's your appetite toward completing that buyback and how soon are you able to enter the market?

Eric Aboaf:

And Mike, it's Eric. I'd just underscore, right, the capital and liquidity strength and ratios are just incredibly high end with us by every measure that one can see. And we've shared quite a bit of that. And that's the reason why we're comfortable at this point proceeding with our buyback. We'll -- I said in my prepared remarks, we do it through the rest of the year. I said we do it at pace. And even within a quarter, we typically start buybacks the day after earnings and then we will operate and execute on them, subject to market conditions, of course, but we typically execute on them over the eight to 10 weeks of available days during the quarter. So it's -- we'll -- we've got good confidence in the broader system and enormous confidence in our particular position here. On earnings, we'll work through the earnings issue. NII was -- is something that we can figure our balance sheet to earn when rates move up and the balance sheet does give some of that back when rates come down. And we'll obviously continue to drive our focus on fees and manage expenses and drive what really is a multi-year trajectory.

Eric Aboaf:

None.

Operator:

Thank you. The next question comes from Rob Wildhack of Autonomous Research. Please go ahead.

Eric Aboaf:

Sure, Rob. It's Eric. And I think there's some materials on RWA both in the earnings deck on Page 12 and then further back in the addendum. I think if you remember, fourth quarter, we had a particularly low print in RWA, which we had signaled at our fourth quarter earnings call in January. Overdrafts came in lower than expected. Some of the risk-weighted assets associated with the FX books came in lower because of the late December move in dollar rates. And so we had expected a rebound of about $10 billion, $15 billion of RWA from fourth quarter to first quarter. And you saw we got about $8 billion or $9 billion of that. We still came in a little light on overdrafts, which is fine. Part of that is the amount of cash in the system and the cash and deposits that we're holding on behalf of our clients. You see RWA is still down year-over-year, and that's because of a fair number of optimization efforts. We felt like there's real opportunities for us to grow the franchise on one hand, but deploy RWAs in very high-quality and higher returning ways on the other and support our clients. And so we've been adjusting the deployment across the FX books. You think about how much we want to deploy in the forward space and the long-dated forwards versus spot and securities finance, there are different amounts. But we're quite well off when it comes to capital and our plan is here really to continue to find ways to smartly deploy additional capital and additional RWA to drive organic growth.

Eric Aboaf:

Yeah. When we described the installation going into the second quarter, we were describing those as realized revenue installations. So in effect, the way the accounting works typically is when we win, we don't book the revenues, but it's only at the installation date that you begin to book them. So you'll see both the backlog assets under custody in the second quarter begin to come down and some of the servicing and middle office revenues float upwards. And similarly, for the software and data processing areas, you'll see something in that direction as well.

Operator:

Thank you. The next question comes from Vivek Juneja of J.P. Morgan. Please go ahead.

Eric Aboaf:

Yeah. I don't -- Vivek, I don't know that we -- in January, we went into that level of detail. I think what we've said in the past is that that there is a range of revenue growth in our different fee categories. We've described back office as growing towards the -- traditional back office growing closer to the lower single-digit revenue growth. We've described middle and front office, which would include CRD at high single-digit growth. There will be years when it could be double-digit revenue growth. So that's what we said about that category -- this category. I think what we see in particular in software is the on-premise revenues over time will -- may not be as heavy, but we do see real momentum in the combination of the software enabled and SaaS. But all in, that should grow in the higher-single digit revenues typically though there'll be some range around that in a given year.

Eric Aboaf:

Yeah. I think, Vivek, there are a couple of ways to think about that because what happens here is that it gets onboarded on -- in tranches. So we might onboard the assets under custody, administration, but there are multiple services that we're often providing for those assets. So we had a couple of wins over the last year or two years with $1 trillion. Those $1 trillion wins would have had some custody, some accounting, they might have had some performance analytics. They would have had some middle office services in many cases because they were Alpha mandates. So there is three, four or five kind of, I'll call it, revenue installations, right, for each of the balances that sit there when we describe them as assets under custody and administration. I think roughly, our view is that we'd expect about half of the backlog in custody and administration to come through during the course of this year. I'll say that roughly, right? It tends to vary. And then the revenue pieces, it won't be quite at that level because the revenues come through over time as you get the different, I'll call it, layers of services that are provided associated with those -- that assets under custody, administration. But what we'll do is we'll -- I think it's -- that may be some kind of broad perspective. What we'll try to do each quarter is give you more and more visibility as we get to those implementation points because, remember, these are implementations where not only have we configured a front-to-back offering that we've -- that we've designed for clients, but clients need to reconfigure many of their processes and systems in parallel with that to adopt. And so it's a joint effort on both sides.

Eric Aboaf:

Yeah. I mean, CF Global for us is a very attractive opportunity. We've historically done some outsourced trading over the years in the U.S. and Asia. We weren't particularly large in that space in Europe. This gives us some real heft and credibility in Europe. It's an acquisition that will close likely at the end of the year. So I think it's really a 2024 topic. And we're looking at a business like that between what we have and what we're adding to be in the $30 million to $50 million range of revenues next year. Now, we've got some of that today, but this -- what we purchased in CF Global really is distinguishing in terms of capabilities, product lines, lets us build around what we have and then drive some real incremental growth. And so something we're very excited about because it fits into being the enterprise outsourcer. You do that for a custody, accounting, middle office, front office, and we do it for the CIOs of small and midsized companies. And it's really -- it fits very well with our positions -- positioning and strength.

Operator:

Thank you. There are no further questions at this time. I will turn the call over to Mr. O'Hanley for closing remarks.

Operator:

Ladies and gentlemen, this does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.

Ilene Fiszel Bieler:

Good morning and thank you all for joining us. On our call today, our CEO, Ron O’Hanley, will speak first. Then Eric Aboaf, our CFO, will take you through our fourth quarter and full year 2022 earnings slide presentation, which is available for download in the Investor Relations section of our Web site, investors.statestreet.com. Afterwards, we’ll be happy to take questions. During the Q&A, please limit yourself to two questions and then requeue. 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.

Eric Aboaf:

Thank you, Ron and good morning everyone. Before I begin my review of our fourth quarter and full year 2022 results, let me briefly discuss some of the notable items we recognized in the quarter outlined on Slide 5. First, we recognize acquisition and restructuring costs, including wind down expenses related to the Brown Brothers Investor Services acquisition transaction, which we are no longer pursuing. Second, we recognize 70 million of repositioning costs consisting of an employee severance charge of 50 million to eliminate approximately 200 middle and senior manager positions, largely related to our investment services business as we continue to streamline our organizational structure. We also recognized 20 million of occupancy charge in the quarter to help us further shrink our occupancy costs. We expect these actions to generate a total run rate savings of roughly $100 million. Lastly, we recognize the benefit of 23 million in the quarter related to the settlement proceeds from a 2018 FX benchmark litigation resolution, which is reflected in the FX trading services GAAP revenue line. Taken together, we recognize notable items of $78 million pretax, or $0.16 a share. Now, turning to Slide 6, I'll begin my review of both our fourth quarter 2022 and full year 2022 results. As you can see on the top left of the table, despite the dynamic and challenging operating environment, the diversity and durability of our business model allowed us to finish the fourth quarter with solid results. Total revenue for the quarter increased 3% year-over-year or 5% year-over-year, excluding notable items, as lower fee revenue was more than offset by robust NII growth of 63%, which I'll spend more time discussing later in today's presentation. We also continued to demonstrate prudent expense management, which enabled us to deliver positive operating leverage in the quarter and pretax margin is up more than four percentage points year-on-year, while ROE is up more than a percentage point this quarter as well. On the right side of the slide, we show our full year 2022 performance. Notwithstanding the challenging operating environment, we saw in 2022 for the year, I am quite pleased that we again delivered positive operating leverage and nearly a percentage point improvement in pretax margin. As Ron mentioned, it has been three consecutive years of margin expansion and ROE improvement. Turning to Slide 7, during the quarter we saw period end AUC/A decrease by 16% on a year-on-year basis, but increased 3% sequentially. Year-on-year the decrease in AUC/A was largely driven by continued lower period end market levels across both equity and fixed income markets globally, a previously disclosed client transition, and the negative impact of currency translation, partially offset by net new business installations. Quarter-on-quarter AUC/A increased as a result of higher quarter end equity market levels and the positive impact of currency translation. At Global Advisors, we saw similar dynamics play out. Period end AUM decreased 16% year-on-year and increased 7% sequentially. The year-on-year decline in AUM was largely driven by lower period end market levels, some institutional net outflows, and the negative impact of currency translation, which was partially offset by 22 billion of net inflows in our SPDR ETF business. Quarter-on-quarter, the increase in AUM was primarily due to higher quarter end market levels, ETF net inflows, and the positive impact of currency translation, partially offset by cash net outflows. Turning to Slide 8, on the left side of the page, you'll see fourth quarter total servicing fees down 13% year-on-year, largely driven by lower average market levels, lower client activity adjustments and flows, normal pricing headwinds, and the negative impact of currency translation, partially offset by net new business. Excluding the impact of the currency translation, servicing fees were down 10% year-on-year. Sequentially, total servicing fees were down 1%, primarily as a result of the client activity adjustments and flows. On the bottom panel of this page, we've included some sales performance indicators which highlights the good business momentum we again saw in the quarter. As you can see, AUC/A wins in the fourth quarter totaled a solid 434 billion driven by strong broad based traditional wins across client segments and regions, including expanding relationships with existing alpha clients. At quarter-end AUC/A won but yet to be installed totaled $3.6 trillion, with alpha representing a healthy portion, which again reflects the unique value proposition of our strategy. Turning to Slide 9, fourth quarter management fees were 457 million down 14% year-on-year, primarily reflecting lower average market levels and the negative impact of currency translation, which represented about two percentage point headwind. Quarter-on-quarter management fees were down 3%, largely due to equity and fixed income market headwinds. As you can see on the bottom right of the slide, notwithstanding the difficult and uncertain macroeconomic backdrop in the year, our franchise remains well positioned as evidenced by our continued strong business momentum. In ETFs we saw solid full year net inflows in the U.S. with continued momentum and market share gains in the SPDR low cost equity and fixed income segments. In our institutional business, there's a continued momentum and defined contribution with 48 billion of inflows in the full year, including target date franchise net inflows of 21 billion, offset by industry wide outflows in Institutional Index products. In our cash franchise, we still gained 60 basis points of market share in money market funds in 2022, even though first half inflows reversed in fourth quarter. On Slide 10, you see the strength of our diverse revenue growth engines with both FX trading services and software and processing up double-digit teens year-on-year in a difficult year. Relative to the period a year ago, fourth quarter FX trading services revenue ex-notables was up 15%, primarily reflecting higher FX spreads partially offset by lower FX volumes. Our global FX franchise was able to effectively monetize the less liquid market environment which was driven by sharp moves in the U.S. dollar. Sequentially FX trading services revenue ex-notables was up 8%, mainly due to higher direct and indirect revenue. Securities finance performance in the fourth quarter was more muted with revenues up 1% year-on-year. Sequentially revenues were down 6%, mainly reflecting downward pressure on spreads due to lower special activity and year-end risk of activity by clients. Fourth quarter software and processing fees were up 16% year-on-year and 17% sequentially, primarily driven by higher front office software and data revenues associated with CRD, which were up 28% year-on-year and 25% sequentially. Lending fees for the quarter were down 10% year-on-year, primarily due to changes in product mix and flat quarter-on-quarter. Finally, other fee revenue of 18 million in the fourth quarter was flattish year-on-year and up 23 million quarter-on-quarter, largely due to the absence of negative market related adjustments. Moving to Slide 11, on the left panel you'll see fourth quarter front office software and data revenue increased 28% year-on-year, primarily driven by multiple on-premise renewals and continued growth in software enabled revenue associated with new client implementations and client conversions to our cloud based SaaS platform environment. Turning to some of the front office and Alpha business metrics on the right panel, the 21 million of new bookings in the quarter was once again well diversified across client segments, including asset owners, wealth and private markets as well as across asset classes, particularly in fixed income. Front office revenue, backlog and pipeline remains healthy, giving us confidence in the future growth of this business. As for Alpha, we are pleased to report to two new Alpha mandate wins this quarter in the insurance and asset owner of client segments. Now turning to Slide 12, fourth quarter NII increased 63% year-on-year and 20% sequentially to 791 million. The year-on-year increase was largely due to higher short and long term market interest rates and proactive balance sheet positioning, partially offset by lower deposits. We have a well-constructed balance sheet including both U.S. and foreign client deposits, a scale of sponsored repo franchise, and high quality loan and investment portfolio that was consciously configured to benefit from rising global rates. Sequentially, the increase in NII performance was primarily driven by higher global market rates working through our balance sheet. On the right of this slide, we show our average balance sheet during the fourth quarter. Year-on-year average assets declined 6% and increased 3% sequentially, primarily due to deposit levels as well as currency translation impacts. The U.S. client’s deposit beta, excluding some new deposit initiatives was about 65% to 70% during the fourth quarter. Foreign deposit betas for the quarter were much lower in the 20% to 50% range depending on currency. Our international footprint continues to be an advantage. Total average deposits were up sequentially. We saw sequential quarter reduction in non-interest bearing deposits of 5% which was more than offset by higher NII accretive interest bearing deposits that will help support high quality client loan growth and selective expansion of the investment portfolio. Turning the Slide 13, fourth quarter expenses excluding notable items were once again proactively managed in light of a tough fee revenue environment and flat year-on-year or up approximately 3% adjusted for currency translation. We have been carefully executing on our continued productivity and optimization savings efforts which generated approximately 90 million in year-on-year growth savings for the quarter or approximately 320 million for 2022, achieving near the top end of our full year expense optimization guidance of 3% to 4%. These savings enabled us to drive positive operating leverage and pretax margin expansion, which while partially offsetting continued wage inflation headwinds and continued investments in strategic parts of the company, including alpha, private markets, technology, and operations automation. On a line by line basis compared to 4Q 2021 compensation employee benefits were down 1% as the impact of currency translation and lower incentive compensation was partially offset by higher salary increases associated with nearly 6% wage inflation and higher headcount. Headcount increased 9%, primarily in our global hubs as we added operations personnel to support growth areas such as alpha and private markets, invested in technology talent, and in sourced certain functions. There was also a portion of the headcount increase associated with some hiring catch up post COVID. We expect headcount to increase more modestly in 2023. Information systems and communications expenses were down 5% due to benefits from our insourcing efforts and continued vendor pricing optimization, partially offset by technology and infrastructure investments. Transaction processing was up 1%, mainly reflecting higher broker fees and market data costs, partially offset by lower sub custody costs related to lower equity market levels. Occupancy was down 17% largely due to an episodic lease back real estate transaction associated with the sale of our data centers which was worth approximately 12 million. And other expenses were up 12%, primarily reflecting higher professional fees and travel costs. Moving to Slide 14, on the left side of the slide we show 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, we continue to navigate the operating environment with strong capital levels relative to our requirements. At quarter end, standardized CET1 ratio of 13.6% increased 40 basis points quarter-on-quarter, primarily driven by episodically lower RWA, partially offset by the resumption of share repurchases in the quarter. With respect to RWA's, it's worth noting that we saw unusually low RWA this quarter worth about $10 billion, largely driven by our markets, businesses and some specific currency factors. We would anticipate a similar amount of normalization of RWA in the 10th $15 billion range going into first quarter. Our Tier 1 leverage ratio of 6% at quarter end, was down 40 basis points quarter-on-quarter, mainly due to the resumption of share repurchases in fourth quarter. We were quite pleased to return $1.7 billion to shareholders in the quarter, consisting of a 1.5 billion of common share repurchases and 220 million in common stock dividends. Lastly, as Ron mentioned earlier, we announced this morning that our Board of Directors has authorized a new common stock repurchase program of up to 4.5 billion through the end of 2023. And as I said in December, we expect to execute this buyback at pace and get back to our target ranges for both CET1 and Tier 1 leverage market conditions and other factors dependent. Turning the Slide 15, let me cover our full year 2023 outlook as well as provide some thoughts on the first quarter, both of which have significant potential for variability given the macro environment we're operating in. In terms of our current macro expectations, as we stand here today, we expect some point to point growth in global equity markets in 2023, which equates to global equity markets being down about 2 percentage points year-on-year on a full year average basis. Our rate outlook for 2023 largely aligned with the forward curve, which I would note is moving continuously. However, we currently expect to reach peak rates of 5% per Fed funds, 3.25 at the ECB, and 4.5 at the Bank of England. As for currency translation, we expect the U.S. dollar to be modestly stronger than the major currencies on average, but less than what we saw last year. As such, currency translations like to have 0.5 point or less impact on both revenues and expenses. In light of the macro factors I just laid out, we currently expect that full year total fee revenue will be flat to up 1% ex-notable items with servicing fees likely flattish and management fees down a bit, largely due to a modest reclassification of revenue, other fees, and NII. Regarding the first quarter of 2023, we currently expect fee revenue to be down 1% to 2% ex-notable items on a sequential quarter basis, given some normalization of foreign exchange market volatility that impacts our trading business with servicing fees expected to be up 1% to 2% and management fees expect to be down 1% to 2%. We expect full year 2023 NII to be up about 20% on a year-over-year basis after a very strong 2022. This is dependent of course on the outcome of rate hikes and deposit mix and levels. After a significant step up in fourth quarter 2022 NII, we expect first quarter 2023 to be flattish. And after the first quarter of 2023, we expect to see a slide 1% to 2% of sequentially quarterly attenuation of NII throughout the remainder of 2023, then with the stabilization expected in 2024. Turning to expenses, as you can see in the walk, we expect expenses ex-notables will be up 3.5% to 4% on a nominal basis in 2023, driven partially by wage and inflationary pressures and continued investment in the business and our people, while still driving positive operating leverage. You can also see on the walk that for a full year 2023, we expect growth saves of approximately 3%, which will help offset inflationary pressures and variable costs and ongoing investments in areas like private markets and alpha and further automation. Regarding the first quarter of 2023, on a year-over-year basis, we expect expenses ex-notable items to be up about 2%. Finally, taxes should be in the 19% to 20% range for 2023. This outlook would deliver a fourth consecutive year of margin expansion and advances us towards our medium term target goal of 30%, as well as deliver positive operating leverage and strong EPS growth for our shareholders. And with that, let me hand the call back to Ron.

Operator:

Thank you, sir. [Operator Instructions]. Your first question comes from the line of Glenn Schorr from Evercore. Please go ahead.

Eric Aboaf:

Glenn, it's Eric. We've navigated through interest rate cycles before, right, and so we have a fair amount of internal data. And we also have, I think, an engagement with our clients that really understands the multiple avenues for them of putting their cash. Clients broadly with us have $1 trillion of cash, some of that's in deposits, some of that's in our sponsor repo program. Some of that's in our global advisers, money market complex, some of it's in our suite products in our State Street Global Link franchise. And so what we're seeing is that clients are shifting gently their deposits between different categories. But they also need an outlet for that cash. They need an outlook for that cash at a reasonable price, at a reasonable ability to move it and use it as necessary. So with that as a context, I think we continue to see some expected rotation out of noninterest-bearing into interest-bearing, that's been happening, I think, at a reasonable pace and kind of in line more or less with what we've seen before, and we expect that to continue for the next few quarters. At the same time, clients do have cash, especially given the risk-off environment but in general, they all sit on cash as part of their investment planning. And we found that they're engaged with us to leave cash in our balance sheet. They like the flexibility. They like some of the pricing. And obviously, some cash comes in at noninterest-bearing, some at lower rates when it's very transactional, some at rates that are closer to market levels. And so it's an ongoing engagement with them and the visibility we have is reasonably good. It can always change. But deposits as a result, seem to be in the zone now after couple of quarters in the first half of the year of coming down a bit, seem to be flattening out. I won't say that we won't see a little bit of seasonality occasionally in January until February, we see a downtick. And then March folks prepare for tax payments is up and then April is down. So we'll see some of that kind of movement. But on average, we expect deposits to be flattish from -- going forward into next year and through the bulk of the year.

Eric Aboaf:

Sure. This is part of the, I think, innovation heritage that we have here at State Street across the franchise, but inclusive of the global markets area. We -- our sponsored repo program, which is now $100 billion in size, was started in I'm sorry, in 2005, I think, if I go back to the history books. And there's now a $100 billion franchise, right, as an example. And we do this in FX, we do this in sec lending. Venturi is a repo offering that instead of working through our balance sheet or one of the clearing corporations, which is how we do repo today actually directly connects lenders and borrowers of securities and cash. And so it's just another platform, so to speak, another venue that clients seem to want to engage with. A big part of it early on is working with the asset owners, those who are -- have long booked securities and cash. And what we find is sometimes when they may want to make margin calls for -- or have margin calls, they want to raise cash without selling securities, right. And so a natural question of well, where do I repo, do I repo through a bank structure, or do I repo with someone who's on the other side of that trade, right, who actually wants to lend against securities. And so we find that there are counterparties on the other side of that trade, who would be interested in doing that. And what a Venturi does is it actually connects borrowers and lenders with direct access to one another. So they have both the underlying collateral as the stabilizing force. And then they have the counterparty rating. And with different counterparties, you get slightly different pricing and sometimes that flow-through is actually positive and quite appealing both to the lenders and borrowers. So that's a little bit of it in a nutshell. We like to grow it to some amount during the course of the year, early returns are positive. But it's -- I'll put it in a bucket of innovation and how to connect folks in the capital markets, but connect folks who our core clients and provide additional services for them.

Operator:

Thank you. Your next question comes from the line of Betsy Graseck from Morgan Stanley. Please go ahead.

Ronald P. O’Hanley:

Hi, Betsy.

Eric Aboaf:

That's all right. But we want to be transparent and sometimes language always matters, as you say. Our perspective is we've got a very nice step-off point from fourth quarter NII. We said we'd be roughly flattish into the first quarter. And then we expect it to trend downwards, so attenuate downward, let's say, 1% to 2% for the next few quarters. Just as you see you see a tailwind of interest rates creating a positive but you see that continued rotation out of net interest bearing deposits being a headwind. And the net of that is down NII we think 1% to 2% for a couple of quarters. And then towards the end of the year and into 2024, we see rough stabilization probably because we've kind of burned out on the noninterest-bearing rotation, and then we get to a more stabilized area. But all in, we expect full year NII to be up about 20% year-over-year, and we'll take it from there.

Eric Aboaf:

Yes. Roughly about half of that comes in, in 2023. The payback on most of these actions is about five quarters so roughly half comes in on a fiscal 2023 basis. And then we'll hit the run rate, I think, within quarters, whatever, sixish or something after these actions, most of these actions are in the next few let's call it the next quarter. The run rate then builds to $100 million. So good payback and the kind of actions we want to keep taking in this kind of environment.

Ronald P. O’Hanley:

Betsy, it's Ron. Maybe I'll take that. I mean, we've obviously got a pattern of investments that we're intending to execute. We've also got an ongoing program in place that we've really had running now since 2019. So we certainly -- if the environment were to change materially, we would think about those investments. We would also think about being more aggressive. I mean, we have more or less in the background, continued to take a lot of gross expense out of the system every year. We see an ongoing ability to do that, but we also want to keep investing in the business. So there is a balance there. But to the extent to which things started to go south in an unanticipated way, I mean we do have levers.

Operator:

Thank you. Your next question comes from the line of Ken Usdin from Jefferies. Please go ahead.

Ronald P. O’Hanley:

Ken, I mean, as we've always said, we've got a very clear strategy and M&A is not a strategy. M&A is a way to help execute a strategy, to move it faster, to enable it to get further than was anticipated. But it's not a strategy by itself. We are very comfortable with our organic strategy. BBH was a scale enhancing acquisition that we would have liked to have done, but it doesn't materially change. In fact, it doesn't change at all our strategy. So at this point, where we sit, we have a strategy that we like. We have a strategy that we're executing against. There are some big milestones that we're confident we're going to be delivering on in 2023. And therefore, we are committed to that share buyback.

Eric Aboaf:

Yes, I think maybe just to answer that in the various components. I think you saw the BlackRock transition begin at the end of last year was $10 million in the quarter, sort of call it, a $40 million run rate. That continues to transition out in 2023 and in 2024, there's obviously just a natural schedule that you expect that we've worked closely with them on. And so it'll impact our servicing fees during 2023, during 2024, and into 2025, just when you think about the year-on-year comparison basis. I think if you want to model it out broadly, we've said in our last regulatory filing, we said it was worth about two percentage of fees as of the December 31 pointer we just crossed. It's now about 1.7% of fees. And I'll let you sort of build it from there. But it's included in our forecast. It will continue to be included in our forecast. We think about net new business, right, we've got to sell. We always have a bit of attrition, and we'll -- we want to continue to be net ahead. And as you've seen us in the last couple of years, we've been net positive with net organic growth broadly. And then with BlackRock, specifically, they continue to be a very important client of ours. We have continued and kept a good amount of business that we do with them. We're strong providers for them in alternatives, which is growing quickly. And we've also been awarded new business over the last year. And so that will just -- I think it will just be part of the outlook that I give you as we go forward.

Operator:

Thank you. Your next question comes from the line of Alex Blostein from Goldman Sachs. Please go ahead.

Eric Aboaf:

Yes. Alex, if you -- I think I tend to spend a little more time on the full year to full year kind of servicing fees, it sounds like you're modeling the last four quarters and then the next four quarters, which obviously model as well, and we have in our budget. It's really a combination of factors, right. So there is -- on a -- if you start with fourth quarter of 2022 and then work forward, we expect some appreciation in equity markets. We'll see if that plays out, and we'll obviously stay in touch with you all. We think that will be a tailwind. We think client flows and activity, in particular, should not be a headwind like it was in 2022, maybe neutral, maybe a positive just as clients have adapted to this new environment. And so we see the new year -- this new year as a time when they're going to be trading, investing, building positions. So we'll see if that plays out, that will be part of it. Then we have net new business. And so we do have a good pipeline both in the traditional servicing and Alpha area. And I think as part of that, we continue to mine our existing client base because the share of wallet growth can be positive there. And then finally, there's always some amount of normal pricing headwinds, but that's factored in. But you kind of have to go through those four areas. And remember, we're assuming some growth in equity markets on a point-to-point basis but we'll see if that plays out.

Eric Aboaf:

Yes. Let me describe it as follows. The investment portfolio has an average duration of a bit over two and half years, so call it average maturity of five years. And so you go through the math, and that means about 20% of it rolls on, rolls off in a typical year. It will move around a bit. I think what we found, and that's invested across the curve, it's invested in various currencies, so there's a mix. So you tend to get as you have rolled-off, rolled-on somewhere between 1%, 1.5% to sometimes 2.5% tailwind for that particular quarter of the amounts that are rolling off and rolling on. And so that's what's actually been one of the factors that's in billing the yields and the yield improvement on the profile and both how it was designed and what we're pleased to see. So that will be a gentle tailwind assuming five-year rates stay more or less where they are and European rates continue to float up. And so we'll just have to -- that will be one of the tailwinds that we see. In terms of more dramatic action, we obviously always think about what we might do. What we've noticed is that if you have high risk-weighted asset positions in your risk-weighted asset-intensive positions in your portfolio, then what happens, you could take the loss, you reinvest, and it helps accelerate a buyback, right. That's why I think a number of players are doing that. Doing the -- just the -- for vanilla instruments, treasuries, agencies, government-guaranteed securities, there's -- I think the benefits are a little closer to a push. We could take some losses through the P&L. They're already in the equity accounts through AOCI, you put on NII in the future. I think that's just moving around of the financials, and we just don't find that that's a particularly compelling trade to do. We'll always evaluate well. So we see if we have specific positions that might need some adjustment. But we don't see that as particularly compelling. It's not really compelling economically. And the financial benefits you guys can kind of model out either way. And so we -- I think we're pleased with the ability to continue to manage the portfolio in line with our current processes, and they've been numerous. The NII is up significantly this past year and up another 20% next year, and we've got a tailwind and it -- I think it bodes well for where we are and where we're going.

Operator:

Thank you. Your next question comes from the line of Brian Bedell from Deutsche Bank. Please go ahead.

Eric Aboaf:

Yes, let me do it in reverse order. The U.S. versus foreign currency betas in our experience, this cycle, prior cycles, do tend to run at different levels, partly because the U.S. has the structure of noninterest-bearing versus interest-bearing deposits. So the client deposit betas are in a subset of the total and partly because the international markets just operate a bit differently, how we're paid and how that -- those expectations have been set over, I'll call it, decades for the industry, operate differently. So I think for the -- as we look into the next few quarters, we think the U.S. client deposit betas ex any new money that we bring in on an initiative basis is going to be in that 65% to 70% and the international betas, we think will continue in the 20% to 50% range when you look at Euros, Pound Sterling, Canadian Dollars, Aussie Dollars and some of the other currencies. So we think they're kind of in the -- they're going to be in this zone and that gives us some ability to continue to take advantage of the interest rate increases. If I then work through the other part of your question, what happens with rate cuts, that's in our expectations, that's in the forward curves, especially for the U.S., that there could be a December cut. There's some probability there could be a cut before that. I think it doesn't dramatically affect because they are late in the year. The rate cuts don't dramatically affect the NII forecast, so we'll kind of take it as it goes. I do think you're -- as you're intimating, there's a bit of this offset, which is if the Fed's cutting rates, and there's probably going to be even more cash that clients keep on hand and deposits in the system, there'll probably be some offsetting impact. And obviously, with the U.S. betas higher, conveniently rate cuts actually at some point help with the NII as well. So I think there's a fair amount of -- there's a range of scenarios, let's call it, in the second half of next year. And so my guess is, Brian, we're going to be having this conversation often with you. And we'll certainly keep you posted as we see some of those scenarios develop or there's more variability.

Eric Aboaf:

Yes, Brian, I think the pricing experience that we're seeing in the industry has been stable and consistent over the last few years, and we expect it to be consistent into next year and beyond. We just have the standard because our contracts are tied to equity markets, when they roll over every four, five, six years, typically, folks are thinking whether they expect equity markets to be. They know we're going to get paid, they're going to pay us more in the coming years, and they want to share some of that. And so there's a partial pricing offset. But it's in the 2% headwind per year on servicing fees and been relatively consistent.

Brian Bedell:

Yeah, perfect, great. Thank you so much.

Brennan Hawken:

Good morning, thanks for taking my questions. So I'd like to start on capital. So the buyback sends a strong message. Ron, very encouraging to hear about your comments on M&A. But I wanted to clarify that the buyback is up to $4.5 billion. So does the upper end of the range there assume that you're going to see some AOCI accretion and is the quarterly range of $120 million to $200 million still the right way to think about it, if rates are stable?

Brennan Hawken:

Okay, excellent. And then a couple folks have touched on it before, but maybe if we think about the fee revenue, can you please update us on the impact of market moves to fee revenues and whether or not there also a corresponding impact on the expense side to I'd assume there's at least some degree of impact there? Thanks.

Brennan Hawken:

Excellent, thank you for that color.

Steven Chubak:

Hi, good morning. So Eric, I actually have a two part if you'll indulge me just on some of the NII guidance. First, I was hoping you could provide just some guardrails on your assumptions for NIB outflow given you're relatively close to the trough that we saw last cycle? And the -- for the second part, just since you alluded to NII stabilizing beyond 2023, even as NID remixing pressures abate and reinvestment tailwinds start to work through the balance sheet, was curious why NII isn't actually growing beyond 2023, is that a function of rate cuts, international mix, any perspective would be really helpful?

Steven Chubak:

That's great. And my defense, Eric, since you did talk about stabilization, I felt like I had to take advantage of that window of opportunity, to look forward to talking about it a little bit more in the middle of the year. Just one more for me on capital management, I was hoping you could just speak to or give us some insight into the cadence. Should we expect that buyback to be executed ratably or be a little bit more front-loaded here? And just given the commitment or at least early like a strong effort to optimize your capital levels, how are you scenario planning for the Basel IV proposal or update that we should be getting from the Fed early in 2023?

Steven Chubak:

That’s great, thanks so much for taking my questions.

Gerard Cassidy:

Good afternoon guys. Eric, as a follow-up on the stock repurchase commentary, did you guys -- and especially in the sense you referenced it would be more front-end loaded, did you guys consider an accelerated share repurchase program?

Gerard Cassidy:

Very good. And then I know you pointed to the RWA benefit you had this quarter for the CET1 ratio. And I think you said in your slides, you're targeted range is 10% to 11%, which, of course, you're above at this time. Do you have any guidance on when you think you may reach your targeted 10% to 11% CET1 range?

Gerard Cassidy:

Great, appreciate it, thank you.

Michael Mayo:

Hi, Well thanks for all the answers on the cyclical factors. I wanted to ask about the structural end game, a strategic end game post Brown Brothers. And the reason I ask, I count five restructurings in the last 20 years. They seem to come around like the softness the Olympics. The fourth quarter is yet one more quarter with notable items, account notable items in 18 of the last 20 quarters. And I do get some of it. Like you have incredible headwinds, mutual funds, markets, technical debt. You've been reinventing yourself front-to-back, straight reprocessing, serving clients, more agile tech. And I also recognize what you said at the start that the ROE and the margin improved for a couple of years in a row. But when I look at fee expenses, that has gone the other way and it seems like maybe one route issue is fixed cost. So really, the question is a concrete question, what percent of your expenses are fixed, how does that compare to the past, I'm assuming they've come down and where would you like to take that? And then more broadly, what is the end game strategy after Brown Brothers? Thanks.

Michael Mayo:

That was expansive, thank you. And the fixed cost part of the question, you don't report it that way, but just in rough terms, I guess. So in asset servicing, less RFPs, lowest price, this enterprise outsourcing, okay, investment management, more holistic instead of the real old model. But still as you transition, you have a certain degree of fixed costs that are tough to manage. I mean it's not quite like a brokerage firm where you reduced bonuses. So is there any way just to ballpark how much of your expenses are fixed costs and I think they've come down from the past, you're probably trying to floor them more?

Michael Mayo:

Alright, thank you.

Robert Wildhack:

Hi guys. AUC/A wins in the fourth quarter were pretty good. And Eric, you called out a strong pipeline there. What level of new business wins are you expecting in 2023? And do you see those coming from any specific client category, cohort, service area, anything like that?

Robert Wildhack:

Got it. And then you also mentioned some higher renewals in the Alpha business. Wondering if you could talk about the retention rate there, how is the retention among front-to-back clients compared to your more traditional back or middle office only clients?

Robert Wildhack:

Got it, thanks.

Vivek Juneja:

Thank you. Just a couple of little details for you, Eric. You mentioned RWA came down by about $10 billion and you expect to see another decline $10 billion to $15 billion. Any color on what you did there and does it sustainable post 1Q?

Vivek Juneja:

Great. Second, another little detail for you, your software processing and data, could you parse that into data versus CRD since that's not combined. So you got this big growth rate there? What's going on underneath? How much is data? How much is...?

Ronald P. O’Hanley:

Yes Vivek, it's Ron. Let me just add to that because we've done a lot of innovation in this area of new product development, and we do expect that to continue to grow as Eric said, because what -- everybody is interested in simplifying their operations, simplifying and getting control of their tech depth and innovating on the technology side. But in addition, there's a data management, data control in some parts of the world with some investors, it's also location of data. Where does the data actually both move and rest. So this is sitting increasingly -- this is a growth area. It goes beyond asset managers, large asset owners in particular very interested in this. So we see it as a way to extend what we're doing broadly in the Alpha arena.

Eric Aboaf:

Yes. It continues through odd pace. I'd say it moves around depending on some of the on-premise renewals that still flow through the P&L, high single digits, low double-digits. And what we've done is continued to -- the team continues to drive kind of the core CRD offerings, the -- start with an equity product. It's moved to equity and fixed income, which are now industry, I think, industry at peer levels, in some cases, industry-leading. And then what we've done is supplemented that. For example, we purchased a small company called Markidis [ph], which was kind of a front-end portion of a Charles River type offering. And so we've added a kind of private market area to what I'll call the broader Charles River Complex. So this is an area that I think will continue to grow probably twice the rate of State Street -- it will help lead us forward but also as the tip of the spear of how we engage with clients, new clients, existing clients in broader ways. And that's why the core software, I think, is an important product. And what I think I've been pleased with, especially this year, which has been all over the place economically and politically, right, even with the equity markets up and down, software and software growth, core Charles River, data, private software for private continues to grow in this double-digit range. Low double-digit range through thick and thin, and that helps balance out, I think, the growth dynamic of the company.

Operator:

Thank you. 1That will be for our last question. I'll be turning the call over back to Mr. Ron O'Hanley for closing remarks.

Operator:

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.

Ilene Fiszel Bieler:

Good morning and thank you all for joining us. On our call today, our CEO, Ron O’Hanley, will speak first. Then Eric Aboaf, our CFO, will take you through our third quarter 2022 earnings slide presentation, which is available for download in the Investor Relations section of our Web site, investors.statestreet.com. Afterwards, we’ll be happy to take questions. During the Q&A, please limit yourself to two questions and then requeue. 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 Web site. 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.

Eric Aboaf:

Thank you, Ron, and good morning, everyone. I'll begin my review of our third quarter results on Slide 4. We reported EPS of $1.80 or $1.82, excluding acquisition and restructuring costs, as detailed in the panel on the right of the slide. As you know, the operating environment in the third quarter remained challenging with persistent market volatility related to ongoing geopolitical tensions, inflationary pressures, rapidly rising interest rates and concerns about the global economy. Despite these challenges, as you can see on the left panel of this slide, strong growth in both net interest income and our FX trading services business enabled us to partially offset the significant headwinds from lower equity and fixed income markets in the quarter. Additionally, we continue to demonstrate prudent expense management in the third quarter even as we experienced ongoing price and wage increases, while we continue to invest in the franchise. Turning to Slide 5. During the quarter, we saw a period end investment services AUC/A decreased by 18% on a year-on-year basis and 7% sequentially. The year-on-year change was largely driven by continued lower period end market levels across equity and fixed income markets globally, a previously disclosed client transition and the impact of currency translation, partially offset by net new business installations. The quarter-on-quarter decline was largely a result of these same factors. Similarly, at Global Advisors, period end AUM decreased 15% year-on-year and 6% sequentially. The year-on-year decline in AUM was largely driven by lower period end market levels, institutional net outflows and the impact of currency translation, which was partially offset by positive net flows in both our ETF and cash businesses. Turning to Slide 6. On the left side of the page, you'll see third quarter total servicing fees down 12% year-on-year, largely driven by lower average equity and fixed income market levels, lower client activity and adjustments, normal pricing headwinds and the impact of currency translation, partially offset by net new business. Excluding the impact of currency translation, servicing fees were down 9% year-on-year. Even with the negative impact of the market environment in the quarter, I would highlight that we're pleased to see good double digit growth in our private markets businesses. Sequentially, total servicing fees were down 6% primarily as a result of these same drivers. Lastly, we recorded traditional custody wins worth 233 billion in the quarter with attractive fee rates across key client segments. And we now have more than 3.2 trillion of assets to be installed, a good portion of which are attributed to large Alpha deals that were won over the past year. Given our large backlog, we installed approximately 250 billion of assets this quarter, which is in line with our historical pace. Turning to Slide 7. Third quarter management fees were 472 million, down 10% year-on-year primarily reflecting lower average equity and fixed income market levels, a previously disclosed client-specific pricing adjustment, institutional net outflows and the impact of currency translation, partially offset by the absence of the impact of money market fee waivers and positive net ETF and cash inflows. Management fees were down 4% quarter-on-quarter, largely due to equity and fixed income market headwinds and the impact of currency translation. Notwithstanding the challenging backdrop in the quarter, while we did see some outflows in our ETF business due to an exit of a low yielding Asia Pacific fund, our franchise still remains well positioned for growth. In ETFs, we saw sustained ETF inflows into the SPDR low-cost suite and fixed income funds. In our institutional business, there's continued momentum in defined contribution with third quarter inflows of 10 billion, including the target date franchise. In our cash business, top quartile performance on our government money market fund was a major driver of net inflows which contributed to market share gains in the institutional money market funds. On Slide 8, FX trading services had yet another strong quarter. Relative to the period a year ago, third quarter FX trading services revenue was up 14% primarily driven by higher FX spreads driven by higher market volatility and the recent regulatory capital changes, partially offset by lower client FX volumes. Quarter-on-quarter FX trading services revenue was down 4% as the benefit of higher FX spreads was more than offset by lower client FX volumes which tend to be lower in the summer months. Securities finance performed well in the third quarter with revenues up 4% year-on-year, primarily driven by higher spreads due to higher specials activity, only partially offset by lower agency and enhanced custody balances due to falling market levels. Sequentially, revenues were up 3%, mainly reflecting higher agency spreads. Third quarter software and processing fees were up 2% year-on-year, primarily driven by higher front office software revenues associated with CRD, which were up 9% while lending fees were down 11% due to changes in product mix. Finally, other fee revenues of negative 5 million in the third quarter declined on a year-on-year basis, largely due to negative market-related adjustments. Sequentially, we saw an increase in other fee revenues, primarily reflecting fewer negative market-related adjustments. Moving to Slide 9, let me provide some details on the performance of the front office software and data revenue in the third quarter on the left panel of the slide. Front office software revenues increased 9% year-on-year as our more durable and recurring software enabled revenue continues to grow nicely, driven by new client implementations and continued success in converting clients to a cloud-based SaaS platform environment. Sequentially, revenues were up 1% due to higher software enabled revenue partially offset by lower professional services revenue. Our revenue backlog remains healthy. Turning to some of the CRD and Alpha business metrics on the right panel, we continue to be pleased with our new bookings for the business. The 14 million of new bookings from this quarter was well diversified across client segments, particularly wealth and asset owners, demonstrating the benefit and breadth of clients the platform can now support. As for middle office, we continue to have extremely healthy uninstalled revenue backlog of over 100 million which is up 50% on a year-on-year basis, as I mentioned earlier. Now turning on Slide 10. Third quarter NII increased 36% year-on-year and 13% sequentially, primarily reflecting the impact of higher short-term interest rates from central bank hikes only partially offset by lower client deposits. More than 40% of this increase was driven by non-U.S. dollar rates, as we saw central banks globally raise interest rates. On the right of the slide, we show our average balance sheet during the third quarter. As a result of a rapidly changing rate environment, industry-wide deposits have begun to trend lower and we are seeing some of this play through our balance sheet as well. Excluding the impact of currency translation, average deposits were down 5% both year-on-year and sequentially, primarily driven by the global tightening in monetary policy by central banks and by the impact of significantly lower market levels on AUC/A. The investment portfolio is down modestly as we continue to manage duration and we now have more than 60% in HTM. As today's results reaffirm, our balance sheet continues to be well positioned to recognize this interest rate and NII tailwind and also protect AOCI. Turning to Slide 11. Third quarter expenses, excluding notable items, were once again proactively managed in light of the revenue environment and flat year-on-year or up approximately 4% adjusted for currency translation and notable items. We've been carefully executing on our continuing productivity and optimization savings efforts, which generated approximately 80 million in year-on-year gross savings or approximately 230 million year-to-date, which puts us in line to achieve our full year expense optimization guidance of 3% to 4% of the expense base. It also contributed to our year-to-date positive operating leverage, which we also expect to deliver for the full year. These savings in addition to benefits from a stronger U.S. dollar enabled us to offset some of the wage inflation we have been seeing in the industry, while we continue to invest in the strategic parts of our company, including Alpha, private markets and operations automation. On a line-by-line basis compared to third quarter '21, compensation and employee benefits were down 1% as the impact of currency translation was partially offset by higher salary costs associated with wage inflation and higher headcount. Headcount increased 6%, primarily in our Poland and India global centers as we invested in foreign technology capabilities and added operations town [ph] to support new products and services in growth areas such as Alpha, private markets and in middle office servicing. There was also a portion of the headcount increase associated with some hiring catch up post COVID. We expect headcount growth to start to level off. Information systems and communications expenses were down 2%, as we began to see benefits from our in-sourcing efforts and continued vendor pricing optimization, partially offset by technology and infrastructure investments. Transaction processing was down 10%, mainly reflecting lower sub-custody costs related to equity market movements. Occupancy was down 5%, largely due to currency translation. And other expenses were up 17%, primarily reflecting higher securities processing costs, marketing costs, travel costs and foundation grants. Moving to Slide 12. On the right side of the slide, we show our capital highlights. We're pleased to report CET1 of 13.2%, up 30 basis points quarter-on-quarter, primarily driven by higher retained earnings and well controlled RWA. With respect to RWAs, there is volatility and I would caveat that they were lower than we expected this quarter. We would anticipate some RWA increases that we continue to both optimize the balance sheet and efficiently put capital to work across our businesses. Third quarter Tier 1 leverage ratio of 6.4% was up 40 basis points quarter-on-quarter, mainly due to the decrease in balance sheet size and higher retained earnings. As the slide highlights, our capital position is strong and our commitment to being stewards of shareholder capital remains steadfast. In keeping with that commitment, we returned 232 million to shareholders in the third quarter through dividends. And as Ron highlighted, we now intend to repurchase approximately 1 billion of State Street's common stock in the fourth quarter. This higher than expected buyback amount is based on our healthy capital levels and our expected future uses of capital. The AFS, mark-to-market and OCI this quarter amounted to $170 million negative as compared to minus 0.5 billion in 2Q '22, meaningfully improved as a result of the management actions we took despite another strong run up in interest rates this quarter. Turning to Slide 13, we provide a summary of our third quarter results. Despite the continued volatile market environment, I'm pleased with our quarterly performance. Even with the current macroeconomic environment and persistent geopolitical uncertainties, our strong growth in net interest income and FX trading services enabled us to partially offset another quarter of significant headwinds from both equity and fixed income markets, highlighting the resiliency of the franchise, and our expenses remained well controlled, demonstrating our laser focus on productivity. Turning to our outlook, let me share our current thinking regarding our fourth quarter and some of our macro assumptions as we look over the remainder of the year. At a macro level, while market rate expectations have been volatile, our current interest rate outlook is broadly in line with the current forwards, which suggests a year end Fed funds rate of 4.5%. We expect other international central banks to continue to raise rates in 4Q and beyond into 2023 as well. Our outlook assumes 4Q equity market levels will be flat to the September month end, which would imply a 10% quarter-on-quarter decline in global daily average equity markets in 4Q. We also expect continued U.S. dollar strength to be worth about 1 percentage point of headwind and a tailwind to expenses on a quarter-on-quarter basis, which is included in our guide. So, in terms of the fourth quarter of 2022. Given the expected decline in average global equity market levels, we expect total fee revenue to be down about 3% on a sequential quarter basis, with servicing fees down 4% to 5% quarter-on-quarter and management fees down 8% quarter-on-quarter. Turning to NII. Following yet another strong sequential increase in NII in 3Q, we expect to deliver additional NII growth of 4% to 10% quarter-on-quarter driven by the tailwind from U.S. and foreign central bank rate hikes. This outlook includes our expectation for some continued deposit outflow in 4Q. For the full year, we now expect NII to increase 28% to 30%, which is better than our prior full year guide of 24% to 27%. We also expect continued good growth in NII in full year 2023. Next, we expect total expenses, excluding notable items, to be roughly flat quarter-on-quarter despite inflationary wage pressure, as we continue to target productivity initiatives in the face of a challenging environment for fee revenue. This focus should enable us to drive positive total operating leverage and a healthy pre-tax margin for both the fourth quarter and the full year. Full year expenses are expected to be flat versus last year. Finally, we would expect the fourth quarter tax rate to be approximately 18% to 19% for the quarter. And with that, let me hand the call back to Ron.

Operator:

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. And we'll take our first question from Glenn Schorr with Evercore. Your line is now open.

Ron O’Hanley:

Glenn, it's Ron. Maybe needless to say, we go through that calculus that you're describing every day. And that's part of what led to this. Obviously, the regulatory environment is driving the timeframe here. But what's driving our work is that tradeoff, the tradeoff between the opportunity to consolidate on a global basis a very attractive firm versus what's the alternative uses of the capital, including returning it back to shareholders. We believe there's still the possibility that we can get this -- we can structure this transaction in a way that it will work out for shareholders and to achieve that strategic objective. But as we've said in the disclosure, the likelihood of that happening is going down. So I think what you can take away from this is one of the reasons that's driving that decreased probability is the calculus that you're describing.

Eric Aboaf:

Glenn, it’s Eric. We’ve carefully considered what portion of the investment portfolio move to held to maturity and in what amounts. But we do as we make that consideration is the benefit is that you largely don't give up NII, right? By and large, you're earning the coupon on whether they're treasuries or agencies or MBS, just in a different accounting form and structure, but the earnings of the corporation are the same and that's what's quite attractive about HTM. The reason why you wouldn't put the whole portfolio in HTM is partly you want some flexibility, you want from time to time rebalance the portfolio, and you might want to rebalance 5, 10, 15 yards and that takes an AFS construct under which to do it. And then partly you want to make sure that you always have monetization at the front end to maximize and to maintain the liquidity contract you'd like. We've now put that in place. We can repo HTM securities in size. We test that in the marketplace. So we're quite comfortable. But there's a point where you say, look, I'd rather sit on cash or I'd rather sit on available for sale until we feel like we're at a good balance now that really provides a real positive NII trajectory and you see that. We've got it now to 28% to 30% up in NII this year. And I've also started to signal that we're positive on the NII trajectory in 2023, and partly because the entire investment portfolio, whether it's an AFS or HTM is contributing to that upswing.

Eric Aboaf:

Sure.

Ken Usdin:

Hi, good morning, guys. I wanted to come back to putting the deal into context with the buyback that you announced, which you would have been clearly saying you'd want to get back into the buyback this quarter. So can you just help us understand the $1 billion sizing and if that has anything to put in context with your thoughts around how the pricing and eventual outcome if the deal goes through might end up coming through? Or is it completely separate and just based on where capital sits regardless of the deal outcome?

Ken Usdin:

Okay. And then on the denominator side, I guess of capital, can you just give us a little color on how you'd expect deposits to traject from here, pretty meaningful decline in both interest bearing and non-interest bearing just relative to where you're ending here, just your general outlook on your thoughts around deposit mix and flows? Thanks.

Ken Usdin:

Thanks, Eric.

Alex Blostein:

Hi, Ron and Eric. Good morning, guys. I was hoping we could speak a little bit more broadly around State Street's capital allocation strategy. If BBH does not go through, what's your appetite for any other deals, whether it's in the services space or asset management space? Obviously, macro conditions are pretty volatile. So I'm sure that'll impact that as well. But curious how you thinking about the tradeoff between the accelerating buyback or other deals? And then if you do go down the path of more buybacks, should we be thinking about the upper end of your CET1 and leverage as sort of the target to which you will go to, or you might need to run with a buffer sort of on top of that, given uncertain macro conditions?

Eric Aboaf:

Yes. And Alex, I think I'd add that we're quite conscious that we raised almost $2 billion of equity from our investors and diluted them. We certainly expect that if the deal doesn't proceed that the bulk of our excess capital needs to go back to shareholders. That's deserved and I think expected and we would deliver on that. I think in terms of capital ratios, I had said earlier this year when the economic environment felt more benign and when we had simplified and attenuated a lot of the OCI risk in the investment portfolio that we might be willing to go down to the lower end and even below the lower end of our 10% to 11% range. I think now given the economic uncertainties, we for the time being expect to operate towards the middle of that range. That they might change over time. But for now, I think our current expectation is, we have reduced the volatility in the investment portfolio, which reduces, on one hand, the need for a capital buffer to some extent, on the other hand, the economic environment is much more -- there’s much more volatility in it. And that pushes us in the other direction. But the net of that is that I think we're quite comfortable with the 10% to 11% range and operating somewhere in the middle there.

Ron O’Hanley:

Yes, I'll start Alex on the investments and Eric can talk you through the pattern. On the investments, there is actually ongoing development, as I mentioned earlier, and that development, some of which is being completed this year, some which has been completed next year, but it's all part of our medium-term plan as well as our budget. So there's nothing out of the ordinary that you should expect to do this. And in fact, much of the development is behind us or will be behind us at year end. Within the 3.4 trillion, as you would expect, it's the larger, more complex Alpha mandates, in some cases, their development partners with us where we're developing new features and functionality, which will be available not just to that particular client, but more broadly to the client base. So these are important things to get done right, and we think are a good use of our investment dollars, because they'll result not just in being able to onboard that client, but to be able to broaden the offering.

Alex Blostein:

Great. Thank you both.

Brennan Hawken:

Good morning, Ron and Eric. Thanks for taking the questions. I'd like to ask on BBH. It seems somewhat unusual to be getting regulatory approval before the approvals within the company. So why is that happening? And given that there's risk of deterioration, loss of talent, customers, Ron you made reference to this during the last quarter call when you guys first said you were renegotiating. Would you have the ability to adjust price further if this process drags, or has that been set already?

Brennan Hawken:

Okay. Thanks for that, Ron. And then second question is maybe a bit -- well, I'll just come right out. So why is this so strategically compelling? It seemed as though it was largely a scaled deal. Now it's deteriorated. You said earlier Ron that the accretion is probably going to be more drawn out and it's going to be lower than initially planned. It's more complicated. So you're introducing a lot of operational and legal complexity. I get it, you're lowering the price. But is this really a good use of time? Is this really a good use of management focus? Why not just understand that the environment deteriorated, the regulatory approvals didn't come through, it couldn't work as constructed. And so it's better off just to walk.

Brennan Hawken:

Amen to that. Thanks for all the color.

Steven Chubak:

Hi. Good morning. So why don't I ask one clarifying question on NII. Some of your bank peers they've indicated 4Q exit rate could be close to the peak this cycle just as lag deposit pricing begins to catch up with rate hikes. You noted that the '23 NII Eric will be up nicely year-on-year. But do you see the potential for '23 NII coming in above that annualized 4Q level, suggesting that that fourth quarter NII guidance is not going to be representative of the peak?

Steven Chubak:

Thanks for that, Eric. So reading the tea leaves, I may scrap my question on the expense growth algorithm and what that implies for next year. But the one area I did want to unpack on expense is the margins in the investment management segment, they're down about 600 basis points year-on-year. That's an area where you made significant progress over the last couple of years. Certainly, you're going to see some pressures given the declining market. But why you get a sense as to how much expense flexibility you have there and where you think you can actually hold the line on the pre-tax margin for that particular business?

Steven Chubak:

Helpful color, Eric. Thanks for taking my questions.

Operator:

Next, we'll go to Brian Bedell with Deutsche Bank. Your line is now open.

Eric Aboaf:

Brian, it's Eric. I think the timing of this feels quite uncertain given where we are. We've not been able to complete the regulatory process and there's still -- so I think thinking about this in months as opposed to quarters is premature. We've done the buyback calculation though fully considering the reduced price that would be part of a Brown Brothers transaction. And so whether the timing is quarter X or quarter Y, we're comfortable proceeding with $1 billion. We're pleased to get it started in the coming days. And regardless how that plays out, be able to return as I said and as Ron said comfortably more than the 80% that we've committed to throughout next year at a minimum.

Eric Aboaf:

Yes, let me describe it this way and let me cover U.S. and non-US because both matter in a positive way for our books. I think the betas this quarter in the U.S. were in the 55% range. We're pleased to see that. Those are up from about 35% last quarter, but exactly where you'd expect us to be where we expect it to be given the uptick in rates. And next quarter if we go from 55% this quarter to 65% betas next quarter would be quite comfortable, and then it just continues to inch up. That's just how it plays through. In euros, we're also in that 50% range as we've started to cross into positive territory for central banks, and we expect that to continue. So part of the reason for the NII forecast into fourth quarter and into next year is that we expect betas in this 50% to 60% range in euros. The market operates a little differently than the U.S., but that would be in the range. And then in pound sterling, betas are lower. They tend to be in the 30% to 35% range there. And then you can keep going; Aussie dollars, Canadian dollars and so forth. And we have a balance sheet that is prepared for rate rises across those currencies as well. And then you'll just see betas notch up quarter-over-quarter. I think at the terminal level, there's always some amount of lagging that you do, that's just how it happens. You never get to 100% beta or anything near that, because you have some non-interest bearing and you have some lag deposits, but we'll see. We're comfortable where we are in the 50% range going to 60% and I think it will play out well for the NII and the balance sheet accordingly.

Eric Aboaf:

Sure.

Jim Mitchell:

Hi. Good morning. Eric, maybe just one last question on NII and I apologize, but as we think about big picture, Fed funds being potentially 20 basis points or more higher than 2018, European rates being positive versus negative back then, do you see anything conceptually to suggest your NIM shouldn't be higher than back then or just want to get your thoughts on that?

Jim Mitchell:

Okay, fair enough. And just maybe on the BlackRock ETF transition, how much is left and do you see that as a material -- any kind of a material impact on forward revenues?

Jim Mitchell:

Okay, great. Thanks.

Gerard Cassidy:

Thank you. Good afternoon, Eric and Ron. Eric, can you remind us, you talked a little bit about it in your prepared remarks about fee revenues and the pricing pressure that you see every year. Can you remind us if that number has changed a bit at all? And second, as part of that, I think you've also indicated in the past, you needed a certain amount of assets under custody to neutralize that pressure. I don't remember, I think it was 1.5 trillion, but I could be wrong of new business wins to neutralize that downward pricing pressure?

Ron O’Hanley:

Gerard, what I would add is on the topic of pricing, we mentioned to you at the end of the second quarter that we launched a targeted repricing initiative that is well underway. And it's focused on the areas of high value or where costs are increasing higher than in other places. And that is intended to and is to achieve margin preservation. In other words, to offset the cost of delivering something high value or to offset the increasing costs in areas, for example, where we have disproportionate market data and things like that. So that initiative is well underway. When we talked to you last time, it had just launched. So we were in the dozens of clients. Now we're in conversations with triple digit number. So we're pleased with that progress too.

Ron O’Hanley:

Yes, I think understood is the right word, Gerard. I think that these are sophisticated institutions themselves. They see what's going on. So I think it's been for the most part understood.

Eric Aboaf:

Yes, it's a bit of a mix across different segments and across geographies, but a good rule of thumb is 50%, 55% are assets under custody base, so move up and down with market. There's another 20% of the pricing tends to be based on transactional activity and we actually saw transactions, volumes, DTCC trades, wire transfers, derivatives, transactions, so forth come down this quarter. And then the last 20%, 25% tend to be relatively fixed or sometimes semi fixed, the number of funds you custody for or some flat fees.

Operator:

Thank you. Okay. Next, we'll go to Mike Brown with KBW. Your line is now open.

Eric Aboaf:

Yes, we’re obviously monitoring the business performance closely; monthly, quarterly. And I think it's -- you should expect -- you can go back to some of the materials that we had shared a year ago, September, as the base case, but you could take that Mike and extrapolate some of what you've seen in our book of business, right. We're an asset management oriented custodian. You can even look at some of our peers as benchmark. And I think you'd find what we've seen, which is that there's a sharp boost in NII in their book or NII plus fees, because of the mix of programs that they run for their clients cash, partially offset I'd say with some downdraft in servicing fee rates, equity and bond markets. And then you'd see a bit of an uptick on the FX services kind of business. So I think it's ours and other large custodians are parallel to what you've seen. And so it's something worth considering. But as we talked about earlier, we're conscious that we need to think about this from a couple different perspectives, but it's performing in line with what we and you would expect at this point.

Eric Aboaf:

Yes, it is part of our capital forecasting now. And it was actually included in some of the buyback and capital return estimates that we provided not only for the fourth quarter, but also for our intentions related to next year. I think this quarter the accretion was worth $60 million or so of capital and that's just the reversal of that mark accreting back as the bonds mature. There tends to be a little lumpiness to it, but that's the start of the accretion. And so it did provide some amount of modest tailwind and we'll certainly factor that in, right, because just like earnings create an opportunity to return capital to shareholders, the accretion does as well. And that'll be part of that builder capital ratios, which then we can share back with shareholders.

Operator:

Thank you. Next, we'll go to Mike Mayo with Wells Fargo Securities. Your line is now open.

Ron O’Hanley:

What you should take away from what we've said, Mike, is that by the end of this quarter, we will have a decision on whether to proceed forward or not to proceed forward. On the buyback, first, we need a Board authorization for a further buyback and we'll communicate what we're intending on buybacks after that authorization.

Ron O’Hanley:

Yes, Mike, what I would say is that the timing of our announcement in this deal in retrospect probably couldn't have come at a worse time, because if you think about the regulatory agencies, many of them to some extent were going through some kind of personnel change. So that itself has slowed things down. In some cases, it's driven a very significant change in philosophy. Whether that change in philosophy will be permitted or not, I don't know. I'd like to think not. But to answer I think the nub of your question is did anything change from beyond the regulatory situation? The answer is no. For all the reasons that we've stated to going back to September of last year, we feel like the deal is strategically compelling. In terms of longer term, what does this mean for our position? Again, that's something that we think about and that's something that we certainly have conversations about with our primary regulator. And I think there's some sympathy to all that. But I don't want to talk about something in the abstract beyond the transaction that we're in, which is the BBH deal. It's not all regulators, it's a subset. And it’s a situation that we're going to work our way through, but work our way through very cognizant of what it means for our shareholders, what it means for clients, et cetera.

Ron O’Hanley:

Well, we've talked about modifications to the transaction and the modifications are meant to meet either regulatory concern or to navigate -- or to do what we believe is required to navigate through regulatory concern. So that's what we're up to now.

Operator:

Next, we'll go to Betsy Graseck with Morgan Stanley. Your line is now open.

Eric Aboaf:

Betsy, it’s Eric. No, those are incurred charges that are about primarily our staffing and then some of the service providers. But we've also -- what we have done is avoided some of the -- obviously there are costs that are continued on deal closing, some of the advisory fees, et cetera, those have not played through there and those would not be incurred. So those are kind of the base level expenses.

Eric Aboaf:

There's no tail on those by and large.

Eric Aboaf:

Since earlier this year, they primarily have been around the BBH transaction work.

Eric Aboaf:

Yes. Betsy, it’s Eric. What I'd describe to you is that the dollar has an effect as do all of the currencies on our P&L and balance sheet. But it's relatively symmetric and thus I'll say almost neutral. And I say that in EBIT terms and in balance sheet terms. Dollar strengthening reduces revenues, but also reduces expenses, not in all currencies and all the time, but it tends to have almost an EBIT neutral impact on the P&L. And then on the balance sheet, you also have a similar effect where as deposits are revalued downwards and foreign jurisdictions as U.S. appreciates, so are the assets in those jurisdictions. And so you have some symmetry. So by and large, it's I'll call it roughly neutral, which is why we don't do any particular hedging on it, because we find that we can manage through it in a comfortable manner. Except that it makes our reporting to all of you in the investment community a little more complicated, but that's just what needs to happen.

Ron O’Hanley:

Betsy, it’s Ron. Let me take that. I would say that we've got a good geographic mix now. And so the way we think about it in virtually all of our locations, it's not like we're not at minimum efficient scale. But to the extent to which we can achieve more scale there, we'd like that. I think in general, the non-U.S. markets have continued in most circumstances, not all to grow faster than U.S. markets on balance. If we could get a little bit more there, we'd like that.

Operator:

Next, we'll go to Vivek Juneja with JPMorgan. Your line is now open.

Eric Aboaf:

Vivek, it’s Eric. Kind of the outlines, the perimeter of the deal with Brown Brothers hasn't really changed. It's around their investment services business. That's the business that we're attracted to. And that's the one that they'd like to transact. So there's not been any real change there.

Vivek Juneja:

What I meant was the whole investment services business. Could you buy a piece of it since it's different geographies, given the regulatory complexity to sort of, if they're geographies are more attractive and more difficult to replicate on your own?

Vivek Juneja:

Ron, I want to go back to a different topic. You mentioned about the price increase discussions you're having and you said the operative word is understood with your clients. Should I interpret understood as understood and agreeing to it or understood but not necessarily open to it and shopping it around with other providers?

Vivek Juneja:

Great. Thank you.

Operator:

This concludes today's question-and-answer session. I'll now turn the call back over to Ron O’Hanley for any additional or closing remarks.

Operator:

Ladies and gentlemen, this concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.

Ilene Fiszel Bieler :

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 Aboaf, our CFO, will take you through our second quarter 2022 earnings slide presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.com. Afterwards, we’ll be happy to take questions. During the Q&A, please limit yourself to 2 questions and then requeue. 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 1 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. 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.

Eric Aboaf:

Thank you, Ron, and good afternoon, everyone. I’ll begin my review of our second quarter results on Slide 4. We reported EPS of $1.91 or $1.94 excluding acquisition and restructuring costs as detailed on the panel on the right side of the slide. As Ron noted earlier, the operating environment in the second quarter remained challenging, largely characterized by continued market volatility related to macroeconomic events and continued geopolitical uncertainties. As you can see on the left panel of the slide, strong growth in both net interest income and FX trading enabled us to partially offset significant headwinds from lower equity and fixed income markets in the quarter that impacted other fee areas. Also evidenced by today’s results, our approach to expense management remains very disciplined and deliberate. On a year-on-year basis, second quarter expenses were down even as we experienced higher-than-expected wage increases and continue to thoughtfully invest in the franchise. Lastly, you’ll see that in the second quarter, we had a lower-than-expected tax rate. The bulk of the discrete tax items that contributed to our lower taxes were due to the reassessment of a deferred tax asset worth roughly $60 million. All things considered during the quarter, our business model demonstrated resilience against the challenging backdrop. Turning to Slide 5. During the quarter, we saw period-end AUC/A decrease by 10% on a year-on-year basis and 8% sequentially. Amidst continued and uncertain economic conditions, the year-on-year change was largely driven by lower period end market levels across just about every equity and fixed income market around the world, partially offset by net new business and client flows. The quarter-on-quarter decline was largely a result of the same lower period end market levels, as we’ve also started to see industry outflows from investment products as the risk off sentiment continues. Similarly, at Global Advisors, quarter-end AUM decreased 11% year-on-year and 14%, sequentially. The year-on-year decline in AUM was also largely driven by lower period end market levels and institutional net outflows which was partially offset by positive net inflows in both our U.S. low-cost ETF complex and cash inflows in the quarter. Turning to Slide 6. On the left side of the page, you’ll see second quarter total servicing fees down 7% year-on-year, largely driven by lower average equity and fixed income market levels, normal pricing headwinds, client activity and adjustments and the impact of currency translation, partially offset by net new business growth. Excluding the impact of currency translation, servicing fees were down only 4% year-on-year. I’d also highlight that from a segment perspective, we continue to see excellent revenue growth in our alternative client segment, both year-on-year and quarter-on-quarter. Sequentially, total servicing fees were down 5%, primarily as a result of the same drivers, lower average equity and fixed income market levels, client activity and adjustments and the impact of currency translation, partially offset by positive net new business. Within servicing fees, back office fees were down 7% year-on-year and 5% quarter-on-quarter, largely driven by the factors I just described. Middle Office Services was down 12% year-on-year and 8% quarter-on-quarter, primarily due to decreased client AUMs, driven by lower market levels and client transaction activity and adjustments. But we are seeing some compression in our legacy middle office book. It is an important component of our Alpha proposition when it connects to both the Front office and Back office and new wins generally come with contracts of 7 to 10 years. We continue to expect to see good growth over the medium term as evidenced by our large uninstalled middle office revenue backlog of more than $90 million, which I will talk more about in a moment. Even against this challenging backdrop, we continue to be pleased with our Investment Services business momentum and robust pipeline. We recorded another strong quarter of new AUC/A wins worth $972 billion while AUC/A won, but yet to be installed amounted to $3.6 trillion at quarter end. As Ron mentioned earlier, during second quarter, we reported another new Alpha win, Allspring Global Investments taking the total number of Alpha clients to 20 and now have 12 implementations live. Lastly, in response to industry inflationary cost pressures, we’ve undergone a comprehensive analysis of our pricing across all our product areas. The result of this analysis has led to the decision to begin to adjust our client pricing upwards in certain areas of servicing where the wage pressure is most acute and industry capacity is stretched. Ultimately, we believe these pricing changes will support the continued investment that allows us to best serve our clients. Turning to Slide 7. Second quarter management fees were $490 million, down 3% year-on-year, primarily reflecting lower average equity and fixed income market levels, the impact of currency translation and a specific client repricing adjustment, partially offset by the elimination of money market fee waivers and the run rate impact of net ETF inflows. Management fees were down 6% quarter-on-quarter, largely due to equity and fixed income market headwinds, partially offset by the elimination of the same money market fee waivers. As you can see on the bottom right of the slide, our franchise remains well positioned for growth. In ETFs, although we saw outflows in equity and commodities, we continue to see inflows into SPDR low cost and fixed income ETFs. In our Institutional Business, there’s continued momentum in our target date franchise, notwithstanding outflows primarily from 1 large client with very low fee assets, which ultimately benefited the overall management fee rate this quarter. Across our cash franchise, we again saw another quarter of strong net inflows, this time worth $15 billion in the quarter, contributing to market share gains. On Slide 8, FX trading services had yet another strong quarter. Relative to a period a year ago, second quarter FX trading services revenue was up 16%, primarily driven by higher FX spreads, partially offset by lower client FX volumes. Quarter-on-quarter, FX trading services revenue was down 8% as the benefit of higher FX spreads was more than offset by lower client FX volumes too. Our second quarter securities finance revenues decreased slightly year-on-year, primarily driven by lower agency and enhanced custody balances due to lower markets, partially offset by higher spreads. Sequentially, revenues were up 11%, mainly reflecting higher spreads, partially offset by lower agency and enhanced custody balances. Second quarter software and processing fees were down 11% year-on-year and 6% quarter-on-quarter, largely driven by lower Front office software and data revenue associated with CRD, which I’ll turn to shortly. Finally, other fee revenues of negative $43 million in the second quarter declined both year-on-year and quarter-on-quarter. Both the year-on-year and quarter-on-quarter declines largely reflect negative market-related adjustments while the absence of prior period positive fair value adjustments on equity investments also contributed to the sequential decline. While we saw pressure throughout the quarter, almost half of the $43 million came through in the second half of June. Moving to Slide 9. Let me provide some details on the performance of our Front office software and data revenue in the second quarter on the left panel of this slide. As a reminder, CRD represents the majority of these revenues, but we also include Alpha Data Services, Alpha Data Platform and Mercatus revenues since they are part of our Front office offering. On both a year-on-year and quarter-on-quarter basis, Front office software revenue declined as expected, primarily driven by the absence of several on-premise renewals in the prior periods as well as some episodic fees when compared to the prior year quarter, partially offset by higher software-enabled SaaS revenue. It is important to note, however, that the more durable and recurring software-enabled and professional services revenues have continued to grow nicely with a year-on-year growth of 15%, demonstrating success in deploying our cloud-based SaaS platform environment to more clients. Turning to some of the softer metrics enabled by CRD and Alpha on the right panel, you’ll see that our annual recurring revenue has grown 20% year-on-year as we convert more clients to SaaS, which we expect will create a stickier and more profitable business model. As for the middle office, we continue to have an extremely healthy backlog of uninstalled revenue worth $92 million, which is almost twice the prior year. Lastly, we are pleased to have announced another Alpha mandate win this quarter. We’re also excited to have expanded an existing Alpha relationship this quarter, winning approximately $300 billion of new back office assets to custody from an asset owner client. This provides another proof point that our Alpha value proposition is working as we’re gaining more of the wallet share over time. Turning to Slide 10. Second quarter NII increased 25% year-on-year, primarily reflecting the impact of higher interest rates and continued growth in loan balances. Relative to the first quarter, NII was up 15%. The sequential increase was largely driven by the improvement in both short and long end rates, which benefited our yields, together with continued growth in loan balances, partially offset by lower investment portfolio balances. On the right side of the slide, we show our average balance sheet during the quarter. Average deposits were down 6% year-on-year and 2% quarter-on-quarter, primarily related to the impact from currency translation and dollar strengthening, which accounted for almost half of the year-on-year decline and 2/3 of the sequential decline. The investment portfolio is now down modestly, and we have almost 60% of our securities now in held to maturity. We’re pleased that our balance sheet is well positioned to recognize this interest rate and NII tailwinds and also protect OCI. Turning to Slide 11. Second quarter expenses, excluding notable items, decreased 1% year-on-year or increased 2% adjusted for currency translation. In response to the revenue environment, we have been proactively managing our expenses, including lowering our incentive compensation, in addition to carefully executing on our continued productivity savings efforts which generated approximately $60 million in year-on-year gross saves or approximately $150 million year-to-date. These savings enabled us to continue to self-fund the good portion of the 4% to 6% higher wage rates we’re facing and the targeted investments in the business, including the Alpha product, technology infrastructure and broader automation. Compared to 2Q ‘21, compensation employee benefits was down 3% as lower incentive compensation, the impact of currency translation were partially offset by salary merit increases associated with wages and inflationary pressure and higher contractor spend. Excluding currency translation, compensation and employee benefits would have been up 1%. Information systems and communications expenses was down 2%, primarily due to the episodic credits related to vendor pricing optimization and infrastructure rationalization. Occupancy was down 4% due largely to currency translation. And other expenses were up 18%, primarily reflecting higher recoverable client-related expenses, which are offset in fee revenue, professional fees and travel costs. On a quarter-on-quarter basis, expenses were down due to seasonal expenses in the first quarter. Headcount increased quarter-on-quarter as we continue to in-source some strategic technology functions from vendors as well as support growth in Alpha. Overall, in light of the current macroeconomic environment, we have had pretty healthy pretax margin for the quarter at approximately 29%, excluding notable items, supported by active expense management and strong NII growth. Moving to Slide 12. On the right side of the slide, we show our capital highlights. We are quite pleased to report CET1 of 12.9%, up 100 basis points happy with our performance under this year’s CCAR with a calculated stress capital buffer well above the 2.5% minimum, resulting in a preliminary SCB at the floor. As a result, in June, we announced the planned 10% increase to our 3Q ‘22 quarterly common stock dividend, subject to Board approval, and it remains our intention to again begin our existing common share repurchase program in the fourth quarter in an amount reflecting market conditions at the time. To the left of the slide, we show the evolution of our CET1 and Tier 1 leverage ratios. As you can see this quarter, even against the backdrop of a challenging operating environment, we drove stronger and higher capital levels. During the second quarter, we completed several of the previously announced RWA optimization actions across our trading, lending and investment portfolios, reducing RWA $12 billion quarter-on-quarter. We also shifted about $20 billion of AFS securities to HTM. As a result, we limited AOCI from the investment portfolio to under $500 million or 40 basis points of CET1, even with a roughly 60 basis point upward interest rate move across the 2- and 5-year part of the curve. You’ll see a larger AOCI move in the GAAP books, but much of that is ratio hedged and offset by the appreciating dollar effect on RWA with an offsetting goodwill and intangibles as well. Given that we have now significantly reduced the OCI risk to interest rate shocks by 75%, we are now comfortable operating somewhat below our standard target ranges for both CET1 and Tier 1 leverage ratios. Turning to Slide 13. We provide a summary of our second quarter results. Despite the continued volatile market environment, I am pleased with our quarterly performance, which demonstrates the strength of our business model. The current macroeconomic environment and persistent geopolitical uncertainties, notwithstanding, our strong growth in both net interest income and FX trading services enabled us to partially offset significant headwinds from both equity and fixed income markets highlighting the resiliency of our franchise. And our expenses remained well controlled, demonstrating the progress we are making in improving our operating model. Now turning to outlook. We would like to provide our current thinking regarding the third quarter. At a macro level, while market rate expectations have been volatile, our current interest rate outlook is broadly in line with the current forward which suggests the year-end Fed funds rate of 3.5%. We expect other major international central banks to continue raising rates, with the ECB expected to start increasing rates in third quarter. The current spot level of global equity markets would imply that average equity markets in 3Q would be down 7% to 8% quarter-on-quarter, and U.S. dollar appreciation to be about 1 percentage point of headwind to revenues and tailwind to expenses, which will be included in our guide. Now in terms of the third quarter of 2022 and on a standalone State Street basis. Given the implied declines in average Global Markets, we expect total fee revenue to be down about 2% on a sequential basis. And we expect both servicing fees and management fees to be down 4% quarter-on-quarter, driven by weaker market levels. Turning to NII. Following 1 of the strongest sequential increases in the NII for many years in 2Q, we expect to deliver further growth with NII expected to increase 5% to 9% quarter-on-quarter, driven by the tailwind from Central Bank rate hikes. This outlook includes our expectation for some initial deposit outflow and rotation in 3Q. And for the full year, on a stand-alone State Street basis, we expect NII to increase 24% to 27%, which is significantly better than our prior full year guide of 18% to 20%. Next, we expect total expenses, excluding notable items, to increase just under 1% quarter-on-quarter, driven by inflationary pressures on wages as we continue to target productivity initiatives and execute against our strategy with a deep focus on expense discipline. This focus enable us to drive positive total operating leverage, excluding notable items for the full year. Lastly, we would expect our 3Q tax rate to be approximately 20% for the quarter. And with that, let me turn the call back to Ron.

Operator:

[Operator Instructions] Your first question comes from Glenn Schorr of Evercore.