Release Date: April 12, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- State Street Corporation reported both fee and total revenue growth while continuing to invest in the business and controlling underlying expenses.
- Positive fee and total operating leverage were achieved, as well as solid EPS growth in Q1 relative to the year-ago period, excluding notable items.
- Asset under custody/administration (AUC/A) increased to a record $43.9 trillion, with Q1 asset servicing AUC/A wins of $474 billion.
- State Street's Global Advisors saw management fees of $510 million, the highest since Q1 2022, and ETF AUM reached a record $1.4 trillion.
- The consolidation of operations joint ventures in India is expected to unlock productivity savings and simplify the operating model.
Negative Points
- The first quarter saw a notable item related to the increase to the FDIC special assessment, impacting EPS.
- Lower net interest income (NII) on total revenue due to deposit mix shift and lower average noninterest-bearing deposit balances.
- Servicing fee revenue is facing headwinds due to pricing pressures, a previously disclosed client transition, and lower client activity.
- Securities finance revenues were down 12% year-on-year, mainly due to lower agency balances and lower spreads.
- Software and processing fees declined 13% sequentially, primarily due to lower on-premise renewals.
Q & A Highlights
Q: Eric, your updated guide suggests that NII is expected to pull back a little bit from this strong result in the first quarter. Could you give a little color around what drove that strength and how sustainable it is?
A: Eric Aboaf (CFO & Vice Chairman) explained that the upswing in NII for the first quarter was primarily due to higher deposit balances across the interest-bearing stack and noninterest-bearing deposits. Repo balances also increased slightly. The higher deposits were attributed to clients holding more cash and putting it into various instruments, sometimes in deposits, sometimes in sweeps, and sometimes in repo. This was aided by the reduction in the fed's overnight repo operations. The NII results were better than expected due to strength in both interest-bearing and noninterest-bearing deposit balances towards the end of the quarter.
Q: You also quantified the impact of the BlackRock transition. It seems as though maybe that impact is a little larger than your prior expectation. Do I have the right read on that?
A: Eric Aboaf (CFO & Vice Chairman) confirmed that the previously announced client transition is in line with the amounts they had expected. The impact was a headwind of approximately 2 percentage points to year-on-year growth, which aligns with their original disclosure over the past couple of years.
Q: Can you talk about the relationship between stock markets and revenues?
A: Eric Aboaf (CFO & Vice Chairman) clarified that they consider the All-World Index, not just the S&P 500, due to their global footprint. An 18% increase in the All-World Index would typically lead to a substantial tailwind of servicing fees on a year-on-year basis, up 4% to 5%. However, they have faced headwinds such as a client transition and lower client activity, which have impacted servicing fees.
Q: Can you comment on how the pricing environment is for your servicing business?
A: Eric Aboaf (CFO & Vice Chairman) mentioned that they have seen pricing headwinds in the servicing business to be roughly in the 2% headwind level over the last 4 years. Inflation has not had a large or substantial effect on their general fee rates or servicing fees. Their fee schedules are negotiated as a package with clients, considering various components like asset-based fees, transactional fees, flat fees, and per-account fees.
Q: What's the outlook for the servicing fee algorithm and when can we expect to see growth?
A: Ronald O'Hanley (CEO, President & Chairman) stated that the transition effect will go away next year, and they are optimistic about the opportunities in fee revenue growth, particularly servicing fee revenue growth, as they overcome headwinds and start to reap the benefits of what they've sold in Alpha and back office.
Q: Can you talk about the pipeline for Private Markets Alpha and your expectations over the next 1 to 2 years?
A: Ronald O'Hanley (CEO, President & Chairman) expressed optimism about the private business as a double-digit growth business and mentioned that Private Markets Alpha is developing nicely, offering opportunities to lower costs and improve operations for clients.
Q: Could you talk a little bit more about your capital priority today?
A: Eric Aboaf (CFO & Vice Chairman) reaffirmed their commitment to return capital to shareholders in line with earnings for the year. He explained that capital return in the first quarter was affected by the normalization of RWA, the FDIC assessment, and the engagement with clients which drove fee revenue growth.
Q: Are you still expecting a 21% to 22% tax rate for the full year?
A: Eric Aboaf (CFO & Vice Chairman) did not update the tax rate guidance from January and suggested that the previous estimate is a good one to use for the full year.
Q: Can you provide more details on the expected preferred dividend for the upcoming quarters?
A: Eric Aboaf (CFO & Vice Chairman) confirmed that the preferred dividend will be elevated in the $50 million to $55 million range in the second quarter, and then it will be around $40 million in the second half of the year.
