State Street Q4 2024 Earnings Call Transcript

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Provided by Quartr
January 17, 2025

There are 6 speakers on the call.

Operator

Good morning, and welcome to State Street Corporation's 4th Quarter and Full Year 20 24 Earnings Conference Call and Webcast. Today's call will be hosted by Elizabeth Lin, Head of Investor Relations at State Street. Today's discussion is being broadcasted live on State Street's website at investors. Statestreet.com. This conference call is also being recorded for replay.

Operator

State Street's conference call is copyrighted and all rights are reserved. This call may not be recorded for rebroadcast or distribution, in whole or in part, without the express written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street website. Now I would like to hand the call over to Elizabeth Lin.

Speaker 1

Good morning, and thank you all for joining us. With me today are State Street's Chief Executive Officer, Ron O'Hanley Chief Financial Officer, Eric Abeloff and Investment Services CFO and as we announced this morning, incoming Interim CFO, Mark Keating. On today's call, Ron will provide an overview on 2024 performance and milestones achieved. Eric will then walk through the Q4 and full year 2024 earnings results in detail, and both Eric and Mark will provide our 2025 outlook, after which we'll be happy to take questions. Today's presentation is available on the Investor Relations section of our website, investors.

Speaker 1

Statestreet.com. 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 presentation. In addition, today's call will contain forward looking statements. Actual results may differ materially from those statements due to a variety of important factors, such as those referenced in our discussion today and in our SEC filings, including the Risk Factors section in our Form 10 ks.

Speaker 1

Our forward looking statements speak only as of today, and we disclaim any obligation to update them even if our views change. With that, let me turn it over to Ron.

Speaker 2

Thank you, Liz, and good morning, everyone. Before we begin, I want to acknowledge the terrible wildfires devastating parts of Los Angeles. Our thoughts are with all those impacted by this terrible event, including our colleagues and clients as well as the brave first responders working to protect the impacted communities. Turning now to our quarterly investor presentation. Our 4th quarter results represent a strong close to a strong year for State Street.

Speaker 2

We entered 2024 with a clear set of strategic priorities aimed at driving revenue growth, improving our sales performance, strengthening our market position and enhancing our operating model. We executed well against these objectives, enabling us to serve our clients and deliver strong financial performance and continued business momentum for our shareholders. These results included both positive fee and full operating leverage, pretax margin expansion and higher earnings growth, illustrating the power of our franchise and the effectiveness of our strategy. The foundation for our strong business performance in 2024 was laid in prior years, building upon the significant strategic investments we have made in our capabilities and our client value proposition to be our clients' essential partner and lead with service excellence. These actions have positioned State Street to compete better and win.

Speaker 2

Turning to Slide 2 and beginning with our financial highlights. I'm particularly pleased with our improved revenue performance. 4 year fee and total revenue increased 7% 9%, respectively. Excluding notable items, fee revenue, NII and total revenue each increased by a solid 6% year over year in 2024. Year over year, each revenue line contributed positively, including double digit growth in management fees, FX trading services and front office software and data revenues, while we also delivered a 2nd consecutive year of record NII.

Speaker 2

Full year EPS was $8.21 as compared to $5.58 in 2023. Excluding notable items, EPS growth was up 13% year over year. Pretax margin expanded by more than 100 basis points, while full year return on average tangible common equity was a robust 19%. Turning to our strong business momentum in 2024. Our key business performance indicator, including wins, clearly illustrate the effectiveness of our strategy and positioning State Street to effectively serve our clients, compete better and gain share.

Speaker 2

2024 was an important year of business growth and significantly improved sales performance, which sets us up well as we look forward to drive further fee revenue growth in 2025 and beyond. In Investment Services, we generated very strong AUCA wins of over $2,300,000,000,000 in 2024, including $1,100,000,000,000 of wins in Q4. Full year new servicing fee revenue wins were $377,000,000 including $154,000,000 in Q4. The strength of our sales performance in the 4th quarter was underpinned by a large strategic and multi regional win with an APAC asset owner. With the strong 4th quarter sales performance, we achieved our goal of $350,000,000 to $400,000,000 of new servicing fee revenue wins in 2024.

Speaker 2

State Street Alpha brings together the full depth and breadth of our servicing and software solutions and is a clear competitive advantage for State Street's investment services business. Our strong 4 year sales performance in 2024 demonstrates the strength of this compelling value proposition. As a tangible proof point, of the more than $2,300,000,000,000 of new AUCA wins in 2024, Alpha accounted for approximately 50% of those wins. All told, we won 7 new Alpha mandates in 2024, including 2 new mandates in Q4, achieving our goal of 6 to 8 new Alpha clients last year. Our investment management franchise had another strong year of strategic progress with both 4Q and full year management fees achieving record levels.

Speaker 2

We continue to strategically broaden Global Advisors' product and distribution capabilities, which has positioned the business for future growth and from which we are already realizing the early benefits of these strategic actions. We generated $146,000,000,000 of net new assets in 2024, including £64,000,000,000 in 4Q. This equates to over 3% organic AUM growth for the 2nd year in a row, well above the 2% target we laid out early last year. ETF inflows were a record in 2024 with record flows in our strategically important U. S.

Speaker 2

Low cost ETF suite as well as in the EMEA region, gaining market share in both. We also had the highest number of ETF launches in Global Advisors' history last year and announced innovative partnerships with a number of market leaders aimed at leveraging our Spider franchise to expand investor access to new investment opportunities. In addition, Global Advisors made a host of key strategic investments, most notably in Envestnet, a leading provider of integrated technology, data and wealth solutions. This investment, consistent with State Street's wealth services strategy, will enhance our access to the independent wealth advisory and high net worth distribution channels, driving future growth. Building on a record year of inflows in 2023, our cash business generated an aggregate $32,000,000,000 of full year inflows, while our institutional business also had a positive year of inflows with U.

Speaker 2

S. Defined contribution again continuing to drive inflows with $28,000,000,000 in 2024. Turning to our markets and financing franchise. Despite lower daily average FX volatility in 2024, FX Trading Services generated double digit revenue growth supported by strong and growing client volumes. Turning to our balance sheet.

Speaker 2

Our markets and financing franchise delivered strong loan growth in support of our clients, contributing to record NII performance in 2024 and supporting fee growth in private market servicing. Our strong balance sheet position enabled us to return $2,200,000,000 of capital to shareholders last year, including common share repurchases and a 10% increase in our quarterly common dividend per share. As we look ahead, we remain focused on consistently returning capital to our shareholders and are targeting a payout of about 80 percent of earnings in 2025, subject to market conditions and other factors. Finally, 2024 was also an important year for our transformation as we continue to focus on core operating model improvements to enhance our client and colleague experience and generate increased productivity. We made a number of key investments in operational simplification, automation and technology modernization.

Speaker 2

These actions contributed to the approximately $500,000,000 of year over year productivity savings that we achieved in 2024, in line with our target. The majority of these savings are recurring and will enable us to continue to increase our investments in alpha, private markets and asset management distribution to drive the sales and momentum to power our next wave of growth. Further, excluding notable items, these transformation efforts supported the approximately 200 basis points of both positive fee and total operating leverage in 2024, even as underlying expenses increased by 4% year over year, driven in part by higher revenue related costs. In summary, our 4th quarter results represent a strong close to a strong and important year for State Street. Good execution against a clear set of strategic priorities enabled us to support our clients better and deliver strong financial results.

Speaker 2

Our strategic actions have positioned State Street to compete better and win as evidenced by the accelerating business momentum we generated from start to finish in 2024. As you know, last October, we announced that our CFO of 8 years, Eric Abaloff, will be departing State Street in February. At that time, we launched a formal search process to identify a successor, which is progressing very well and as planned. This morning, we announced that Mark Heating, EVP and CFO for Investment Services, will serve as our interim CFO following Eric's departure next month while our search for a permanent CFO continues. Mark is a 30 year State Street Finance veteran who has worked in almost every area of our business across 3 continents.

Speaker 2

As the executive finance leader within our largest segment, Mark has been instrumental in supporting our transformation efforts, driving revenue growth initiatives, and he brings deep operational expertise, a partnership mindset and team building focus. Once again, I want to thank Eric for his leadership and wish him well in his new role. With that, let me hand the call over to Eric, who will take you through the quarter in more detail.

Speaker 3

Thank you, Ron. Before I begin my review of our financial results, let me briefly discuss some of the notable items we recognized in the 4th quarter on the right panel of Slide 3. 4th quarter notable items collectively totaled $58,000,000 pretax or $0.14 a share and were largely driven by an acceleration of expenses associated with certain prior period deferred incentive compensation awards to allow our compensation program to be more competitive with peer practices. Notable items this quarter also included an FDIC special assessment release and some other small items. Our Q4 results are the culmination of the important work we accomplished throughout 2024 and reflect broad based fee close across the entire franchise, up 13%, higher NII, up 10% and continued capital returns.

Speaker 3

As detailed on the left panel of the slide and excluding notable items, in the Q4, we also achieved a pretax margin of about 30% and an ROE of over 13%, while year on year EPS growth was a robust 27%. On a full year 2024 basis and excluding notable items, we were pleased to deliver strong revenue growth of 6%, both positive fee and total operating leverage of about 200 basis points each and a pretax margin of approximately 28%, contributing to strong EPS growth of 13% and an ROE of roughly 12% for the year. Our 2024 results demonstrate the strong momentum we are seeing across our various businesses and provide a strong step off as we move into 2025. Turning now to Slide 4, detailed on the left panel of the slide. Period end AECA and AUM both increased nicely year on year in Q4, supported by the market tailwinds and positive client flows.

Speaker 3

On the right panel of the slide, we detail some of the key market indicators that impact our business. Most of the market drivers, global equity markets, bond markets, FX volatility and industry flows are up year on year, which we have successfully monetized in the form of revenue growth this quarter. Turning to Slide 5. We saw good momentum continue in our Investment Services business this quarter with strong sales and strong installations. On a year on year basis, servicing fees increased 6%.

Speaker 3

The quarterly performance reflected higher average market levels and net new business, partially offset by pricing headwinds, lower client activity and a previously disclosed client transition. The impact of that previously disclosed client transition was a headwind of roughly 1 percentage point to year on year growth, while lower client activity, including the asset mix shift into cash, was still a slight headwind to the year on year growth, but now updating as clients put more money to work. As Ron mentioned, we were pleased with the meaningful progress we achieved in our investment services business during 2024. With our strong performance in 4Q, we comfortably met our annual servicing fee sales goal of $350,000,000 to $400,000,000 in 2024. In addition, our strategically important private markets business, which continues to be a key growth driver, increased 15% year on year in 4Q and represents approximately 9% of full year 2024 servicing fees.

Speaker 3

Taken together, we are encouraged by the strategic progress we're making in our Investment Services business. Moving to Slide 6. In the 4th quarter, management fees increased 20% year on year to a record $576,000,000 primarily reflecting higher average market levels and quarterly net inflows of $64,000,000,000 dollars As Ron mentioned, in 2024, we delivered organic AUM growth of over 3% for a 2nd year in a row as we continue to drive incremental net inflows through the expansion of our distribution and product capabilities. Product innovation continues to be a strategically important growth driver for Global Advisors. In the Q4, we launched 3 new ETFs, bringing our full year total to 24 new launches.

Speaker 3

Efforts such as these broaden our product capabilities and have contributed to the strong organic AUM growth we have achieved. So taken together, we are quite pleased with the strong performance of our investment management business in the quarter, which generated a pretax margin of approximately 32%. Turning now to Slide 7. 4th quarter FX trading revenues increased 17% year on year as investor confidence and increased FX volatility drove double digit increases in client volumes across most of our trading venues. Securities Finance revenues increased 22% year on year in 4Q, primarily driven by strong prime services performance as we put another $2,000,000,000 of risk weighted assets to work to support our clients.

Speaker 3

Agency lending volumes grew 25% year on year in 4Q as we continue to engage with our clients even though U. S. Equity Specials activity and spreads remained muted. Moving on to software and processing fees. 4th quarter revenues were up 9% year on year, mainly driven by higher fraud office software and data revenue associated with CRD, which is described in greater detail on the following slide.

Speaker 3

Turning to Slide 8 now. Front office software revenues increased 10% year on year in 4Q with our software enabled and professional services revenues up or robust 25%. We continue to have very solid momentum in the front office as evidenced by the record quarterly new bookings of $48,000,000 in the quarter and over $70,000,000 for the year. As Ron noted, we reported 2 additional alpha mandates wins in the quarter, bringing our full year wins to 7. Importantly, all 7 of these mandates either included the back office as a component of mandate or were built upon an existing back office relationship consistent with our goal of prioritizing our sales mix towards faster time to revenue products.

Speaker 3

State Street Alpha continues to be an important differentiator for our business. And in 2024, a substantial portion of servicing fee and AECA wins were driven by Alpha. Moving to Slide 9. 4Q NII increased 10% year on year to 749,000,000 dollars as higher investment portfolio yields and higher loan growth more than offset continued deposit rotation. On a sequential basis, NII increased 4%, primarily driven by higher deposit balances with average non interest bearing deposits increasing 2,000,000,000 as well as healthy loan growth.

Speaker 3

As detailed on the right panel of the slide, we benefited from very strong average deposit growth this quarter as we saw more cash in the banking system and higher assets under custody as well as typical Q4 seasonality. In addition, our continued focus on client engagement also helped to contribute to this strong growth consistent with prior quarters. Average total deposits were up 15% year on year and 5% quarter on quarter, and 4Q marked our 5th consecutive quarter of sequential growth in average deposits. Our strong deposit performance together with our targeted management actions throughout 2024 were the principal drivers of the improvement in our NII performance relative to our expectations at the beginning of last year. I'd also note that we modestly shortened our investment portfolio duration in the early part of the quarter in anticipation of rising long end rates, and this mitigated the AOCI impact on our capital, which I'll come back to shortly.

Speaker 3

Turning to Slide 10. As we calibrated our expense base to the more constructive revenue environment in the 4th quarter, we generated positive operating leverage of 4 percentage points, excluding notable items. And in 4Q, revenue related costs, including performance based incentive compensation, represented 3 percentage points of the 8% year on year increase in total expenses, excluding notable items. Employee benefits contributed to another percentage point. As we continue to invest in our business for future growth, we remain intensely focused on maintaining expense discipline.

Speaker 3

Outside of performance based incentive compensation and employee benefits expenses, our 4th quarter compensation expense was roughly flat year over year. And as detailed on the bottom left of the slide, our pro form a headcount actually fell by an additional 4% year on year as we continued to benefit from our ongoing organizational simplification and process improvement initiatives. We continue to drive sustained productivity improvements through the transformation of our operating model and other savings initiatives in 4Q, totaling approximately $500,000,000 of productivity savings in 2024, thereby meeting the target we set at the beginning of the year. This allowed us to self fund roughly $375,000,000 in incremental business and technology investments, including those that will drive further revenue growth. Moving to Slide 11.

Speaker 3

Our capital levels remain well above regulatory minimums, allowing us to put our balance sheet to work in support of our clients. As of quarter end, our standardized CET1 ratio of 10.9% was down approximately 70 basis points quarter on quarter. RWAs increased roughly $5,000,000,000 sequentially, largely due to the impact of the appreciating U. S. Dollar on our FX trading business.

Speaker 3

In addition, we saw good volumes and utilization in our lending and prime services businesses, which also contributed to the RWA increase. We were pleased to deliver another quarter of increased capital return with common share repurchases of $550,000,000 up from $450,000,000 in the prior quarter. Part of this came from our strong earnings generation and part from our active AOCI management, which I mentioned earlier. In total, we returned $770,000,000 of capital to our shareholders in the Q4, equivalent to a total payout ratio of 106%. And for the full year, we returned $2,200,000,000 of capital to shareholders for a total payout ratio of 87%.

Speaker 3

Turning to Slide 12. Let me first share some of the macro assumptions underlying our current view for the full year. We expect global equity markets to be up 5% point to point in 2025, which equates to a daily average being up approximately 8% year on year. Our interest rate outlook for 2025 broadly aligns with the forward curve as of the end of 2024, which I would note continues to move. In addition, we expect to see a modest increase in volatility.

Speaker 3

With that as an economic backdrop, I'd like to turn the call over to Mark to walk through expectations for 2025.

Speaker 4

Thank you, Eric and Ron for the introduction, and good morning, everyone. It's a pleasure to be on the call today. I am excited by the opportunity ahead of us at State Street as we aim to build upon the strong results we achieved in 2024. Now turning back to Slide 12. Based on the macro assumptions that Eric laid out for the full year and excluding notable items, we currently expect fee revenue will be up approximately 3% to 5%.

Speaker 4

This includes a headwind of nearly 1 percentage point to servicing fee revenue from the previously disclosed client transition weighted toward the second half of the year. Turning to NII. Based on our current assumptions, we expect NII to be roughly flat for the full year with a range from up low single digits to down by a similar amount in percentage terms. Of course, the path of NII is subject to global monetary policy and deposit mix and levels, which are difficult to predict. We currently expect that the 2025 expense growth rate will moderate relative to 2024, with expenses excluding notable items expected to be up approximately 2% to 3%.

Speaker 4

Importantly, we expect continued productivity savings will enable us to once again self fund incremental growth investments in our business this year. One final point. With the outlook for a stronger U. S. Dollar, we expect currency translation to have an unfavorable impact on fee revenues but a favorable impact on expenses, worth roughly 1 percentage point each on fee revenues and expenses.

Speaker 4

So stepping back, given our positive outlook for fee revenue growth together with continued expense discipline, we currently expect to achieve another year of positive fee operating leverage, excluding notable items. I would also note that we see a path to delivering positive total operating leverage, excluding notable items in 2025, contingent mainly upon NII coming in roughly flat or slightly better, which is market dependent, and we will have more to say as we move through the year. Lastly, we expect an effective tax rate at or just above 22% for the full year. And with that, let me hand the call back to Eric.

Speaker 3

Thank you, Mark. As this is my final earnings call, I want to take a moment once again to say how much I've enjoyed my 8 years at State Street and that it's been a privilege to work with Ron, the leadership team and the thousands of fellow employees that I've had the pleasure of collaborating with. At this point, I'm leaving things in the good hands of Mark and the whole finance team. And finally, I'd like to thank all of our analysts and shareholders. I've appreciated your engagement, your candor and your support over the past 8 years.

Speaker 3

And with that, let me hand the call back to Ron.

Speaker 2

Thank you, Eric. As we look ahead to 2025, we are intensely focused on a set of strategic priorities to deliver for our clients, shareholders and people. These are: 1, driving revenue growth by sustaining the solid broad based growth and momentum we are seeing across our businesses 2, further advancing operational excellence to deliver enhanced productivity and client service and 3, continuing to develop an even higher performing culture, employee experience and destination for talent. To conclude, we are encouraged by the strategic and financial progress we made in 2024, and we look forward to continuing that progress as we move into 2025. Operator, we can now open the call for

Speaker 3

questions. Thank

Operator

you. Our first question comes from the line of Alex Blosten from Goldman Sachs. Your line is open.

Speaker 5

Good morning, everybody. Thank you for the question. I was hoping we could start with a question around service and fee growth outlook. Your slide implies that you expect to see some growth there in 2025 given favorable market and organic growth. The favorable market point makes total sense, pretty reasonable and organic growth feels right as well given the momentum seen in the business.

Speaker 5

But maybe what are some of the other assumptions in terms of client retention or attrition rates? Pricing has always been a factor as well. So maybe just a little more granularity there on that as well as what are your sales growth expectations for 2025 within servicing?

Speaker 4

Thanks, Alex. This is Mark Keating. I'll take that and nice to meet you. Look forward to working with you. When I think about the momentum in our servicing fee business, I think it's important maybe if we go back a little bit and think through where we've come from because this really has been a multiple year journey in how we're building our servicing fee business.

Speaker 4

About 1.5 years ago, we laid out a plan on how we're going to power our sustainable growth in our servicing fee business. At that point, we knew we needed to perform better in our kind of core custody and servicing business. Our near in history at that point in time, if you recall, and I think we've talked about this a couple of times, we have been doing sales of approximately $140,000,000 to $160,000,000 a year in 2019 2020. We then took a step up in 2021 2022 to around $250,000,000 to $260,000,000 And at that point, we set a goal for ourselves, which is the target that we've been talking to and that you know now, which is around the $350,000,000 to $400,000,000 range. We did $300,000,000 last year, and today, we're announcing that we did nearly $380,000,000 And it's important to note too about $380,000,000 about 85% of that is related to the back office, which as you all know, brings NII, brings FX, brings securities finance and a lot of other products that we can cross sell.

Speaker 4

So when you think about it in that way, as I just laid out, we've really increased our servicing fee sales about 45 percent from 2022 and over 2 50 percent from 2020. And we did that by restructuring our sales teams, our RM teams, realigning incentives, focusing on service excellence. And importantly, as we've talked about investing in our business, products and services, features and functionality, Eric mentioned our growth in private markets, I think it's a good example of that. And so we expect that to be the range right now for our business. And as we target that, the team knows that is the level that we need to achieve in order to grow the business.

Speaker 4

And when you talk about things like revenue retention you mentioned, we tend to talk about our business around 97%. That's a target we've set for ourselves. That's consistent. And then also, we tend to target about 2% of fee compression, which has been consistent. So that level of $350,000,000 to $400,000,000 is in the equation that we need in order to provide sustainable growth.

Speaker 4

One other thing I would one other way to think about the sustainability of our fee revenue growth, servicing fees, is to also take a look at the backlog that we've been now disclosing over the last several quarters, which is roughly 350,000,000 dollars at the end of 2024. If you go back, I mean, we've disclosed this. That figure was roughly $200,000,000 at the end of Q3 2023. So that's an increase of nearly 75%, which I think is another good proof point because that represents future revenue to come on our platform. And we expect that that needs to be in that range as we go forward to power sustainable growth.

Speaker 4

So those are the things that I think about in terms of gauging our ability to continue to drive our fee revenue growth. We laid out a plan. We reported on that plan. We continue to measure ourselves against it, and we are delivering on it. So hopefully, that's a helpful some helpful context.

Speaker 5

Yes. No, that's very helpful framework. I appreciate that. Yes, go ahead, Ron.

Speaker 2

Alex, what I would add to what Mark said is kind of why do we believe that this is sustainable. There were 3 things that enabled what Mark described. One was an intense focus on improving service quality, which had a lot to do with the technology investments that we were starting to make back then and now we've have come to fruition. We've got a few more that we want to make. 2nd was enhancing capabilities in areas such as core custody, private markets, as well as Alpha broadly.

Speaker 2

And we've talked about Alpha being a back office and servicing fee gathering machine. And then thirdly was just in raw sales capabilities. There's been a significant buildup of those capabilities, change out of some people. So that stuff is all in place and therefore gives us a lot of confidence as we look forward.

Speaker 5

My follow-up is around capital management. And Ron, I heard you say 80% or 80% plus for 20, 25 payout. But given the fact that Tier 1 leverage, I think, slipped a little bit at the end of the quarter, given the high balance sheet and the client activity component also seems to be a bit more out.

Speaker 2

So in aggregate for the year, 80% return to our shareholders, a combination of dividends and buybacks. There is a seasonality to this. And you saw what it was last year and probably you should expect to see something similar this year. So starting out modestly and then continuing to progress.

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