Eric W. Aboaf
Vice Chairman and Chief Financial Officer at State Street
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 $18 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's 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 to 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 remained challenging in the quarter, but 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 a 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 was 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 ticked 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 impacts 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 offering through the launch of new funds as we continue to broaden our product range and geographies. Our investment management business had a 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 US 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 $1 billion in annual revenues over the next five years.
In addition, we are pleased with the continued momentum we're seeing in Alpha. We reported an additional Alpha mandate win and two 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 benefitor 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 non-interest-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 joined 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 continued 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 in 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 functions to increase our management span and 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 and 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 remain 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 supported 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 have 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 a planned 10% per share quarterly common dividend increase on the heels of a strong performance under 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 flat 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 muted.
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.
