Eric W. Aboaf
Vice Chairman and Chief Financial Officer at State Street
Thank you, Ron. Before I get into the numbers, I want to say that it has been a privilege to have been here at State Street and to have worked with you and the team. I'm proud of all that we've accomplished together over the past eight years, and it's with mixed feelings that I'm moving on. But I know that the progress will continue and that State Street is well-positioned with a strong financial foundation and strategy for success. And I look forward to working with the team into 2025 during the transition.
Now, let me walk everyone through our results for the third quarter. Starting on slide three, we reported record EPS of $2.26 for the third quarter, which included notable revenue items that, in aggregate, were neutral to earnings and are detailed on the right side of the page. You can see that we took the opportunity to do some additional repositioning of the investment portfolio this quarter, which I'll talk more about in a moment. We delivered robust EPS growth of 17% year-on-year, excluding notable items, reflecting broad-based fee growth, higher NII, and continued capital return, which increased on a sequential quarter basis.
Our third quarter performance builds upon our strong first half of the year, as healthy fee and total revenue growth, coupled with expense discipline, delivered both positive fee and positive total operating leverage, excluding notable items in the quarter and on a year-to-date basis. The quarter clearly demonstrates good margins and returns, with pre-tax margin at almost 28.5%, an ROE of 12%, and a return on tangible common equity of over 19%.
Turning now to slide four, the third quarter period end AUC/A and AUM again increased to record levels, supported by both equity and bond market tailwinds, as well as strong client flows. As you can see on the right panel of the slide, after an eventful third quarter, the various external indicators for our Markets businesses were mixed. That said, we were encouraged by the continued growth in client volumes and balances across our FX trading and securities finance businesses, which I'll discuss more in detail shortly.
Turning to slide five. Third quarter servicing fees increased 3% year-on-year, as higher average market levels and new business were partially offset by pricing headwinds, a previously disclosed client transition, and lower client activity, including an asset mix shift. The impact of the previously disclosed client transition was a headwind of approximately two percentage points to year-on-year growth, while lower client activity, including an asset mix shift into cash, was a headwind of approximately one percentage point to year-on-year growth, which seems to be abating somewhat. We do feel we -- we do feel good about servicing fee momentum going into the fourth quarter. Encouragingly, we generated $84 million of revenue wins in the quarter, the majority of which were driven by back office mandates, in line with our strategic focus. Over the past four quarters, we've achieved nearly $330 million of servicing fee revenue wins.
Moving to slide six. Third quarter management fees increased 10% year-on-year, primarily reflecting higher average market levels, as well as record quarterly net flows, with positive inflows across all three major product lines. We gained market share within our Cash business, due to strong investment performance and expanded distribution, as well as in ETFs, where our strategic repricing initiatives contributed to the strong flow performance and continued ETF market share gains. Taken together, our Investment Management business demonstrated strong growth in the quarter, while also generating a healthy pre-tax margin of approximately 30%, up over two percentage points year-on-year. Importantly, as Ron mentioned earlier, we continue to position Global Advisors for success by further expanding its capabilities and client solutions, and meeting the evolving needs of investors in key growth areas, such as digital assets, private markets, and innovative fixed income solutions.
Now, turning to slide seven, as I noted, this quarter we were pleased to see continued growth in our Markets businesses, with higher volumes across nearly all of our FX venues relative to the year-ago period. FX trading revenue increased 15% year-on-year, excluding notable items, driven by higher client volumes, with particular strength in emerging markets. Securities finance revenues increased 13% year-on-year, reflecting higher agency lending balances and share gains, with excellent performance in prime services, as we put more balance sheet to work to support our clients. Moving on to software and processing fees, revenues were up 11% year-on-year, mainly driven by higher front office software and data revenues associated with CRD, which is described in greater detail on the following slides.
Turning to slide eight. Our third quarter front office software revenues increased 12% year-on-year, with our software-enabled and professional services revenues up a strong 21%. We are pleased with the robust growth we've consistently delivered in our software business, with revenues up 10% year-to-date. This level of growth supports our belief that our software business has the potential to reach $1 billion of revenue over the next five years. And as Ron noted, we reported two additional Alpha mandate wins in the quarter, and we remain confident in achieving our goal of winning six to eight new Alpha clients this year.
Moving to slide nine. Third quarter NII increased 16% year-on-year to $723 million, as higher investment security yields and higher loan growth more than offset continued deposit rotation. On a sequential basis, NII was 2% lower, primarily driven by continued deposit rotation, as well as by the impact of lower short-end rates stemming from central bank actions. This dynamic was partially offset by higher investment security yields, as well as additional lending and sponsored repo activity. The market dynamics for the sponsored repo product were constructive in the quarter.
As detailed on the right panel of this slide, average investment portfolio balance has increased both sequentially and year-on-year. We also opportunistically repositioned a small portion of the book late in the quarter, which has a payback of approximately five quarters, benefiting NII over the next two years. Average deposits increased 14% year-on-year and 2% quarter-on-quarter, as we continue to realize the benefits of our client engagement efforts. As we move into 4Q, we'd expect to generally operate around these levels, albeit with a bit of continued non-interest-bearing deposit rotation.
Turning to slide 10. Year-on-year third quarter expense growth was 6%, primarily driven by higher performance-based incentive compensation and revenue-related costs, which were worth about half of the increase, as well as important investments in products, technology, and infrastructure. We remain acutely focused on managing our cost base, as demonstrated by year-on-year expense growth of just 3% on a year-to-date basis, excluding notable items. As Ron mentioned, in the third quarter, we continue to deliver productivity benefits through transformation of our operating model and other savings initiatives, achieving roughly $125 million of year-on-year savings for a variety of actions.
Year-to-date, we delivered roughly $350 million of savings, and we're on track to achieve our productivity savings target of $500 million this year. We're continuing to benefit from our ongoing organizational simplification, process improvements, and automation initiatives, which has enabled us to further improve service quality while also lowering our headcount on a pro forma basis, including the JV consolidations by 4% year-on-year, as detailed on the bottom left of the slide.
Moving to slide 11. As you can see, our capital, leverage, and liquidity levels all remain very strong. As of quarter end, our standardized CET1 ratio of 11.6% increase from the prior quarter as capital generated from earnings, combined with the benefit of lower rates on AOCI, more than offset increased capital return and RWA growth as we supported our clients. As I just noted, we delivered on our goal to accelerate capital return in the third quarter with common share repurchases of $450 million, up from $200 million in the prior quarter, and $100 million in Q1. But falling rate moves at the end of the quarter did create some unexpected excess capital. In total, we returned over $670 million of capital to our shareholders this quarter, equivalent to a total payout ratio of almost 100%.
As we look ahead, we are planning for another quarter of healthy capital return in Q4, which we would expect to be somewhat higher than this quarter, subject to market conditions and other factors. As such, we continue to expect the full year payout ratio for 2024 to be comfortably in the 80% to 90% range as we aim to strike the right balance between our capital return goals and supporting our clients with our balance sheet.
In summary, we're pleased with both our third quarter and year-to-date results, which continue to demonstrate our ability to execute against our strategy to drive sustainable business momentum while delivering positive fee and total operating leverage, excluding notable items, along with a significant return of capital to shareholders. With that, let me cover our improved full year outlook, which is all on a year-on-year basis and ex notable basis. I would highlight that the outlook continues to have the potential for significant variability given the economic and political environment we're operating in.
In terms of our current macro assumptions, we're assuming global equity markets are flat to third quarter end for the remainder of the year. Our rate outlook broadly aligns with the current forward curve, and we expect FX market volatility to remain relatively flat to third quarter average levels for the remainder of the year. Given our strong results year-to-date and higher average market levels, we now expect that total fee revenue will likely be at or slightly above the high-end of our up 4% to 5% range, better than our prior expectations.
Turning to NII, we now expect full year NII will be up in the 4% to 5% range, which is also better than our previous guide for NII to be up slightly on a full year basis. Finally, given these improved top line revenue expectations, expenses are expected to be somewhat higher than our prior outlook, and now up in the range of 3.5% this year, given higher revenue-related costs. Importantly, we continue to expect to deliver both positive fee and positive total operating leverage for the full year.
And with that, let me hand the call back to Ron.
