Eric Aboaf
Executive Vice President and Chief Financial Officer at State Street
Thank you, Ron, and good morning everyone. I'll begin my review of our third quarter results on Slide 4. We reported GAAP EPS of $1.96 or $2.00 excluding the impact of notable items. On the left hand of the slide, you can see that we delivered strong revenue growth year-over-year across every line item, controlled expenses, we delivered significant pre-tax margin expansion, all of which drove strong earnings growth. In fact, expenses were down year-on-year excluding notable items and the headwinds from currency translation, which you can see at the bottom of the slide. This was another strong quarter where we were able to demonstrate the progress we are making in delivering on both our strategic priorities and our medium-term targets.
Turning to Slide 5, you'll see our business volume growth. Period-end AUC/A increased 18% year-on-year to a record $43.3 trillion. The year-on-year increase was largely driven by higher market levels, net new business growth and client flows. At Global Advisors, AUM increased 23% year-on-year to $3.9 trillion. The year-on-year increase was primarily driven by higher market levels coupled with net inflows. Quarter-on-quarter, both AUC/A and AUM were relatively flat given relatively stable domestic market levels.
Turning to Slide 6, you can see another quarter of strong business momentum. Third quarter servicing fees increased 7% year-on-year. The increase reflects higher average equity market levels, good client activity inflows and positive net new business. These items were only partially offset by normal pricing headwinds and about a percentage point of impact from some divestiture activity. On a sequential basis, servicing fees were flat as favorable equity markets and client activity were offset by about a percentage point of currency translation from the US dollar appreciation.
AUC/A wins totaled roughly $1.7 trillion in the third quarter, which gets us to a record of over $3 trillion of new AUC/A wins year-to-date. We continue to estimate that we need at least $1.5 trillion in gross AUC/A wins annually in order to offset typical client attrition, normal pricing headwinds. And given the strong wins we've garnered year-to-date, we have already more than doubled that this year. At quarter-end, AUC/A won but not yet installed amounted to $2.7 trillion, and I would also note that the unique Alpha value proposition represents a large proportion, which reflects our competitive strength as the only front to back office offering from a single provider. I will remind you that installations typically in current phases and over time and deals would vary by fee and product mix. And as we've discussed previously, we would expect current won but yet to be installed AUC/A to be converted over the coming 12 to 24 month time period with about half of the annualized revenue benefit through 2022 and about half in 2023. We continue to be pleased with our pipeline and our robust wins this quarter further showcases the broad-based geographic and multi-segment momentum of our business and will help drive net new business revenue growth in 2022.
Turning to Slide 7, third quarter management fees reached a record $526 million, up 10% year-on-year and were up 4% quarter-on-quarter, resulting in a record investment management pre-tax margin of about 36%. Both the year-on-year and quarter-on-quarter management fee results primarily benefited from higher average equity market levels and strong ETF flows. These year-on-year benefits were only partially offset by the impact of the previously reported idiosyncratic institutional client asset reallocation and money market fee waivers. Notably, we previously estimated that growth in money market fee waivers on our management fees could be approximately $20 million to $25 million per quarter. As a result of the recent improvement in short-end rates, we now expect they will be modestly lower at around $20 million in the fourth quarter, assuming current forward rates. Lastly, as you will recall, we have taken a number of actions to deliver growth in our long-term institutional and ETF franchises and we continue to have strong momentum in year-to-date results as you can see on the bottom right of the slide.
Turning to Slide 8, let me discuss the other important fee revenue lines in more detail. Within FX trading services, we are pleased that we continued to generate strong client volumes, which remained above pre-pandemic levels in the third quarter. Relative to the third quarter of 2020, FX revenue increased 3% year-on-year, reflecting higher direct sales and trading revenue and indirect volumes, partially offset by lower FX volatility. FX revenue was down 2% quarter-on-quarter, largely driven by seasonally lower client volumes and spreads.
Moving to securities finance, third quarter fees increased 26% year-on-year, mainly reflecting higher client securities loan balances and spread as well as business wins and enhanced custody. On a sequential basis, fees were down 3% quarter-on-quarter, mainly as a result of lower agency balances. Finally, third quarter software and processing fees increased 15% year-on-year, but were 8% lower quarter-on-quarter, largely driven by CRD, which I'll turn to next.
Moving to Slide 9, I'd like to highlight our CRD and Alpha performance. We delivered strong standalone CRD results in the quarter with a year-on-year revenue growth of 22%. We saw growth across all three categories of CRD revenues, on-premise, professional services and software enabled. The more durable SaaS and professional services revenues continue to grow nicely and were up 18% year-on-year. Record new quarterly bookings of $28 million and a healthy revenue backlog of $105 million also demonstrates the continued business momentum that we're seeing in CRD supported by the Alpha value proposition.
On the bottom right of the slide, we show some of the third quarter highlights from our State Street Alpha mandates. We reported three new Alpha mandates during the third quarter as the value proposition continues to resonate well with clients. Notably, since inception through the third quarter, we now have seven of 18 total Alpha client mandates that are live. As a testament to our ongoing commitment and investment to further building out our Alpha value proposition, we've also acquired Mercatus, a premier front and middle-office solutions and data management provider for private market managers. In connection with the acquisition, we launched Alpha for Private Markets, which will extend our end-to-end data platform offering for alternatives.
Turning to Slide 10, third quarter NII increased 2% year-on-year, mainly driven by higher loan balances, growth in the investment portfolio and more deposits as well as the absence of the previously disclosed third quarter '20 true-up, partially offset by lower investment portfolio yields due to the low rate environment. Relative to the second quarter, NII came in 4% higher, primarily as a result of higher loan balances and a larger investment portfolio as well as higher short-term rates, all of which was partially offset by ongoing compression of yields. I would also note that we saw a larger than usual slowdown in premium amortization in the quarter due to some tactical rotation on the MBS portfolio which accounted for about a third of the sequential quarter improvement and something we wouldn't expect to repeat in the fourth quarter. On the right of the slide, we show our average balance sheet during the third quarter. Notably, total average deposits decreased by $9 billion in the third quarter or a decrease of roughly 4% quarter-on-quarter, reflecting the active management of non-operational deposits. We also put more of our surplus balance sheet cash to work. We added approximately $3 billion quarter-on-quarter to our investment portfolio. We also increased our average loan balances quarter-on-quarter to $32 billion in response to good client demand.
Turning to Slide 11, third quarter expenses excluding notable items were flat year-over-year as productivity savings for the quarter continue to more than offset targeted business investments, typical expense headwind and $10 million to $20 million of higher than expected revenue-related quarterly costs. Compared to the third quarter of last year on a line-item basis, excluding notables, compensation employee benefits was down 1%, driven by higher salary deferrals and lower headcount partially offset by higher medical benefit costs as claims begin to normalize. Information systems and communications were up 3% due to continued investment in infrastructure and our technology estate, partially offset by our savings programs. Transaction processing was up 8%, primarily driven by higher revenue-related expenses associated with sub custody volumes and market data costs. Occupancy was down 6% reflecting benefits from our footprint optimization efforts. And other expenses were down 5%, primarily driven by lower asset management sub-advisory fees and the timing of some marketing costs. Relative to the second quarter, expenses excluding notable items were down primarily driven by the currency translation of the strong dollar and lower headcount. Overall, we are pleased with our continued ability to demonstrate productivity and expense discipline, while driving high single-digit fee revenue growth year-over-year. When combined together, we delivered a solid pre-tax margin of nearly 30% and generated a robust operating leverage of about 7 percentage points year-over-year.
Moving to Slide 12. On the right of the slide, we show our capital highlights. As Ron mentioned earlier, to finance our proposed acquisition of Brown Brothers Investment Services business, we completed a $1.9 billion common offering this quarter. Also in conjunction with that transaction, we did not repurchase any stock during the third quarter and intend to temporarily suspend repurchases before resuming them during the second quarter of 2022. Lastly, we still increased our quarterly dividend by 10% and returned a total $179 million to shareholders in the third quarter in the form of dividends paid.
To the left of the slide, we show the evolution of our CET1 and Tier 1 leverage ratios. As you can see, we continue to navigate the operating environment with strong capital levels with or without the recent equity raise relative to our requirements. As of the third quarter, our standardized CET1 ratio improved by roughly 230 basis points quarter-on-quarter to 13.5%. The improvement was primarily driven by the issuance of $1.9 billion of common stock related to the proposed acquisition of Brown Brothers Investment Services and higher retained earnings. We also managed down our RWA's. Our Tier 1 leverage ratio also improved quarter-on-quarter by a little over 100 basis points to 6.3%, primarily driven by the issuance of the common stock, a decrease on the balance sheet size as we actually reduced some excess deposits and higher retained earnings. Post closing of the Brown Brothers Investment Services acquisition, we expect both capital ratios to be at the lower end of our target ranges.
Turning to Slide 13. In summary, I'm pleased with our quarterly performance, which demonstrates continued business momentum on our topline and productivity and engineering across our operating model. Total fee revenue was up 9% year-over-year, continuing the momentum we saw last quarter, reflecting growth in all businesses with management fees reaching a record level this quarter. Our expenses remain effectively flat, excluding the impact of notable items as a result of our productivity efforts, notwithstanding higher revenue-related costs mentioned earlier. As a result, we delivered about 7 percentage points of operating leverage year-on-year and we're able to drive pre-tax margin and ROE closer to our recently enhanced medium-term targets, even in this low rate environment.
Next, I'd like to update our outlook. With just one quarter left in the year, I would like to provide our current thinking regarding the full year outlook. At a macro level, our rate outlook broadly aligns with the current forward rate curve. We are also assuming global equity market levels will be flat to the third quarter average for the rest of the year as well as continued normalization of FX market volatility. In terms of the full year outlook, we expect overall fee revenue to be up 5% year-over-year with servicing fees expected to be up 7.5% to 8.5% year-over-year. You will recall that at the beginning of the year, our guide was for total fee revenue to be flat to up 2%, so this continues to be a meaningful increase over our earlier expectations. We increased this due to both higher equity markets and our net new business performance. Regarding NII, we had a small rebound in short-end market rates and some movement in the longer-end of the curve as well. We now expect NII in the range of $475 million to $490 million next quarter, which is a meaningful improvement from the range we provided last quarter. This assumes rates do not deteriorate and premium amortization continues to trend favorably, though as I mentioned earlier, we would not expect the same episodic slowdown in amortization that we saw in the third quarter to repeat in 4Q.
Turning to expenses, we remain confident in our ability to effectively manage core operating costs while on-boarding new clients and investing in the business. Given the strong revenue performance this year and the healthy pipeline in front of us, we now see the need to both invest in our staff and in our business as well as covering some revenue-related costs. We thus expect full year expenses ex notables to be up 1% to 1.25% year-over-year, which means sequentially quarter increase into the fourth quarter. This is the equivalent of full year expenses being flat adjusted for the currency translation headwind and this would put us in a position to drive solid full year margin expansion and operating leverage in spite of the double-digit year-on-year decline in NII. On taxes, we now expect that full year 2021 tax rate will be towards the lower end of our range of 17% to 19%.
And with that, let me hand the call back to Ron.
