Eric Aboaf
Vice Chairman 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 EPS of $1.25, which was down year on year due to the impact of the $294 million loss on sale in connection with the repositioning of our investment portfolio, which will benefit NII in future periods. EPS was up year on year at a $1.93, excluding the repositioning, which you can see on the right-hand side of the page.
Turning to the core business. As you can see on the left panel of the slide, total fee revenue grew by 3% year on year, driven by growth in our front, middle and back office investment services business, as well as solid management fee performance at Global Advisors. This performance enabled us to offset some of the industry-wide headwinds we saw in our Global Markets business as well as lower NII, given the mixed macroeconomic backdrop in the quarter. Lastly, we remain focused on managing costs in the current operating environment, limiting expense growth to just 3% this quarter and achieving productivity savings as part of our plans to deliver a positive fee operating leverage in 2024.
Turning now to Slide 5, we see -- we saw a period-end AUC/A increase by 12% on a year-on-year basis and 1% sequentially. Year on year, the increase in AUC/A was largely driven by higher period-end equity market levels and net new business. Quarter on quarter, AUC/A increased primarily due to client flows and net new business. While net new business was positive, long-term flows in the asset management industry have been muted, as you can see on the bottom right of the slide. This risk loss sentiment leads to the current headwind across the servicing industry.
At Global Advisors, period-end AUM increased 13% year on year and was down 3% sequentially. Relative to the period a year ago, the increase was primarily driven by higher quarter-end market levels and inflows of $10 billion. Notably, in the quarter, our cash franchise continued to perform strongly, generating a record $41 billion of net inflows as our competitive performance contributed to market share gains. Quarter on quarter, AUM increased, mainly due to lower quarter-end market levels.
Turning to Slide 6, on the left side of the page, you'll see third quarter servicing fees up 1% year on year, primarily from higher average equity markets, net new business and the impact of currency translation, partially offset by lower client activity and adjustments, normal pricing headwinds, and a previously disclosed client's transition. Sequentially, total servicing fees were down 2%, primarily as a result of the lower client activity and adjustments and previously -- and the previously disclosed client transition, partially offset by higher average equity markets.
As I've mentioned over the past year, we continue to see lower levels of client activity and flows, all of which impact transactional volumes leading to a 2 percentage point to 3 percentage point headwind on servicing fees year to date. Part of this is the cyclical nature of the servicing business. The full year effect has ranged from minus 2% to plus 1 percentage point impact over the last five years. Within servicing fees, back office services were generally consistent with total servicing fees. Middle office services, which is part of the Alpha proposition, had another quarter of good growth. On a year-over-year basis, middle office fees were up 3% and up 1% sequentially, largely driven by net new business.
On the bottom panel of this page, we highlight the business momentum we saw in the quarter. We won $149 billion of new AUC/A. We onboarded roughly $250 billion of AUC/A in the quarter, primarily in the asset management client segment. And importantly, as Ron mentioned, we achieved new annual servicing fee revenue wins of $91 million this quarter, which will be recognized in future periods. These servicing wins underscore the progress we're making towards stronger sales performance. While we've historically only described wins in AUC/A terms, we recently expanded our disclosure to indicate that a healthy level of annual servicing sales is in the $300 million range this year. You can measure us against this benchmark. We now have about $2.3 trillion of assets to be installed and about $255 million of servicing fee revenue to be installed as well.
Turning to Slide 11, third quarter management fees were $479 million, up 1% year on year, primarily reflecting higher average equity market levels, partially offset by a previously-described shift of certain management fees into NII. Quarter on quarter, management fees were up 4% as a result of higher equity market levels and record quarterly cash net inflows.
As you can see on the bottom right of the slide, our Investment Management franchise remains well positioned with very strong and broad-based business momentum across each of its businesses. In ETFs, we had neutral overall flows, but saw positive net inflows and consistent market share gains in the SPDR Portfolio low-cost suite. As you know, we strategically dropped the fees on about a third of our low-cost suite of products and expect more growth in the coming quarters from this action. In our institutional business, notwithstanding net outflows of $30 billion in the quarter, which were primarily driven by client insourcing, both our defined contribution and indexed fixed income products continued to drive strategic momentum. Lastly, across our cash franchise, we saw record quarterly cash net inflows of $41 billion as we captured some of the cyclical movement of cash in the financial system. I'll just remind you that cash flows can be volatile quarter to quarter.
Turning now to Slide 8, third quarter FX trading services revenue was down 2% year on year, while up 3% sequentially. Relative to the period a year ago, the decrease was mainly due to lower direct FX spreads and lower FX volatility, partially offset by higher volumes. Quarter on quarter, the growth primarily reflects higher volumes. Industry volatility is down 25% to 40% across developed markets and emerging markets relative to the period a year ago and down 5% to 10% sequentially, which is presenting fewer trading opportunities and lower spreads.
Securities finance revenues were down 6% year on year due to lower specials activity and lower agency balances. Sequentially, revenues were down 12%, primarily as a result of seasonally lower activity and the recent industry drop off of U.S. equity shorting activity and specials. Third quarter software and processing fees were up 2% year on year, but down 15% sequentially, largely driven by CRD, which I'll turn to shortly. Other fee revenue increased $49 million year on year, primarily due to the tax credit investment accounting change and the absence of negative market-related adjustments.
Moving to Slide 9, you'll see on the left panel that front office software and data revenue increased 2% year on year, primarily as a result of higher growth in our more durable, software-enabled and professional services revenue as we continue to convert and implement more clients to the SaaS environment, which now accounts for about 60% of our clients, partially offset by fewer on-premise renewals. Sequentially, front office software and data revenue was down 20%, primarily driven by lower on-premise renewals, partially offset by higher software-enabled revenues. Our sales pipeline continues to grow and remain strong for our Charles River Development front office solutions products.
Turning to some of the other Alpha business metrics in the right panel, we were pleased we had two more mandate wins in the quarter for Alpha. Most notably, we also had our first Alpha for Private Markets win. We also meaningfully advanced CRD's institutional fixed income capabilities.
Turning to Slide 10, third quarter NII decreased 5% year on year and 10% sequentially to $624 million. The year-on-year decrease was largely due to the continued mix shift from non-interest-bearing deposits to interest-bearing and lower average deposit balances, partially offset by higher interest rates. Sequentially, the decline in NII performance was primarily driven by lower average deposit balances in the deposit mix shift, partially offset by the benefit of higher interest rates, including international central bank hikes and our investment portfolio repositioning. The NII results were somewhat better than expected due to non-interest-bearing deposit levels coming down slightly less than expected and the portfolio repositioning, partially offset by client repricing, some of which will be delayed and will impact fourth quarter instead.
On the right of the slide, we show our average balance sheet during the third quarter, with average deposits declining 4% quarter on quarter. Cumulative U.S. dollar client deposit betas were 73% since the start of this recent cycle, while cumulative foreign currency deposit betas for the same period continued to be much lower in the 25% to 50% range. Finally, as I mentioned earlier, last month, we executed an NII-accretive and capital-accretive investment portfolio repositioning exercise to take advantage of both higher yields and spreads, which, all else equal, should drive NII towards the higher end of the previously disclosed range of $550 million to $600 million per quarter next year.
Turning to Slide 11, third quarter expenses, excluding notable items, increased 4% year on year. Sequentially, third quarter expenses were down 1% as we actively managed expenses and continued our productivity and optimization savings efforts, all while carefully investing in the strategic elements of the company, including Alpha, private markets and technology and operations automation.
On a line-by-line basis, year on year, compensation and employee benefits increased 4%, primarily driven by salary increases associated with wage inflation, higher headcount, and the impact of currency translation. Sequentially, however, we brought headcount down and we also reduced incentive compensation this quarter, in line with our year-to-date performance. Information systems and communications expenses increased 3%, mainly due to higher technology and infrastructure investments, partially offset by the benefits from ongoing optimization efforts, insourcing, and vendor savings initiatives. Transaction processing increased 6%, mainly reflecting higher sub-custody vendor costs. Occupancy increased 4% as we relocated our headquarters building and other expenses were up 4%, mainly reflecting higher marketing spend and professional fees.
Moving to Slide 12, on the left side of the slide, we show the evolution of our CET1 and Tier 1 leverage ratios, followed by our capital trends on the right side of the slide. As you can see, we continue to navigate the operating environment with very strong capital levels, which remain above both our internal targets and the regulatory minimum. As of quarter end, our standardized CET1 ratio of 11% was down 80 basis points quarter on quarter, largely driven by the continuation of our share repurchases and modestly higher RWA, partially offset by retained earnings. Our LCR for State Street Corporation was a healthy 109% and 120% for the State Street Bank and Trust. In the quarter, we were quite pleased to return roughly $1.2 billion to shareholders, consisting of just over $1 billion of common share repurchases and over $200 million in common stock dividends. Over the last year, ending September 30, we repurchased approximately 12% of shares outstanding.
Finally, a few brief closing thoughts before turning to outlook. Our third quarter performance was solid with fee revenue growth of 3% year on year. We executed on our plan to improve sales capacity and reported $91 million in new servicing fee wins in the quarter as we look towards our goal of $350 million to $400 million in servicing fee wins in 2024. And as you have seen us do for the last four years, we again demonstrated expense discipline, while continuing to invest in the business.
Next, I'd like to provide our current thinking regarding the fourth quarter. At a macro level, our interest rate outlook is broadly in line with the current forwards. We currently assume global equity markets will remain flat from now to quarter end, which implies the daily average is down about 3% quarter on quarter. Bond markets are also expect to be down about 3% on average quarter on quarter.
Regarding fee revenue in 4Q on a year-over-year basis, we expect overall fee revenue to be flat to up 1% year over year, with servicing fees approximately flat and management fees to also be flattish, as we expect the year-on-year business drivers similar to what we saw this quarter. We do expect fourth quarter sales momentum to be similar to the strong sales performance we saw in third quarter. We also expect that our markets businesses will be down modestly year over year given lower volatility. We expect software and processing fees to be up 10% to 12%, largely due to the timing of on-prem renewals and the expected new SaaS installations. And we expect the other revenue line to come in at around $30 million to $40 million in fourth quarter.
Regarding NII, we now expect 3Q NII -- we now expect 4Q NII to be towards the middle of the $550 million to $600 million range we previously mentioned. This includes continued expected rotation of about $3 billion to $4 billion out of non-interest-bearing deposits and the impact of deposit pricing, which we previously noted, but with more stability in the total deposit averages.
Turning to expenses, we remain focused on controlling costs in this environment and expect to maintain relatively flat expenses in 4Q quarter over quarter. As always, this is on an ex-notables basis and, in this regard, we are keeping an eye on the likely FDIC assessment. And we expect our adjusted effective tax rate for 4Q will be around 22%.
And with that, let me hand the call back to Ron.
