3Q 2026 Earnings Call - STATE STREET CORP

Financial Performance:

• Reported third-quarter 2026 EPS of $3.69, up 33% year-over-year (YoY).
• Total revenue reached $4.0 billion, a 13% increase YoY.
• Fee revenue grew 11% YoY to record levels; excluding a $30M one-time gain in the prior year, fee revenue grew 12%.
• Net Interest Income (NII) surged 21% YoY to $864 million, driven by Net Interest Margin (NIM) expansion of 16 basis points to 112 bps.
• Operating expenses increased 8% YoY to $2.6 billion, primarily due to revenue-related costs and strategic investments.
• Achieved 11 consecutive quarters of positive YoY operating leverage, with pre-tax margin expanding 350 bps to 35% and Return on Tangible Common Equity (ROTCE) rising to 25%.
• Assets Under Custody and Administration (AUCA) hit a record $59.2 trillion (+15% YoY); Assets Under Management (AUM) reached a record $6.3 trillion (+16% YoY).
• Generated approximately 530 basis points of operating leverage in the quarter.

Guidance and Future Outlook:

• Raised full-year 2026 fee revenue growth guidance to 13–14% (from 12–13%).
• Raised NII growth guidance to 15–16% (from 14–15%) and expenses growth to 8–8.5%.
• Projects over 500 basis points of positive operating leverage for the full year.
• Expects a 2026 effective tax rate of approximately 22% and a total shareholder payout ratio approaching 80%.
• Forecasts fourth-quarter NII growth sequentially, likely delivering toward the upper end of the full-year guidance range.
• Targets medium-term NIM stabilization between 110–115 bps, with a view to reach the upper end over the medium term.

Business Segments and Product Lines:

• Investment Services: Servicing fees grew 10% YoY ($1.5B); organic growth was 7%. Sales of new business reached $68M, with record wins in alternatives and early traction in wealth services.
• Investment Management: Management fees rose 20% YoY to $797M. Delivered record ETF flows and six consecutive quarters of organic net inflows ($7B in the quarter). Launched 38 new products, including a record $2.5B seed for a UC Investments endowment ETF.
• Markets: FX trading revenue up 17% YoY to $427M; client volumes hit a record, up 30% YoY. Securities finance revenue increased 9% to $151M.
• Software: Software services revenue grew 5% YoY to $175M. Annual Recurring Revenue (ARR) increased 8% to $442M; new bookings totaled $14M.
• Strategic Initiatives: Announced acquisition of Santander Casas' Latin American security services business (closing expected 2027). Launched tokenized fund servicing capability and the Galaxy on-chain liquidity suite on the Stellar network. Secured a servicing mandate from a top U.S. RIA via an Apex FinTech partnership.
• Alternatives: Servicing fees grew at a double-digit rate YoY, driven by private markets activity.

Market and Competitive Landscape:

• Recognized as "World's Best FX Bank for Real Money Clients" (5 Euromoney 2026 FX Awards).
• Operating in a dynamic environment characterized by fiscal pressures, inflation uncertainty, and accelerating AI/tech adoption.
• Positioning strongly across three secular growth areas: Alternatives, Digital Assets (tokenization), and Wealth.
• Leveraging the "One State Street" model to offer integrated end-to-end solutions, deepening relationships with global institutional clients.
• Strong performance in APEC and EMEA regions driving FX volume growth.

Risks and Challenges:

• Potential revenue volatility in "other fee revenue" due to mark-to-market gains on strategic investments (non-recurring).
• Regulatory uncertainty surrounding digital assets and tokenization, though no immediate medium-term revenue loss is anticipated.
• Sensitivity to interest rate movements: A 25 bps rise in rates could impact capital ratios by ~10 bps absent optimization.
• Deposit mix volatility and potential "lumpiness" in sales timing for the fourth quarter.
• Loan portfolio runoff in specific non-core categories, though offset by growth in subscription finance and CLOs.

Management Commentary and Tone:

• Tone is highly confident and optimistic, citing "strong momentum" and "consistent, durable improvement."
• Management emphasizes the success of the "One State Street" integrated model and disciplined execution.
• Ron O'Hanley highlighted the firm's ability to act as a trusted partner amidst complex market forces.
• John Woods (CFO) confirmed strong capital positioning with a Common Equity Tier 1 (CET1) ratio of 11% and a leverage ratio of 5.5%.
• Confirmed a ramp-up in share buybacks for Q4 (likely >$700M) to support the ~80% payout ratio target.

Analyst Questions and Answers:

• NII Outlook: Confirmed sequential NII growth in Q4 despite a slightly lower guidance range compared to some prior street expectations, driven by strong underlying trends and balance sheet growth.
• RIA Custody Strategy: Explained the move into RIA custody as a response to industry shifts toward customization and wealth accumulation; highlighted the strategic value of cross-selling services (e.g., Charles River to custody).
• Sales Growth: Clarified that while YTD sales were $200M, a back-end loaded Q4 is expected to push annual wins above $300M, maintaining a healthy net new business engine.
• Capital Allocation: Discussed capital sensitivity to rate hikes and reaffirmed commitment to high buyback levels while maintaining strong capital buffers and funding organic growth.
• FX Volume: Explained Q3 sequential FX revenue decline as expected normalization after a record Q2, with strong YoY growth (+17%) maintained.
• Deposit Trends: Average deposits expected to range 275–280B in Q4; growth driven primarily by new custody business wins rather than market conditions alone.
• Expense Structure: Noted that 5% of the 8% expense growth was revenue-related, with the remainder attributed to strategic investments partially offset by productivity gains.

Other Key Points:

• Transformation agenda continues to simplify processes and improve efficiency via AI, enabling further investment in growth initiatives.
• Partnership with Charles River and Apex FinTech validates the integrated approach to wealth services.
• Digital asset strategy focuses on bridging traditional and digital markets, with tokenized funds expected to launch by year-end subject to regulatory approval.
• The firm maintains a robust capital distribution plan, having increased the quarterly dividend by 10% in Q3.
• Long-term outlook remains constructive, with confidence in achieving 35% pre-tax margins and 25% ROTC targets.