3Q 2026 Earnings Call - STATE STREET CORP

Explicit Guidance:

• FY2026 Revenue Growth: Fee revenue expected to grow 13–14% (up from 12–13% previously); Net Interest Income (NII) expected to grow 15–16% (up from 14–15%).
• FY2026 Expenses: Expected to increase 8–8.5% year-over-year, driven by revenue-related costs and continued investment.
• FY2026 Operating Leverage: Expectation to deliver over 500 basis points of positive operating leverage, excluding notable items.
• FY2026 Margin & Returns: Implied full-year pre-tax margin of ~33% (excluding Q1 seasonality/accounting issues); Target full-year effective tax rate ~22%.
• FY2026 Capital Allocation: Total payout ratio approaching 80% for the full year; Significant ramp-up in share repurchases expected in Q4 2026 (estimated >$700M for the quarter to align with 80% payout).
• FY2026 Balance Sheet: Average deposits expected to range 275–280 billion in Q4 2026.

Business-Segment Outlook:

• Investment Services (Custody): Expect organic fee growth in the low-to-mid single-digit range over the medium term; Sales momentum expected to drive >$300M in new business for the fourth consecutive year (Q4 sales expected >$100M).
• Investment Management: Strong long-term asset gathering momentum continues; ETF AUM remains at record levels ($2.3T), with 38 new solutions launched in Q3 2026; Outlook includes sustained organic AUM growth and net inflows.
• Markets: FX client volumes expected to grow in Q4 2026 following a strong Q3; Securities finance revenue (lending and prime services) expected to continue growing driven by client balance sheet expansion.
• Software: Continuing migration to SaaS solutions and adoption of platforms expected to drive further growth in Annual Recurring Revenue (ARR) and new bookings in 2027.
• Digital Assets: Tokenized fund servicing capability targeted for launch by year-end 2026 (subject to regulatory approval); Investment management business expected to be an early adopter of on-chain platforms.
• Wealth Services: Secured mandate from a top US RIA; pipeline expected to expand as advisors seek integrated, technology-enabled solutions.

Market and Competitive Outlook:

• Alternatives: Continued double-digit growth in alternative servicing fees; Focus on serving the evolving private markets ecosystem, including daily pricing for private credit (e.g., Apollo partnership).
• Pricing & Margins: Target Net Interest Margin (NIM) of 110–115 bps (from mid-90s last year) with expectation to rise to the upper end of this range over the medium term.
• M&A: Initial agreement to acquire Santander Casas' Latin American security services business (expected to close in 2027 subject to approval); Transaction aimed at creating a leading platform in Brazil, Mexico, and Colombia.
• Market Structure: Expectation of a long period where traditional and digital finance coexist; no anticipated medium-term revenue loss from tokenization infrastructure build-out.

Macro / Industry Outlook:

• Interest Rates & NII: Modestly asset-sensitive; NII growth driven by investment portfolio reinvestment and balance sheet growth. Expect NII to grow in Q4 2026 sequentially.
• Capital Sensitivity: Rule of thumb: 25bps rate increase = ~10bps capital impact (unmitigated); AFS duration ~1 year; Expecting to maintain standardized CET1 ratio around 11%.
• Inflation/Debt: Recognition of fiscal pressures, credit risk, and geopolitical uncertainty as headwinds requiring client-focused risk management.
• Regulation: Monitoring upcoming liquidity rules (expected year-end) but anticipate minimal impact on balance sheet mix; "Clarity Act" and atomic settlement rules remain under observation.
• FX & Deposits: FX volatility normalized from Q2 highs; Non-interest-bearing deposit mix expected to remain stable around 10% despite seasonal fluctuations.

Strategic Initiatives:

• AI & Transformation: AI integration expected to simplify processes, accelerate execution, and reduce costs over time; Transformation agenda aims to create a simpler, faster, and more scalable operating model.
• One State Street Model: Deepening connectivity across Investment Services, Management, and Markets to deliver integrated solutions (e.g., Charles River front-office + custody back-office for RIAs).
• Capacity & Expansion: Regional expansion investments included in 2026 expense outlook; Loan portfolio optimization (runoff of non-core books) expected to conclude by end of 2026/start of 2027, followed by growth in subscription finance, AAA CLOs, and fund finance.

Risks and Headwinds to Outlook:

• Market Conditions: Guidance assumes global equity markets remain flat; actual results sensitive to market volatility and asset levels.
• Regulatory: Uncertainty around digital asset regulations (tokenization) and potential liquidity rule changes.
• M&A Risk: Acquisition of Santander Casas' business subject to regulatory approvals and closing conditions in 2027.
• Accounting/Seasonality: Q1 seasonality and specific accounting issues may impact quarterly margin comparisons.
• One-time Items: "Other fee revenue" volatility due to mark-to-market gains/losses on strategic investments.

Management Tone on the Future:

• Confidence Level: Highly constructive and confident; Management describes the environment as reinforcing the value of the "One State Street" model.
• Progress: Noting 11th consecutive quarter of positive operating leverage; Current Q3 performance (35% pre-tax margin, 25% ROTC) already nearing medium-term targets.
• Strategy Validation: Belief that strategic initiatives (Digital Assets, Wealth, Alternatives) are gaining traction and will drive sustainable growth; Confidence in delivering medium-term targets (35% pre-tax margin, 25% ROTC) over the next 3–5 years.
• Capital Discipline: Emphasis on disciplined capital allocation: organic investment -> dividend -> buybacks, with a clear ramp in Q4 buybacks.

Miscellaneous:

• Dividend: 10% increase in quarterly common stock dividend became effective in Q3 2026.
• Share Count: Q3 2026 share repurchases totaled $400M; Q4 2026 buyback expected to exceed $700M to reach the 80% total payout ratio.
• Productivity: Productivity savings expected to ramp and grow over time, offsetting "run-the-bank" cost growth.