3Q 2026 Earnings Call - STATE STREET CORP

Financial Performance:

• Reported Q3 2026 EPS of $3.69, a 33% year-over-year increase.
• Total revenue reached $4.0 billion, up 13% YoY, driven by broad-based strength across core franchises.
• Fee revenue grew 11% YoY; adjusted for non-recurring market-related gains in the prior year, organic fee revenue growth was 12%.
• Net Interest Income (NII) surged 21% YoY to $864 million, supported by a Net Interest Margin (NIM) expansion of 16 basis points to 112 bps.
• Pre-tax margin expanded 350 basis points YoY to 35%, and Return on Tangible Common Equity (ROTCE) rose to 25%.
• Achieved the 11th consecutive quarter of positive operating leverage, generating approximately 530 basis points of leverage in the quarter.
• Operating expenses increased 8% YoY to $2.6 billion; 5 percentage points of this increase was revenue-related, while the remainder covered strategic investments.
• Assets under Custody & Administration (AUC&A) hit a record $59.2 trillion at quarter-end, up 15% YoY.
• Assets under Management (AUM) reached a record $6.3 trillion, up 16% YoY, with six consecutive quarters of organic net inflows totaling $7 billion in the quarter.
• Capital position remains robust with a CET1 ratio of 11% and a Tier 1 leverage ratio of 5.5%.
• Total capital return to shareholders was $651 million for the quarter, including $400 million in buybacks and $251 million in dividends, resulting in a ~63% payout ratio for Q3.

Guidance and Future Outlook:

• Updated full-year 2026 outlook excludes notable items; expects fee revenue growth of 13-14% (up from 12-13%) and NII growth of 15-16% (up from 14-15%).
• Full-year expense growth guidance increased to 8-8.5% to account for revenue-related costs and strategic investments.
• Expects to deliver over 500 basis points of positive operating leverage for the full year 2026.
• Projected effective tax rate for 2026 is approximately 22%.
• Full-year payout ratio is expected to approach 80%, implying a significant ramp-up in share buybacks in Q4.
• Management anticipates NII growth to continue sequentially into Q4, potentially delivering toward the upper end of the updated range.
• Medium-term outlook targets a pre-tax margin of 35% and ROTCE of 25%, driven by sustained NII growth, organic fee expansion, and transformation productivity.

Business Segments and Product Lines:

• Investment Services: Generated record quarterly servicing fees; sales totaled $68 million. Announced an initial agreement to acquire Santander Casas' Latin American security services business, closing expected in 2027.
• Investment Management: Recorded record management fees ($797 million) with 20% YoY growth. ETF flows were record-breaking, with AUM reaching $2.3 trillion. Launched 38 new products, including an endowment strategy ETF with a $2.5 billion seed investment.
• Markets: FX trading revenue increased 17% YoY; FX client volumes hit a record, up over 30% YoY, driven by EMEA and APEC. Securities finance revenue rose 9% YoY.
• Software Services: Revenue grew 5% YoY; Annual Recurring Revenue (ARR) increased 8% to $442 million. Secured a major servicing mandate from a top-tier U.S. Registered Investment Advisor (RIA) via partnership with Apex FinTech.
• Strategic Initiatives:
  • Alternatives: Servicing fees grew at a double-digit rate YoY; highlighted partnership with Apollo to support daily pricing in private credit.
  • Digital Assets: On track to deliver tokenized fund servicing capability by year-end; launched the State Street Galaxy on-chain liquidity suite on the Stellar network.
  • Wealth: Early traction in wealth services; secured a mandate from one of the largest U.S. RIAs.

Market and Competitive Landscape:

• Operating in a complex environment characterized by fiscal pressures, geopolitical risks, inflation uncertainty, and AI advancement.
• Recognized as the "World's Best FX Bank for Real Money Clients" by Euromoney in 2026.
• Strong market share retention with high client retention rates in the custody franchise.
• Competitive landscape in wealth services is intensifying, but State Street leverages its "One State Street" model to integrate custody, software, and advisory capabilities to win mandates.
• Global equity markets assumed flat for the outlook; NII growth assumptions aligned with forward interest rate curves.

Risks and Challenges:

• Regulatory Risk: Digital asset tokenization and liquidity rules remain in flux; regulatory clarity is needed before market-wide normalization occurs.
• Capital Sensitivity: A 25 basis point rate increase could result in a ~10 basis point reduction in CET1 capital if unmitigated, though management has levers to optimize this.
• Sales Timing: New business wins are "lumpy," and some deals may spill into the first quarter of the following year, affecting Q3 sales reporting.
• Revenue Volatility: Non-core fee revenue includes mark-to-market adjustments on strategic investments which can fluctuate significantly quarter-over-quarter.
• Loan Growth: Loan portfolio growth slowed sequentially due to the runoff of lower-relationship loan books, though optimization is expected to conclude by year-end.

Management Commentary and Tone:

• Tone was highly confident and disciplined, emphasizing the strength of the "One State Street" integrated model.
• Management highlighted 11 consecutive quarters of positive operating leverage and record performance across multiple business lines as validation of their strategy.
• Ron O'Hanley (CEO) emphasized the strategic shift toward integrated solutions in wealth and digital assets, viewing these as extensions of the core franchise.
• John Woods (CFO) expressed confidence in the capital allocation plan, prioritizing organic investment followed by a strong dividend and significant buybacks.
• Management reiterated that while market conditions are favorable, the firm is building a simpler, faster, and more scalable platform through AI and transformation.

Analyst Questions and Answers:

• NII Outlook: Clarified that despite sequential moderation in FX, NII growth is expected to continue sequentially into Q4, potentially hitting the upper end of guidance.
• Sales Guidance: Reaffirmed expectation of over $300 million in sales for the full year, driven by a strong Q4 close, though Q3 sales were lower than the annual target due to deal timing.
• Capital & Buybacks: Confirmed a ramp in Q4 buybacks (north of $400M, potentially $700M+) to achieve the ~80% annual payout ratio, with capital strength allowing for both organic investment and shareholder returns.
• RIA Custody: Explained the entry into RIA custody as a response to the shift toward customized investing and the strategic value of the Apex partnership and Charles River platform integration.
• FX Volume Fluctuation: Attributed Q3 FX volume moderation to the normalization of volatility after an exceptionally strong Q2, noting 17% YoY growth remains attractive.
• Deposit Mix: Non-interest-bearing deposits are expected to stabilize around 10% of the mix, driving future NII growth through asset sensitivity outside the U.S.
• Expense Management: 8% expense growth was largely driven by revenue-related costs; "run-the-bank" costs were flat or down due to productivity savings offsetting investment spend.
• Digital Assets: Viewed as a long-term opportunity with no expected medium-term revenue loss; traditional and digital finance are expected to coexist, with State Street enabling the on/off-ramps.

Other Key Points:

• Announced the acquisition of Santander Casas' Latin American security services business to create a leading platform in Brazil, Mexico, and Colombia.
• Launch of the State Street Galaxy on-chain liquidity suite on the Stellar network, bridging traditional and digital markets.
• Management reiterated that the current strong performance (35% pre-tax margin) is already approaching medium-term targets, with a goal of sustaining and improving these levels.
• The firm views the "One State Street" model as a key differentiator, allowing for cross-selling and deepening client relationships across investment services, management, and markets.