STATE STREET CORP Q3 FY2026 earnings call

• Financial Strength & Leverage: Delivered 11th consecutive quarter of positive year-over-year operating leverage, excluding notable items. EPS grew 33% to $3.69. Pre-tax margin expanded 350 basis points to 35%, and Return on Tangible Common Equity (ROTC) increased to 25%.
• Strategic Growth Initiatives: Focused on three key areas: Alternatives, Digital Assets, and Wealth. Alternative servicing fees grew at a double-digit rate. The firm is on track to deliver tokenized fund servicing capabilities by year-end. In wealth, State Street secured a mandate from one of the largest U.S. RIAs through its partnership with Apex FinTech Solutions.
• M&A Activity: Announced an agreement to acquire Santander Casas' Latin American Security Services business, expected to close in 2027. This transaction will create a leading asset servicing platform in Brazil, Mexico, and Colombia.
• Operational Momentum: Achieved record sales across core franchises. State Street Investment Management launched 38 new client solutions, including 13 ETFs. The firm benefited from strong client activity and flows, particularly in index and ETF products.
• Technology & AI Transformation: Leveraging AI to simplify processes, improve execution speed, and strengthen resilience. The transformation agenda aims to reduce costs and create capacity for strategic investments while enhancing the client experience.

• Investment Services: Generated record quarterly servicing fee revenue of approximately $1.5 billion, up 10% year-over-year (7% organic growth). Assets under custody and administration (AUCA) reached a record $59.2 trillion, up 15% year-over-year. This segment represents the largest portion of fee revenue.
• Investment Management: Delivered record quarterly management fee income of $797 million, up 20% year-over-year (8% organic growth). Assets under management (AUM) hit a record $6.3 trillion, up 16% year-over-year. ETF AUM reached a record $2.3 trillion.
• Markets: Generated record FX client volumes, increasing over 30% year-over-year. FX trading services revenue rose 17% to $427 million. Securities finance revenue increased 9% to $151 million.
• Software Services: Revenue increased 5% to $175 million, with annual recurring revenue (ARR) up 8% to $442 million.
• Net Interest Income (NII): Increased 21% to $864 million, driven by net interest margin expansion to 112 basis points.
• Total Revenue: Reached $4 billion, up 13% year-over-year.

• Full Year 2026 Fee Revenue: Raised guidance to 13-14% growth, up from the previous 12-13% range, reflecting favorability in servicing fees and healthy client activity.
• Full Year 2026 NII: Raised guidance to 15-16% growth, up from 14-15%, citing strong third-quarter performance and favorable trends.
• Full Year 2026 Expenses: Expected to increase by roughly 8-8.5%, driven by higher revenue-related costs and continued investment in strategic growth initiatives.
• Operating Leverage: Expects to deliver over 500 basis points of positive operating leverage for the full year.
• Tax Rate & Payout Ratio: Anticipates an effective tax rate of approximately 22%. The total payout ratio is expected to approach 80% for the year, implying a significant ramp-up in share buybacks in the fourth quarter.

• Regulatory Approvals: The acquisition of Santander Casas’ Latin American Security Services business is subject to regulatory approvals and closing conditions, with an expected close in 2027.
• Interest Rate Sensitivity: While asset-sensitive, rising rates can impact capital levels through Available-for-Sale (AFS) securities valuation changes. The CFO noted that every 25 basis points of unmitigated rate increase could result in approximately 10 basis points of capital level reduction, though optimization levers exist.
• Market Volatility: FX revenues are sensitive to volatility; moderation in volatility led to a sequential decline in FX revenue despite record volumes.
• Digital Asset Uncertainty: Regulatory clarity regarding digital assets (e.g., Clarity Act) is still evolving, creating uncertainty in market structure and liquidity normalization, though management sees no medium-term revenue loss risk.

Q: Glenn Shore (Evercore ISI) asked about the NII outlook for Q4, noting it seemed below street expectations given the asset-sensitive balance sheet and higher rates. He questioned if this implied weaker Q4 performance.

A: John Woods clarified that NII has grown sequentially every quarter this year and they expect continued growth in Q4. They anticipate delivering towards the upper end of their raised guidance range (15-16% YoY growth), consistent with strong underlying trends and balance sheet growth.

Q: Ron O'Hanley explained the strategic rationale for entering the RIA custody space via the Apex partnership. He highlighted the shift from pooled funds to customized wealth management and the need for integrated technology solutions. He emphasized that the 'One State Street' model allows them to deepen relationships by connecting front-office platforms like Charles River with back-office custody services.

A: Ron stated this is a long-term strategic opportunity to capture growth in the rapidly expanding wealth sector. The recent win with a large U.S. RIA validates the approach, demonstrating how connectivity across the franchise creates value beyond single products.

Q: Alex Wolfstein (Goldman Sachs) asked about capital sensitivity to interest rates and how AOCI fluctuations might impact buyback expectations for Q4 and 2027.

A: John Woods provided a rule of thumb: a 25 bps unmitigated rate hike impacts capital by ~10 bps. Despite Q3 rate rises, they maintained an 11% CET1 ratio. They remain confident in delivering the ~80% payout ratio, planning to ramp buybacks significantly in Q4, using levers to optimize capital if needed.

Q: Mike Mayo (Wells Fargo) asked why FX revenue dropped 14% sequentially despite record volumes, and what was driving the volume surge.

A: John Woods noted the prior Q2 had exceptional strength, so some moderation was expected. Ron O'Hanley added that the volume surge was largely due to record-high volatility in APAC in Q2, which normalized slightly in Q3 but remained elevated. They expect YoY FX revenue growth of 17% to continue into Q4.

Q: Scott Seavers (TD Securities) asked about fee income dynamics, reconciling concerns about Q3 fee shortfall with the full-year guidance update.

A: John Woods affirmed the 13-14% full-year fee growth guidance. He explained that Q3 'other fees' were impacted by non-recurring mark-to-market adjustments on strategic investments in the prior year. Excluding this, core fee growth (servicing, management, FX) was strong (~12%), and they expect all three core drivers to grow in Q4.