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Text: On our call today, our CEO, Ron O'Hanley, will speak first.
Afterwards, we will be happy to take questions.
During the Q&A, please limit yourself to two questions and then requeue.
Actual results may differ materially from those statements due to a variety of important factors, such as those factors referenced in our discussion today and in our SEC filings, including the risk factors in our Form 10-K.
I'm particularly pleased with our results as quarterly total fee revenue exceeded $2.5 billion for the first time in the Company's history.
We delivered a fourth consecutive quarter of servicing fee growth with servicing fees at the highest level in three years, propelled by both strong equity markets and the impact of our actions to strengthen relationship management and sales effectiveness.
We continue to differentiate State Street through our unique product and operational capabilities as well as through delivering enhanced client service quality.
Our pipeline continues to deliver as evidenced by another strong -- another quarter of strong servicing and Alpha client mandates, which I will discuss shortly.
Additionally, we continue to invest in our business and innovate across the franchise to drive growth and enduring shareholder value creation.
For example, we announced the formation of State Street Digital in the second quarter, a new division focused on addressing the industry's evolving shift to digital finance both as product offerings and as a business model.
This is just one example in a long history of innovation that State Street has and is continuing to drive within our industry.
We also continue to develop State Street Alpha, our front-to-back offering.
This unique capability has created an attractive value proposition that is resonating with both new and existing clients as well as contributing to client retention and growth opportunities, which I will also discuss shortly.
Turning to Slide 3, I will review our second quarter highlights before handing the call over to Eric, who will take you through the quarter in more detail.
Second quarter earnings per share was $2.07 or $1.97 excluding notable items.
Despite the impact of interest rates on our NII, earnings per share ex-notables reached the highest level since 4Q '19 when quarterly NII was notably higher more than 35% more than it was in 2Q '21.
Relative to the year-ago period, quarterly total fee revenue exceeded $2.5 billion for the first time, increasing 6% year-over-year, driven by solid servicing and management fee growth, which increased 10% and 14% year-over-year respectively, as well as better securities finance results.
This strong performance was partially offset by the year-over-year impact on total revenues from lower software and processing fees, continued moderation of FX market volatility and ongoing interest rate headwinds.
Even with record quarterly fee revenue, expenses were well controlled.
While second quarter total expenses were up 1% relative to the year-ago period, they were down almost 0.5 percentage point year-over-year, excluding notable items and currency translation as our productivity improvements continued to yield results.
We have created a culture of expense discipline over the last two-and-a-half years and we remain confident in our ability to effectively manage core operating costs over the remainder of 2021.
Our strong fee revenue performance coupled with continued cost discipline, delivered a 200 basis point improvement to our pre-tax margin year-over-year which reached nearly 30% in the second quarter excluding notable items.
Further, return on equity was 12.6% or 11.9% excluding notable items in the second quarter.
AUC/A increased to a record $42.6 trillion at quarter-end, supported by higher period-end equity market levels and new business onboardings.
New asset servicing wins increased to $1.2 trillion for the quarter, including the large Alpha mandate with Invesco announced in April.
We reported two new Alpha wins in the second quarter, taking the total number of Alpha clients to 15.
After the second-quarter close, we also entered into an Alpha mandate with Legal & General.
While Invesco is an example of how Alpha is helping to expand and deepen existing client relationships, the Legal & General win demonstrates how the Alpha strategy is also helping us forge new client relationships with the world's most sophisticated investors.
Our experience to date gives us confidence that Alpha relationships will drive stronger retention rates for existing clients, while also allowing us to broaden and deepen those relationships as we add additional products and services to these existing mandates.
Additionally, we are signing Alpha clients that are new to State Street demonstrating that Alpha is enabling us to reach new clients and deliver front, middle and back office services in a differentiated manner.
We also created new relationships to help drive revenue growth across client segments and regions.
For example, earlier this week, we announced a new strategic alliance with First Abu Dhabi Bank.
The alliance will create a full service enterprise offering for institutional investors in the Middle East and North Africa region.
It will provide investors with extensive reach into more than 100 markets around the world.
Clients will have access to State Street's full suite of front, middle and back office capabilities in addition to our extensive data management and analytic solutions, which seamlessly integrates with First Abu Dhabi Bank's regional suite of security services products, local expertise and regional direct custody network.
At CRD, annual recurring revenue increased 11% year-over-year to $230 million and we remain pleased with how the business is performing while also enabling and propelling our Alpha strategy.
Global Advisors continued to demonstrate strong performance.
AUM increased to $3.9 trillion and management fees increased to $504 million, both records, benefiting from strong second quarter flows of $83 billion across the ETF, institutional and cash businesses as we continue to leverage the strengths of our asset management franchise.
In ETFs, our low cost and sector funds as well as our ESG and commodity products, continue to enjoy good market share with low cost ETFs expanding share in the second quarter.
And in institutional, our sales force and relationship management realignment coupled with a strong product set led to good revenue growth.
Turning to our balance sheet and capital, we returned over $600 million of capital to our shareholders during the second quarter, inclusive of $425 million of common share repurchases, consistent with the limit set by the Federal Reserve.
I am pleased with yet another strong performance under this year's annual stress test.
The new SCB framework provides us with additional flexibility to manage our capital base.
As examples, yesterday, we announced that our Board of Directors has approved a 10% increase of our third quarter common dividend to $0.57 per share and authorized a common share repurchase program of up to $3 billion during the third quarter of 2021 through the fourth quarter of 2022.
To conclude, we had a very strong quarter.
Business momentum is building and we are demonstrating meaningful progress toward our medium-term financial targets.
As I look ahead, to support our strategic vision and help us achieve those targets, we are continuing to prioritize improvement in our fee revenue growth while controlling costs by transforming the way we work and building a higher performing organization for the future.
I'll begin my review of our second quarter results on Slide 4.
We reported earnings per share of $2.07, or $1.97 excluding the $0.10 positive impact of notable items which was driven by a previously announced sale of a majority stake in a legacy business.
On the left panel of the slide you can see strong results.
As we continue to drive fee revenue growth while controlling expenses, we delivered pre-tax margin expansion and solid earnings growth.
As a result of the weaker dollar relative to the year-ago period, we continue to show our year-on-year results excluding the impact of currency translation in the right column.
We also show results excluding notable items on the bottom of the slide.
Turning to Slide 5, you'll see our business volume growth.
Period end AUC/A increased 27% year-on-year and 6% quarter-on-quarter to a record $42.6 trillion.
Both the year-on-year and quarter-on-quarter increases were largely driven by higher period end market levels, net new business growth and client flows.
At Global Advisors, AUM increased 28% year-on-year and 9% quarter-on-quarter to $3.9 trillion, also a record.
The year-on-year and quarter-on-quarter increases were both primarily driven by higher period-end market levels, coupled with net inflows.
Turning to Slide 6, you can see another quarter of strong business momentum.
Second quarter servicing fees increased 10% year-on-year, including currency translation, which was worth approximately 3 percentage points year-on-year.
The increase reflects higher average market levels, positive net new business onboarded and client flows, only partially offset by normal pricing headwinds and the absence of elevated prior-year client activity.
AUC/A wins totaled $1.2 trillion in the second quarter, substantially up from recent quarters, primarily as a result of the large Alpha client mandate announced last April that Ron just mentioned.
AUC/A won, but yet to be installed also amounted to $1.2 trillion at quarter-end as we smoothly onboarded over $400 billion of client assets this past quarter.
We remain focused on reigniting business growth across both client segments and regions.
This quarter, we had strong growth in the EMEA region, aided by our intense coverage efforts, which now extend to approximately 350 overall of our top clients.
We continue to estimate that we need at least $1.5 trillion in gross AUC/A wins annually in order to offset typical client attrition and normal pricing headwinds and we've clearly exceeded that mark this year.
I will remind you that inflations typically occur in phases and over time and deals will vary by fee and product mix.
At this time, we expect the current won but yet to be installed AUC/A will be converted over the coming 12 to 24-month time period with the associated revenue benefits beginning in 2022 and the majority occurring in 2023.
As we said in June, we are pleased with our pipeline and our momentum.
Turning to Slide 7.
Second quarter management fees reached a record $504 million, up 14% year-on-year inclusive of a 2 percentage point impact from currency translation and were up 2% quarter-on-quarter resulting in an investment management pre-tax margin approaching 35%.
Both the year-on-year and quarter-on-quarter management fee performance benefited from higher average equity market levels and strong ETF flows.
These benefits were only partially offset by the run rate impact from the previously reported idiosyncratic institutional client asset reallocation, as well as about $25 million of money market fee waivers this quarter.
While we previously estimated that money market fee waivers on our management fees could be approximately $35 million per quarter, as a result of the recent improvement in short-end rates following the June FOMC meeting, we now expect that they will be about $20 million to $25 million per quarter for the rest of the year, which is about a third lower than we had previously expected.
Global Advisors recorded solid flows across institutional, ETFs and cash for the quarter with the total amount -- amounting to $83 billion.
We have taken a number of actions to deliver growth in our long-term institutional and ETF franchises, which are driving this momentum as you can see on the bottom right of the slide.
Turning to Slide 8, let me discuss the other important fee revenue lines in more detail.
Within FX trading services, we are pleased that we continue to generate strong client volumes which remain above pre-pandemic levels in the second quarter.
Relative to a strong second quarter in 2020, FX revenue fell 12% year-on-year as declining FX market volatility compared to the COVID environment last year more than offset higher client volumes.
FX revenue was down 17% quarter-on-quarter, driven by a moderation of client volumes from index rebalances experienced in the first quarter and lower market volatility.
Our securities finance business recorded strong revenue growth with fees increasing 18% year-on-year and 10% quarter-on-quarter, mainly as a result of higher enhanced custody and agency balances as client leverage rebounded.
Finally, second quarter software and processing fees were down 12% year-on-year, largely due to the absence of prior-year positive mark-to-market adjustments.
Software and processing fees increased 24% quarter-on-quarter, mainly as a result of higher CRD revenues.
Moving to Slide 9, I'd like to provide some further updates on our CRD and Alpha performance.
We delivered strong stand-alone CRD results in the quarter, primarily reflecting higher client renewals and episodic fee revenues.
The more durable SaaS and professional services revenues continued to grow nicely and were up 10% year-on-year resulting in an increase in stand-alone annualized recurring revenue to $230 million.
This quarter marks the three-year anniversary since announcing the CRD acquisition and we are very pleased with how the business has performed.
On the bottom right of the slide we show some of the second-quarter highlights from State Street Alpha mandates.
We reported two new Alpha mandates during the second quarter as the value proposition continues to resonate well with clients.
Notably, since inception through second quarter, we now have five Alpha client mandates that are live.
Although Alpha deals usually take somewhat longer to implement given the size and scope, the pay-off outweighs the longer implementation period as we are able to further expand share of wallet to generate attractive revenue growth rates and increase the contract lengths which can be up to 10 years in length for Alpha services that span the front and middle office.
Turning to Slide 10, second quarter NII declined 16% year-on-year, mainly as a result of the effects of lower interest rate environment on our investment portfolio yields and sponsored member repo product.
These impacts were partially offset by balance sheet expansion, driven by higher balances.
Relative to the first quarter however, NII was flat as lower investment portfolio yields and the impact of short-end rates were offset by further expansion of the investment portfolio and lending activity.
On the right side of the slide, we show the growth of our average balance sheet during the second quarter.
Total average deposits increased by $16 billion in the second quarter or an increase of 7% quarter-on-quarter, reflecting the continued impact of the Federal Reserve's expansionary monetary policy.
While we continue to remain mindful of OCI risk in the current rate environment, we tactically added about $5 billion quarter-on-quarter to our investment portfolio a few months ago, before the recent downdraft in rates.
We also increased our average loan balances by approximately 5% quarter-on-quarter to over $29 billion, driven by higher utilization by asset managers and private equity capital call client.
We also have a number of initiatives in play to reverse and reduce this recent deposit uptick that we saw during the quarter.
Turning to Slide 11.
Second quarter expenses, excluding notable items, increased 2% year-on-year, mainly driven by the weaker dollar.
Excluding the impact of notable items and currency translation, total expenses were down nearly 0.5 percentage point year-on-year as productivity savings for the quarter more than offset higher revenue related expenses and targeted investments in client onboarding costs.
Compared to 2Q '20 on a line-item basis and excluding notable items and the impact of currency translation, compensation employee benefit costs was flat as we reduced high-cost location headcount, which offset higher medical costs as claims began to normalize to pre-pandemic levels.
Information systems and communications were up 5% due to continued investment in our technology estate.
Transaction processing was up 10%, primarily driven by higher revenue related expenses for sub-custody balances and market data costs.
Occupancy was down 13% reflecting benefits from our footprint optimization efforts and some timing benefits.
And other expenses were down 11% primarily driven by lower-than-usual professional services fees.
Relative to the first quarter, expenses were primarily impacted by the absence of seasonal and deferred compensation reported in the first quarter.
So, overall, we are pleased with our continued ability to demonstrate expense discipline as we have effectively managed total expenses ex-notables and currency down year-on-year in the second quarter while driving strong total fee revenue growth.
Moving to Slide 12.
On the right of the slide, we show our capital highlights.
We are pleased with our performance under this year's CCAR with the calculated Stress Capital Buffer well below the 2.5% minimum, resulting in a preliminary SCB at that floor.
The new SCB framework provides us with additional flexibility to deploy our capital base in a number of different ways, including investment opportunities, dividends and buybacks.
For example, yesterday, we announced a 10% increase to our third quarter common dividend to $0.57 per share and our Board has authorized a common share repurchase program of up to $3 billion from the third quarter of 2021 through year-end 2022.
In addition, we are also pleased that the Federal Reserve has provided State Street with one additional year until January 1, 2024, to retain its current G-SIB surcharge of 1%.
To the left of the slide, we show the evolution of our CET1 and Tier 1 leverage ratios.
As you can see, we continue to navigate the operating environment with strong capital levels in excess of the requirements.
As of quarter-end, our standardized CET1 ratio improved by 40 basis points quarter-on-quarter to 11.2% as we had expected and sits above the upper end of our 10% to 11% CET1 target range.
Our Tier 1 leverage ratio remains well above the regulatory minimum, but declined by 20 basis points quarter-on-quarter to 5.2%, primarily as a result of the further increase in average client balances as the Fed's quantitative easing continues.
We continue to think that a Tier 1 leverage ratio in the 5s as appropriate for our business model.
And we can operate the lower end of this range for a number of quarters while we consciously limit and reduce client deposits and offer them a range of liquidity alternatives.
Turning to Slide 13.
In summary, our quarterly performance demonstrates solid business momentum on our top line and the scale we are driving within our operating model.
Total fee revenue was up almost 6% year-on-year and exceeded $2.5 billion for the first time with double-digit growth in servicing and management fees, despite the year-on-year headwind from the strong FX trading services results we had in the second quarter of last year during COVID.
Our expenses remain well-controlled as a result of our productivity program.
As a result, we are able to drive pre-tax margin and ROE close to our medium-term targets, notwithstanding the low rate environment.
Next, I'd like to update you on our economic outlook for the remainder of the year and provide our current thinking regarding the third quarter outlook.
At a macro level, our rate view broadly aligns the current forward rate curve and assumes that short-end rates remain low and there is some modest steepening to the yield curve.
We are also assuming global equity markets will be relatively flat to quarter-end for the rest of the year as well as continuing normalization of FX market activity.
In terms of the third quarter of 2021, we expect overall fee revenue to be up 7% to 8% year-over-year with servicing and management fees each expected to be up 7% to 9% year-over-year.
This means full year fee guidance is likely to be better than the upper end of the full-year range we previously provided.
Regarding NII, despite the recent flattening in the yield curve, we have seen an increase in short-end market rates and we now expect a modestly improved quarterly NII range of $460 million to $470 million per quarter for the rest of the year, assuming rates do not deteriorate and premium amortization continues to attenuate.
Turning to expenses, we remain confident in our ability to effectively manage core operating costs.
We expect that third quarter expenses ex-notable items will be flattish, plus or minus 0.5 percentage point year-over-year in 3Q.
These fee and expense guides for 3Q include approximately 1 point of currency translation year-over-year.
On taxes, we expect that the 3Q '21 tax rate will be in the middle of our full-year range of 17% to 19%.
And with that, let me hand the call back to Ron.

user
state street - q2 earnings per share $2.07.
announced common share repurchase program of up to $3 billion.
investment servicing auc/a as of quarter-end increased 27% to $42.6 trillion.
investment management aum as of quarter-end increased 28% to $3.9 trillion.
state street corp - q3 2021 cash dividend of $0.57 per share of common stock, an increase of 10% from $0.52 per share of common stock in prior quarter.

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