Q2 2024 Earnings Summary
- State Street reaffirms confidence in achieving their increased servicing fee revenue sales goal of $350 million to $400 million for this year, due to a strong pipeline and historically stronger second half performance.
- The company plans to accelerate share buybacks in the second half, increasing capital returns to shareholders.
- Lending is up double digits, supporting clients and contributing to higher Net Interest Income (NII); deposits are strong across different types.
- Slower-than-expected onboarding in the first half of the year due to delays with large clients and a slowdown in private markets has negatively impacted revenue recognition. The company is not yet deriving meaningful revenues from some clients due to these delays.
- State Street experienced institutional net outflows in the last two quarters, partly due to significant client rebalancing away from certain asset classes, including an extremely large client. This could indicate potential challenges in retaining assets under management.
- Continued pricing pressure in the industry, particularly in the asset manager segment, is expected to result in pricing headwinds of about 2% per year, which may impact revenue growth. This ongoing pressure could limit the company's ability to grow fees.
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NII Outlook and Deposits
Q: Will NII declines and deposit shifts stabilize soon?
A: Management expects Net Interest Income (NII) to stabilize over the next few quarters as deposit levels and mix become more stable. They foresee a "bottoming" of NII and a potential upward inflection as headwinds and tailwinds equalize over time. Deposit mix and noninterest-bearing deposit erosion are expected to stabilize, contributing to improved NII trajectory. -
Fee Income and Sales Growth
Q: What drives confidence in better fee growth in second half?
A: Management is confident due to strong retention, expected increase in onboardings, and a robust pipeline. They reaffirmed their servicing fee sales target of $350 million to $400 million for the year, with sales traditionally higher in the second half. Onboardings are anticipated to accelerate, enhancing fee income growth. -
Buyback Plans and Capital Return
Q: How will buybacks accelerate given capital constraints?
A: Management plans to accelerate share buybacks in the third and fourth quarters, citing strong capital generation and sufficient capital ratios. They indicate that the Common Equity Tier 1 (CET1) ratio is the primary constraint and that they have ample room to increase buybacks, though exact amounts were not specified. -
Asset Management Outflows and Rebalancing
Q: Are institutional outflows in Global Advisors expected to continue?
A: The outflows were largely due to client rebalancing, particularly from an extremely large client reallocating away from certain asset classes. Management views this as idiosyncratic and does not expect it to continue, expressing confidence in Global Advisors' trajectory in both institutional and ETF businesses. -
Onboarding Delays
Q: What caused slower-than-expected onboardings earlier this year?
A: Delays were mainly due to large clients who are also development partners experiencing operational delays, along with a slowdown in private markets affecting fund drawdowns. Management expects onboarding to pick up going forward, contributing positively to servicing fees. -
Foreign Exchange Volatility
Q: What drove low FX volatility, and what could increase it?
A: Low FX volatility was due to the strong U.S. dollar and clients' reduced speculation in currency markets, resulting in more natural, transactional flows. Potential factors that could increase volatility include shifts in global currency dynamics or geopolitical events. -
Pricing Pressure
Q: Where are you seeing continued pricing pressure?
A: Pricing pressure remains consistent at about 2% per year, primarily in the asset manager segment due to shifts from mutual funds to ETFs and the need to manage costs. This is considered a normal part of the business environment. -
Repo Activity
Q: Is strong repo activity sustainable and aiding NII?
A: Higher-than-expected repo NII in the second quarter was due to market dislocations and is not expected to significantly impact future NII. Repo contributes only about 10% to total NII, and management does not see it as a major driver going forward.