State Street Corporation (STT) Earnings Call Transcript & Summary

Good morning, and welcome to State Street Corporation's conference call and webcast reviewing the proposed acquisition of BBH Investor Services. Today's discussion is being broadcast live on State Street's website at investors.statestreet.com. I'm sorry, that website is investors.statestreet.com. This conference call is also being recorded for replay. State Street's conference call is copyrighted, and all rights are reserved. This call may not be recorded for rebroadcast or distribution in whole or in part without the expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street website. Now I would like to introduce Ms. Ilene Fiszel Bieler, Global Head of Investor Relations at State Street. Ma'am, please go ahead.

Thank you, Raul. Good morning, and thank you all for joining us. On our call today, our CEO Ron O'Hanley and our CFO Eric Aboaf will take you through our slide presentation reviewing the proposed acquisition of BBH Investor Services, which is available for download in the Investor Relations section of our website, investors.statestreet.com. Afterwards, we'll be happy to take questions. [Operator Instructions] Before we get started, I would like to remind you that today's presentation will include results presented on a basis that excludes or adjusts one or more items from GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measures are available in the appendix of our slide presentation. In addition, today's presentation will contain forward-looking statements. 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. Our forward-looking statements speak only as of today, and we disclaim any obligation to update them even if our views change. Now let me turn it over to Ron.

Thank you, Ilene, and good morning, everyone. Thank you for joining us for today's presentation. Earlier this morning, we announced that State Street has entered into a definitive agreement to acquire Brown Brothers Harriman Investor Services, a leading global independent asset servicing business. Let me start by saying that we are excited about this transaction. Investment Servicing is our largest business. This industry enjoys strong fundamentals as worldwide financial assets continue to grow and asset managers and asset owners globally move to outsource more activities. BBH Investor Services is a successful capability-rich asset servicer with a long track record of innovation and high client satisfaction. Moreover, it is probably the last remaining independent consolidation opportunity of scale in the global asset servicing landscape, and our announcement today represents an important step forward for State Street towards delivering future growth for our shareholders and achieving our medium-term financial targets. In addition, the transaction enables us to increase our pretax margin target by 1 percentage point to 31%. As you may recall, 3 years ago, we acquired Charles River Development to expand our services into the front office and to develop our interoperable front-to-back platform, State Street Alpha. With our acquisition of BBH Investor Services, we are further taking advantage of our scale, technology and product leadership to propel our strategy across the front, middle and back office while also significantly augmenting our skill base. Turning to Slide 3 of the presentation. Acquiring BBH Investor Services will create the world's leading end-to-end asset servicing franchise as we combine State Street's broad product capabilities and scale efficiencies with BBH Investor Services' additional capabilities and renowned operational excellence. The combined entity will be an even stronger franchise for clients and shareholders with high-quality service and increased global reach and market positioning. On the right side of the page, we highlight how this acquisition is compelling and creates a unique opportunity for State Street to advance its core strategy. Four key elements underpin the strategic rationale for this transaction. First, with BBH Investor Services, we are strengthening our market leadership in asset servicing to become the #1 asset servicer by AUC with enhanced capabilities, scale and a deep bench of talent globally. This acquisition will create the world's leading end-to-end asset servicing franchise. Second, given BBH Investor Services' global presence, the consolidation allows us to expand and deepen our international reach in key developed markets like Japan, enabling us to build a leading position in segments such as nondomestic trust bank assets and EMEA offshore as well as in key growth markets such as Latin America. Third, by leveraging BBH Investor Services' powerful data integration technology, this acquisition will accelerate the development of the Alpha data platform, reducing development costs and timing while enhancing the State Street Alpha service offering, further propelling our value proposition to a larger client base. Lastly and importantly, this transaction is financially compelling. Based on current expectations for 2021, we expect it will be accretive to State Street's earnings in year 1 and will create attractive value for our shareholders, which we will outline in more detail on Slide 5 later in the presentation. Moving to Slide 4. Let me describe BBH Investor Services and highlight the strength of its business model given it is a private company and may be unfamiliar to some of you. As we have mentioned already, BBH Investor Services is a renowned asset servicing and technology solutions provider, operating in over 90 geographic markets with sophisticated product and client service capabilities. BBH Investor Services' commitment to service excellence has garnered a well-deserved reputation for client success over the last 60-plus years. As of 2Q '21, BBH Investor Services had $5.4 trillion of AUC and notably, generated roughly 70% of its $1.4 billion of full year 2020 total revenue from international markets. As a result, the acquisition of BBH Investor Services positions State Street to benefit from scale as well as growth in strategically attractive regions. As you can see across the bottom of the page, BBH Investor Services revenues are diversified across regions, products and client types. Recognizing the importance of this breadth and depth to our investment services strategy, BBH Investor Services expertise and strong relationships are extremely attractive as we continue to grow wallet share and execute on our front-to-back strategy. The BBH Investor Services leadership team is coming with the transaction, and we expect to net upgrade our talent base. If we step back, what is obvious is that BBH Investor Services is the last premier midsized franchise in asset servicing. Notwithstanding BBH Investor Services' breadth and depth, they do not have, but we at State Street do have, the size and scale to continue to invest $2 billion a year in technology as well as about a $10 billion capital base to support its clients. With this combination and resulting scale, we can drive the next wave of revenue and earnings growth. I will now turn it over to Eric to discuss the transaction in further detail, and then I will return to take you further through our strategic rationale.

Thank you, Ron. And let's turn to Slide 5. We believe the financial metrics of this transaction are compelling as we bring together 2 renowned businesses to offer scale, leading technology and distinctive set of capabilities to an investment servicing industry increasingly in need of innovative outsourcing solution providers like State Street. As Ron noted, this $3.5 billion transaction, which values BBH's Investment Services business at 12x expected 2021 earnings, is expected to be accretive in year 1. We expect to achieve substantial cost synergies over time of approximately $260 million, which we detail later in the presentation. In addition, we expect to achieve about $35 million of EBIT from clearly identified balance sheet actions which will deliver incremental net interest income, plus a modest $40 million of EBIT in the form of revenue synergies, a portion of which is related to the additional flow in the markets businesses given the size of our capital base. With the financial benefit of this combination, we expect the transaction to be progressively accretive to mid-single digits over the phase-in period. We also estimate an IRR of approximately 25%. And beyond these numbers, there's also additional upside if and when we ever get to a more normalized rate environment. The acquisition is a $3.5 billion all-cash transaction and will be financed primarily through the issuance of common stock by suspending repurchases through first quarter 2022 worth about $1.5 billion as well as some cash on hand. We expect to reinstate share repurchases during second quarter of 2022 and expect that our CET1 and Tier 1 leverage ratios will be at the lower end of our target ranges through first half of 2022. We expect no material impact to our SCB or GSIB surcharge. The transaction is primarily an asset purchase, and we and Brown Brothers Harriman are targeting to close by year-end 2021, subject to regulatory approvals and customary closing conditions. Finally, as Ron noted, as a result of the scale of this transaction, we are increasing our State Street medium-term pretax margin financial target by 1 percentage point to 31%. Let me now turn it back to Ron to discuss the strategic rationale of this transaction in more detail.

Thank you, Eric. Our strategic rationale for this acquisition consists of 4 key elements. Turning to Slide 6. First, the acquisition strengthens State Street's market leadership and asset servicing and will clearly position State Street as the #1 provider of asset servicing with roughly $37 trillion in total AUC as of 2Q '21. As we highlight on the right of the page, this acquisition adds attractive scale and enhanced positioning along with high-quality servicing capabilities and talent to State Street. This will ultimately help us drive future growth and improve client service and satisfaction across the front, middle and back office while also enabling consolidation. We are particularly pleased with how this transaction will position us with large and midsized asset managers, the industry's largest segment or our premium and preferred clients. These clients represent attractive revenue opportunities for us, and we expect that many of them will grow with financial markets. In addition, with BBH Investor Services, we are also gaining deep industry expertise that is culturally aligned with the renowned service excellence reputation coupled with significant expertise in asset servicing. Our combined management team represents an extensive bench of skill and experience. The second element of our strategic rationale is the expanded and deepened geographic reach for State Street. Slide 7 illustrates both State Street's and BBH Investor Services' presence and expertise in key investment servicing markets such as EMEA, Japan and Latin America as well as how the acquisition enhances our overall global profile and capabilities. Starting on the left of the page in EMEA. BBH Investor Services complements our extensive expertise and client base in the attractive offshore markets of Luxembourg and Ireland. Those markets are expected to grow at a 7% CAGR through 2025. This acquisition also adds expertise in cross-border funds and solidifies State Street as a top transfer agent in Europe. In Japan, BBH Investor Services is a leading player in the investment servicing market, supporting asset managers in the distribution of their offshore products into Japan with a locally based and experienced bond services team. BBH Investor Services' position in servicing nondomestic global custody assets is particularly attractive as it is in effect a new market opportunity for us. This acquisition enhances our local subject matter expertise and further differentiates us in servicing the most sophisticated and demanding clients. Lastly, in Latin America, following this acquisition, our revenue from the region will nearly double. The consolidation provides us the opportunity to leverage our Brazil infrastructure and extend our reach to some of the largest and fastest growing markets in the LatAm region, which are expected to grow at a 9% CAGR through 2025. On the whole, acquiring BBH Investor Services will deepen relationships and accelerate our strategy in international markets, which we expect will lead to added growth over time. Turning to Slide 8. The third element of our strategic rationale is that the acquisition propels our Alpha front-to-back platform strategy. With the acquisition of Charles River Development in 2018, we took the first step in building our unique front-to-back asset servicing platform, State Street Alpha. For the last 3 years, we have been keenly focused on developing the leading investment management technology platform to provide a streamlined source of data and an ecosystem of capabilities throughout the entire investment life cycle from front to back. As a complement to Alpha, BBH Investor Services brings well-established data connectivity tools, branded Infomediary, that will allow us to automate and integrate data for clients in a more streamlined way than we even do today. More specifically, adopting this technology allows us to accelerate the development of the Alpha platform and reduce future costs as we no longer need to build this functionality into the platform. In addition, the acquisition also deepens integration between global markets and Alpha and creates an additional foundation for add-on products and revenues within our FX business via BBH Investor Services' Info FX. Info FX aggregates clients' FX needs across multiple custodians so that institutional managers have a single unified FX experience. Ultimately, by combining Alpha with BBH Investor Services' powerful data integration technology, we are able to enhance the existing Alpha service offering, propelling our Alpha strategy by accelerating development and mitigating future development costs, all while expanding the base of potential users for State Street Alpha. Now let me turn it back to Eric to take you through how this acquisition enhances State Street's overall financial profile. I will then open the call to questions.

Thank you, Ron. Turning to Slide 9. The fourth element of our strategic rationale for this transaction is the compelling financial and shareholder value creation outcomes. Here, we provided a detailed view of the estimated cost synergies, specific balance sheet actions and modest revenue synergies which we have identified and expect will help drive attractive financial returns for our shareholders. Over the past 2.5 years, State Street has demonstrated a proven track record for reducing operating costs as a result of process engineering and strict resource discipline even as we continue to invest in our business and execute on our strategy, and over the last 2 decades, we have completed about 0.5 dozen custody acquisitions, giving us a deep experience base. As you can see on the left side of the slide, the transaction synergies are heavily weighted towards realization of expected cost synergies, which we estimated at approximately $260 million. We expect that we can fully realize these synergies by the end of year 3 with about 60% being realized by the end of 2023. Now let me break this down further. First, we expect around $50 million of cost savings from reducing redundant corporate overhead costs, which you would expect from a consolidation of this nature. Second, as we focus on simplification across our technology estate, a reduction in mainframe and other platform costs as well as technology licensing fees will allow us to achieve an additional $70 million in estimated savings. Thirdly, we think we can realize the majority of the cost synergies totaling approximately $140 million from operational efficiencies as we streamline annual processes, consolidate roles and reassess vendor relationships while maintaining or enhancing client service levels. All in all, this is a little under 25% of BBH Investor Services expense base and roughly 3% of consolidated BBH Investor Services and State Street expense base and well within our historical experience. On the right of the slide, you can see that we expect about $35 million of EBIT from known balance sheet actions. As we highlight here, it is important to think of these actions as a separate category from the modest revenue synergies that we will discuss shortly as these actions are different in both nature and timing. Today, because of its limited capital base, BBH Investor Services client cash is largely swept off balance sheet to other banks via its bank sweep program. After the acquisition, we'll continue this program but expect to bring a modest amount of incremental deposits from BBH investment services onto our balance sheet, increasing deposits from roughly $6 billion currently on the balance sheet to roughly $20 billion. The $35 million revenue benefit will come from reinvesting these deposits in our investment portfolio, which we would expect to begin to carry out quickly after closing. Lastly, we expect a modest $40 million of EBIT from revenue synergies, primarily by providing access to State Street's broader FX product suite and platforms that were previously unavailable to BBH clients through our global markets business. We also expect to expand our share of wallet by leveraging our asset servicing products and Alpha offerings, although we have only factored in a conservative portion of these opportunities. Our track record from the numerous successful acquisitions we have completed and the knowledge we have gained from these transactions gives us confidence that we can successfully realize these synergies that we have outlined on or ahead of schedule. Turning to Slide 10. We are buying an attractive business with good growth dynamics that will drive additional earnings growth and additional pretax margin expansion for State Street. On the left side of the page, we show a year-over-year comparison of BBH investment services stand-alone financial performance based on full year 2020 and full year 2021 estimates. Based on the first half 2021 results and detailed analysis, we estimate BBH Investor Services full year 2021 total revenue and pretax income to increase by approximately 5% and 17% year-over-year, respectively, driven by rising equity market levels and strong year-on-year net new business growth. On the right side of the page, we show State Street's pro forma financial profile following the acquisition of BBH investment services based on fiscal year-end 2020 for both entities and including fully phased-in year 3 synergies. On a pro forma 2020 basis, the acquisition adds just over $1.4 billion of total revenue and just over $300 million of pretax income in year 2020, which, with estimated fully phased-in synergies and excluding notable items, would have increased State Street's pro forma pretax margin by about 2 percentage points. Turning to Slide 11. Let me wrap up by highlighting the key strategic and financial points that support the value BBH investment services provides to State Street's business and shareholders. Overall, this acquisition represents a significant milestone in the evolution of our Investment Servicing business as we continue to target growth in strategically attractive regions and client segments while generating attractive financial returns for our shareholders. First, this transaction will strengthen our leadership in asset servicing, enabling us to become the #1 asset servicer by AUC with increased scale, high-quality client service and a deep bench of industry experience. Second, we'll be able to expand and deepen our international reach, improving our positioning in EMEA, Japan and Latin America. Third, BBH investment services' client base provides additional Alpha opportunities and technology capabilities via Infomediary and are complementary to our technology strategy, operational capabilities and client functionality. And lastly, as you can see on the slide, we expect this well-priced deal will generate attractive financial returns and compelling financial impact. The transaction is expected to be accretive in year 1 excluding A&R. And importantly, we expect the acquisition will enable us to increase our medium-term pretax margin target by 1 percentage point to 31%. With that, let me turn it back over to Ron, and we'll be happy to take your questions.

Thank you, Eric. And with that, operator, we can now open the call for questions.

[Operator Instructions] Your first question is from the line of Glenn Schorr from Evercore.

So I wonder if you could -- you guys have been great at integrating these deals in the past. But the question that I think I had in my mind is if you could talk to, relative to State Street, the client composition in terms of like what's the mutual fund composition there and then pricing relative to yours and your client retention assumptions within your accretion targets.

Glenn, it's Eric. Let me start there. I think as you referenced, we've got deep experience in diligencing transactions of this sort and then executing on them. And so as you can imagine, we've gone through the client list as part of our assessment early on in the process. In the middle of the process, we went deep into the client list of which is #350, the top 25, the next 25 and all the way down to the final client. As we've done that, we've done exactly what you've described. We thought about consolidation opportunities. We thought about price equalization. We thought about some amount of attrition and factored all those in as you would expect us to and also thought about the opportunities of the same size at the same time. I would say there is a -- in this deal, as in all of our previous custody acquisitions, there is a certain amount of client overlap. We're not surprised. We're actually -- that was expected. Of the clients that overlap, I think I can tell you a little bit about what they're like. About half of them overlap in primarily what I'll call the ancillary services outside of core custody and accounting, so FX, lending and so forth. And so those clients actually provide an opportunity for us. The other feature of this client base is -- the overlapping client base is that its share of wallet on the Brown Brothers investment servicing side was relatively low. It was about 15%. And when you then add our business with those clients, the share of wallet gets up to 20%, 21%. So quite a low share of wallet on one hand and an opportunity for upside on the other. So all in all, I think in line with what we've seen in the past. I think what is different this time around is not only do we have all the facts and understanding of the client base, but with this transaction, we bring over 9 of the senior partners that have operated this business for decades. And they come over with their client relationships. We supplement that with our coverage team, which is quite strong in the client relationship side. And so I think there's actually more -- even more upside over time as we take on this business and operate it as one.

Your next question is from the line of Alex Blostein from Goldman Sachs.

So just maybe building on Glenn's question for a second. I was hoping you guys could give us a little bit more color on Brown Brothers' organic growth over the last couple of years, so kind of excluding any market dynamics. Just really thinking about a baseline for organic base fee growth, what it's been and how that could sort of inform the forward growth rate that you've assumed in the forecasted period. So kind of relative to the $1.5 billion in revenues, what do you kind of expect that to look like over the next few years? So just a little more color there.

Alex, it's Eric. We obviously spend a lot of time on that question as we diligence this business and went through the history in a fair amount of detail. We did include in the materials here -- Page 10, I think, gives you a good understanding for the business over the first half of this year, which is what these figures are based on. They've had good growth. I think what I would call out is that servicing fee growth has been quite strong at 12% year-over-year. Now some of that is driven obviously by the uptick in equity markets. That would be understandable. Our assessment is at least 2 to 3 percentage points of that is driven by net new business growth, right, sort of core underlying growth in the franchise. And that's a testament to what this boutique midsized provider could offer. It's a mix of its, I think, client relationships, its sales prowess and its servicing abilities. And as I just said, part of what's different about this transaction is we bring over the team and we integrate the team with ours because we think that's the way to continue this kind of growth in the future. So I think it will supplement our growth in a nice way based on the data and the facts and the assessment that we've made.

Great. And just a follow-up around the purchase price and the capital plans going forward. So maybe just to break down how much of cash on hand do you guys expect to use and how much ultimately will be in stock issuance. And then once you resume the buyback, which sounds like in the second half of next year, how should we think about the payout target, sort of back in line with historical targets or lower as you kind of rebuild the capital base a bit?

Sure. I've got -- I'll be careful with my wording here because we've got to prepare for an offering and there's certainly certain restrictions on what I can cover at this point. But let me give you the outline that I think would be helpful. I think from a cash on hand standpoint, you understand where our capital ratios were at the end of the second quarter. They were just north of 11% on a CET1 basis. And I think you know what our range is of -- that we've described pretty clearly. I think in addition to that, we are -- we suspended buybacks for this quarter, and we'll do so again for the fourth quarter and the first quarter. That's worth about $1.5 billion. And then the balance will be around an equity issuance. And so I think it's literally a mix of those elements against the purchase price and the usual small adds to the balance sheet that you would expect. Finally, the plan is to proceed with this transaction close, integrate and then, as soon as practical, restart the buyback in line with our medium-term target commitments. And you know we have a high return on equity business. We can return quite a bit of capital given that our balance sheet runs -- it's not loan heavy. And so we certainly expect to come back and initiate buybacks, we've said, in the second quarter of next year, not in the second half but in the second quarter of next year. And obviously, we'd like to return as much as we can as we get started.

Your next question is from the line of Brennan Hawken from UBS.

Eric, just sort of struggling a little on a high level with the accretion math. You were buying back stock at around 12x, right? And you're buying this for about 12x. So the net impact of turning off the buyback should be pretty modest. You've got $260 million of cost synergies, which is approaching 7% of like the forecast pretax earnings plus tacking on the BBH pretax. And so what's the offset that brings it down to just 4% accretion by year 3 that maybe I'm missing? Or maybe it was just a function of conservatism.

Brennan, we want to make sure that we provide good guidance here. But we also -- as you've said, I think, in a nice way, we'd rather be quite confident in what we can do. And ideally, we underpromise a little bit and overdeliver because of -- that's the kind of business we're in. We think that's what our investors expect. I think if you -- you're doing the right math on the accretion dilution. I think we're pleased that it's a well-priced deal. We feel like it's a good temporary trade-off with our buyback for just a few quarters. I think you've got the right set of understanding the earnings. I think our model is probably a bit on the conservative side, but we like it that way, right? We want to -- we've got a lot of confidence in the cost synergies. Those should come in quite smoothly. Those, I think, are actually -- we've estimated a little more conservatively than our last 4 major deals here, but we want to be careful. We want to be careful about how we bring in and integrate this premier franchise. As you go out to year 3, estimated accretion is about 4%. If you go out to year 4, it's at 6%. And so you've got a rising earnings stream that we've created here partly from the synergies, as you've described, as they fully phase in and then the underlying growth. So I think we get to a nice mid-single-digit accretion in years 3 and 4, and that comes back to support our shareholders.

Okay. And then just a sort of minor question. You referenced the balance sheet synergy. Does the timing of the deposit transfer happen at close? What's the size of the BBH deposit base? Just sort of curious why those synergies are labeled by end of year 3 when I would think they would happen pretty expediently.

Yes. So the balance sheet synergies come in relatively quickly and actually start industriously in the first quarter of next year. On Page 4, there are some footnotes for you and your team that actually describe the bank sweep program that BBH operates today. Today, they have about $6 billion of deposits on the balance sheet. And they sweep to other banks, right, not to other money market funds but to other banks, about $55 billion of client cash. Why? Because those clients want to keep cash at reputable banks like -- that -- as you'd expect. Our plan, and we're working carefully on this, is we'd like to certainly continue that bank sweep program. It's attractive for our -- what will become our bank counterparties, all of which we know well and we'd like to continue to do business with on behalf of our clients here. But we certainly have an opportunity to participate ourselves in the bank sweep, so move some of that $55 billion onto our balance sheet. We've estimated, as I said in my prepared remarks, about $10 billion roughly that we would move onto our balance sheet. And that's just a matter of, I think, just putting ourselves on that platform, participating in the process. It's pretty straightforward in the first 1, 2, 3 months. I think we can scale up to that and then invest those deposits as they come on to our balance sheet and to our investment portfolio. So that's how we would tackle that. It's -- I think most of that happens during the first quarter. And so I think by the end of the first quarter, it should be relatively well ramped up. What I like about this is that it gives us some future functionality and flexibility for both our clients and for us, right? In periods where deposits could be a little more attractive, we can -- we could participate more actively in that sweep onto our balance sheet. But overall, we think this is a -- it's a pretty attractive program that was designed and built over a couple of decades and one where it will be remunerative as we participate and adjust it, but it's also one that we want to continue.

Yes. That's great. Last one, if I could sneak in. We are -- here we are, we're chatting. It's a Reg FD forum. How is 3Q trending versus what your prior expectations were?

Brennan, let me -- usually -- we finished July. We're mostly closed with August. And you're right, it's just past Labor Day weekend and back-to-school for our kids and for ourselves. The quarter overall is coming well -- coming in well. The fee revenues are coming in at the upper end of our range as we've seen good tailwind of equity markets, but our net new business sales continue to play through strongly. And so we're pleased to continue to build off the momentum in the second quarter. Expenses are coming in, in our range. They'll be in the upper half of our range but still within our range just as we're getting the variable costs that come through, as you'd expect from sub-custody expenses and fund expenses come through the P&L but all in line with our expectations. And then I think the other piece is NII. NII is coming in a bit better than our previous guide of $460 million to $470 million. Mostly, we've just continued to deploy the cash into our investment portfolio and I think, made progress in optimizing the balance sheet.

Your next question is from the line of Jeff Harte from Piper Sandler.

Could you talk a little bit about the acquisition process? And I guess I'm kind of trying to get a feel of how long you may be talking about Brown Brothers and whether this was kind of a competitive bidding process or kind of something you did one-on-one strategically.

Yes, Jeff. It's Ron here. We've been talking to them for a while. And I think it's a process that evolved on their part from one that I suspect was competitive to one in which we became exclusive. And as you might expect just given the nature of this, there's obviously a consolidation and scale-enhancing element to it, but there's also a very much strategic and talent element to it. And really, both sides wanted to get that right. So that's what consumed most of the discussion and really how would we ensure that this was going to have the right impact for clients, staff as well as shareholders. So much of it was really what evolved to be an exclusive discussion.

Okay. And I guess my second would be the deposit synergies. I guess I find it a little interesting. Bringing on deposits is typically a good thing, but we're also kind of sitting in a place where you've had such deposit growth over the last 12 months. It feels like you've been trying to kind of economically rationalize some of that growth. So I guess the question would be, adding more deposits in the current interest rate environment given capital restrictions or limitations, how attractive is bringing in extra deposits right now?

Jeff, it's Eric. It's a balance, exactly as you've described. We've -- in our core business, we've run rich in deposits. And we've consciously said on our second quarter call that we'd like to bring those down modestly, and we've actually been effective in July and August to do that. So we feel like we've been able to run the balance sheet in our core underlying State Street business in a real effective manner now and with the carefulness that you'd expect. I think as you -- as we bring on this Brown Brothers investment services business, there is a balance here. There's certainly earnings to be accrued for a certain amount of deposits. But I think as I described, we don't want to bring on more than another -- $6 billion of deposits come with the franchise. Another $10 billion would be plenty. And then that will be enough, and we think that's a good balance. The other thing to keep in mind is that what we're also always trying to optimize as a bank is the relative CET1 ratio with Tier 1 leverage ratio. And so as we bring on some amount of RWA or risk-weighted assets with this transaction and then put common equity against that, it's natural for us to bring on a certain amount of deposits so that the ratios stay in line. And that incremental amount that we've described is about right in this interest rate environment and I think provides a good balance. That said, I think that's where we'll be right now given the current interest rate dynamic. And I think we have an option to adjust in a way that's even more accretive to earnings as rates rise, which is actually something we've not factored into our accretion dilution model but something that we have an option to do at the right time depending on the level of prevailing rates.

[Operator Instructions] Your next question is from the line of Rob Wildhack from Autonomous Research.

You mentioned that BBH's share of wallet was 15%. What is State Street's share of wallet with your existing clients before anything BBH related?

It varies by client group. The BBH share of wallet that I shared with you of 15% is for the overlapping clients. There are also some non -- good bit of nonoverlapping clients, and there's a range of share of wallet there in the 5% to 10% range all the way to 70% to 80% range. And so that gives us a good base for continued growth. On the State Street side, back in June, we shared in one of our conference presentations share of wallet for our different -- across our franchise for different size clients. So some of our largest clients, we tend to have 30% to 35% share of wallet. And then when you get into the middle market, just by nature of those clients being, in a way, barbell, some of them are 80% and some of them are 5%. The share of wallet for the midsized clients at least in our franchise tends to be at about that 15% plus/minus. But that's -- there's a good conference presentation back in June, Rob, that we can point you to.

Okay. And just wondering if you could unpack the $40 million net revenue synergies outlook and maybe discuss the key variables to achieving or beating that target.

Sure, Rob. Part of our doing diligence on this and previous deals is we always surface opportunities. We like to circle those, tackle those and measure them. And I think we do that as much for our own internal purposes as we do for you all on the investor side. I think there are 2 buckets of revenue synergies that come with this transaction. First, on the market side, there's a relatively easy way for us to put our full product array in front of the Brown Brothers Harriman's clients -- investment services clients. And so examples would be adding products that they don't have today. So if you think about the FX, we operate in a number of additional markets of FX payers, in particular in EM markets, emerging markets that are quite remunerative. We have panels, and we could immediately transact those with some of their clients. We have a broader product set. We offer not only spot forwards but we also offer non-deliverable forwards, which is something they don't offer today because of their limited capital base. So it's that kind of activity. We'll obviously reroute some of their sub-custodial FX, which they were unable to support but we can support because of our larger market space. So there's a number of areas like that in addition to just being on the panels with our larger and deeper franchise that I think gives us some real lift. And it's relatively straightforward to do because it's about -- it will be about existing clients and just adding product set but takes some time to build in as we get clients engaged, coverage teams communicating with clients and then connecting that to our products. So that's the bulk of the increase on revenue synergies, and that comes through over time. And then the other is going back to the share of wallet, in particular the share of wallet on the servicing side. Whether it's more custody and accounting, more middle office, some Charles River sales, there's opportunities there. I would say we've not put a lot on revenue synergies here. I think that we'd expect more over time. We'd expect it to be quite positive. But what we've tried to do here is just put on some of those very practical and tactical opportunities so that we're highly focused to get them in the door and then proceed and add to those.

We have no further questions. Mr. O'Hanley, please go ahead.

Well, thank you, operator, and thanks to all of you on the call for joining us.

And with that, this concludes today's conference call. Thank you for attending. You may now disconnect.