State Street Corporation (STT) Earnings Call Transcript & Summary

All right. We'd like to get started with our next fireside chat if everybody could take their seats. And also, if you haven't noticed, there's coffee and some fruit and pastries and stuff out in the hallway for snacks. So please feel free to partake in that. And I want to thank State Street for joining us. As many of you know, State Street is the tenth largest bank in the United States, ranked by assets, over $323 billion in assets. But obviously, their real claim to fame is the assets under custody, today exceed $43 trillion. And then assets under management exceed $3-point, I think, 8 trillion, if I remember correctly. And with us is Eric Aboaf. Eric is their Chief Financial Officer. He joined State Street in 2016 after working for Citizens for a little bit. But prior to that, of course, he was with Citi for 12 years as their Treasurer. So Eric, thank you so much for joining us.

It's my pleasure, delighted to be here in person.

Yes, it's -- we've had a nice response from many of the management teams since this is their first in-person conference.

So, like, it's about time.

There you go. Maybe you can share with us -- obviously, State Street is a large custody and asset management company rather than a traditional bank. Maybe you could share with us some of the macroeconomic expectations that you guys have in your outlook for your core businesses?

Yes, Gerard, we try to keep it relatively simple, and I'd say a little bit on the conservative side when it comes to macroeconomic assumptions. So we typically think equity markets will rise 5 points or so a year. U.S. international, we're trying to be straightforward about it. We look at the forwards, now you got to be a little careful looking at the forwards one day versus another day. But we're -- we generally forecast us off the forward curves. And then we look the general indicators in the capital markets themselves. Foreign exchange volatility tends to have some impact on our business, not a spread that we can earn. So those are the kind of elements we look at. I think over time, what I'd tell you is we've become -- we've tended to be just a little more conservative on those assumptions because what we've realized is you don't want to overestimate what revenue growth be through those tailwinds and then get caught on the other side on the expense side. So we're trying to be disciplined about what expectations should realistically be in terms of some of those market environments. Some of those market environments create tailwinds for us, so that's a good thing. But we also want to do our part on the expense and the margin expansion side. And so we're trying to navigate through carefully.

What would you say differentiates State Street from its peers? And where do you have an edge, would you say compared to maybe some of your competitors?

Let me answer that in the core custody just to start. And I think there are probably 3 areas that, in our minds, makes a real difference when you talk with clients and what they're looking for. The first is our -- the alpha front-to-back offering in custody and accounting. And you all saw us do that Charles River acquisition a number of years back. There's a little uncertainty as to how that would work. But I think that's really come of age and you've seen us announce now a number of deals more than a dozen, including some real landmark trillion-dollar-type deals over the course of the last couple of quarters. So that offering where we offer the front, the middle and the back. And what we can do it as an open architecture with a mix and match of other providers. We're the only ones who can do it ourselves, right? And that provides a set of offerings that's pretty unique. So that's the first, I think, area. I think the second one is around what I'll describe as scale and scope. And if you think about it, we are almost the largest facility, and post the Brown Brothers acquisition, we will be the largest custodian in the business. We've got very significant positions in Europe in the offshore market, in the U.S., obviously, our home country, in Asia. And what we're finding is this is not a variable cost business like it was 10 or 20 years ago where you get new business, you hire a bunch of fund accountants. It's a scale driven, high fixed cost more capital-intensive and tech-intensive business. And so what we've really come to realize is scale matters in this business. Now not scale where it's fragmented everywhere, but scale in a real deep way, deep by products, ETFs, privates, hedge fund, servicing, fee by region. And so that's another I think important attribute, you can do that organically, you can do that inorganically. And you've seen mostly organic, but we've done a little bit of inorganic recently. And then the last part I'd tell you is innovation. We have to keep innovating with feature functionality. We were the first to do ETF servicing years ago when all needed mutual fund servicing. We added middle office, which is the back office, a lot of the asset managers. You've seen us now be one of the leading providers of crypto ETF recordkeeping. Why? Because there's a landgrab going on there. And the more we can tie up those areas. So there's always been an element of innovation. And we find that in a more mature industry. This is more mature than it was 10 or 20 years ago. So that makes a difference. That makes a difference. And you've got to keep out innovating while you keep driving down the scale curve.

Sure. You've been now at State Street for 5 years, just about 5 years. And you probably have learned a ton, obviously. And what do you think is the sustainable profitability if you look at it from an ROE or ROTCE basis? And how market dependent is that profitability once you get your arms around it?

We've put out, I guess, it was at the end of '18, '19, our medium-term targets. So we think we can operate at a 12% to 15% ROE, not ROTCE, that's -- there's little bit cheating going on there.

I agree.

It's ROE, right? That's what investors expect all the way through. And we think we can get there. Now why do we think that? It's probably we weren't there in the past, right? And so if you ask tough questions, and I'll say criticized appropriately, and we weren't there in the past. So we knew others were. And so if they can, we can. And part of that is scale, part of that is focused, part of that is different elements of growth and management. The economic environment does help, right, whether it's interest rates now or equity market sales wins, they create upside. But we see a market where we can operate at that level. And as an example, this past quarter -- and a quarter doesn't define a trend, we were at 11.5% ROE and almost 30% margin which I think is not something you could have said 1, 2, 3, 4 years ago. And so over time, what we've learned is you got to drive the top line in a very disciplined manner. And then you got to figure out how to drive productivity. And then capital management, I think, for us is something that we do particularly well, right? We know how to return capital. We know how to do buybacks. We know how to return capital so it's in the shareholders' hand, which drives up our ROE at the same time.

Sure. Speaking of using capital, maybe can you give us an update on how the Brown Brothers deal is progressing? And oftentimes, when these big custody deals have happened, the customers of the acquired company are given the option or the right to put their business out for bid. And if that is the case here, just what do you expect in terms of retention?

Yes, this is a -- look, what I felt this from Brown Brothers deal is we've done half a dozen deals of this, ilk, not same size, shape, but same texture in the last 20 years. And so we've got probably the deepest data set about what assumptions to assume on share of wallet, share of wallet growth, client overlap, retention, new client sales that you can do pre-close, post-close, right? And so it's -- to us, this was a fairly modelable opportunity. What I'd tell you is the close process is advancing as we thought. We announced this in early September. We've gotten all our regulatory filings in and there's a lot of those, not just the U.S. Fed, but the other U.S. regulators, the international regulators, country by country. We've stood up the merger integration team. Now we have a merger integration leader, who's been on the field as of more than a month ago. So just a couple of weeks after the announcement, they've got a team of 15 different work streams. I'm just trying to think through all the different pieces. We've been facing off with the other -- with each of our counterparts, in finance, in risk, in compliance on the client side at Brown Brothers. Ron and I have a weekly with our integration leads with Bill Tiree and Sean is Head of Brown Brothers who is coming over with us every Friday morning. So 7 a.m. tomorrow morning, we're checking in on what the -- how things going and are things going smoothly. So it's all in flight. And then I think most importantly, we're getting to clients one by one, wrapping our arms around them, making sure that they know what's going on, they know when it's happening, answer their questions. And then in truth, describe to them and engage them on how do we plan bringing the best of both State Street and Brown Brothers to them. And the good news here is this is not the classic bolt-on, right? We're bringing them in, but we'll bring them in with 9 of their senior partners who ran the franchise plus the whole next group of management. And so there's a lot coming together. So we're all in. We just have to get to close, and then we can take things from there. There are just like many of us in -- at financial institutions or in the midst of budget. November is budgeting season for most of us, they're budgeting. And we'll be taking a look at their budget in the coming weeks. So every step is playing out.

Yes. You just mentioned something about in the process. We're hearing some kind of scheduled, but there's like a backup at the Fed on maybe some of these approvals for M&A. Are you guys sensing anything like that? Or is -- when do you think it might close that kind of...

It's hard to tell, right? It's just hard to tell. And we've learned over time, it's not really helpful to do tea leaf or [indiscernible] some of us were old enough to remember, how to say it. Because the other Fed, they've got a very strong staff. The staff is very adroit at understanding opportunities, going through their processes. There's the Biden antitrust oversight. We're obviously working through that. So there's -- this is a -- in our minds, a pretty straightforward acquisition where actually it's an asset sale, not a bank combination. It's a situation where we bring something that's not been in the Federal Reserve system, right? It's in the New York State Banking supervisory area into the Federal Reserve system. So a lot of reasons just to proceed. But you know what, you never know. And we're obviously we'd -- we announced and we'd like to see if we can close by the end of the year. That's our intention. We're doing everything we can. And obviously being responsive as there are any questions or inquiries, and we'll take it from there.

Just one last question on this transaction. Sometimes, we've seen over the years these deals announced and the concentration risk sometimes is excessive to the customer, meaning they have too many eggs in, let's say, the State Street basket. Is there any risk of any of the Brown Brothers customers having to kind of take some business away because they just don't want to have all their eggs in that one basket?

You could imagine, we did a lot of due diligence on this business. And we also have a lot of experience on what clients are willing to feel is attractive, is acceptable, is unacceptable. And we actually feel -- we feel quite positive here, partly because there's been a trend in general for consolidation in this industry. Why? Because as we provide more of the offering to bigger client, we can give them better benefits, whether it's product benefits, product integration. We can give them slightly better fees. There's a series of benefits that come of that. And so it's not as if it's like the trading business where you want to keep not more than 10% of your account -- of your exposure to a counterparty. Here, getting to 40%, 50%, 60%, 70% is not out of the ordinary, and it's just can you get value for it. So that's -- I think there's been a trend over the last 5, 6, 7 years that's made it more natural. And then as you can imagine, we did a lot of due diligence. I think I disclosed that the average share of wallet of the overlapping clients was about -- before we combined was 15%. With the combination, share of wallet is about 21%. Now there is some spiky ones and some lower ones. But with averages like that, there's a lot of room for -- to bring clients on and not have any of those concerns. And the -- even more importantly, there's a lot of room to actually bring clients on and actually deepen relationships with them because now we have the full offering of State Street and the full offering of Brown Brothers' offer. So I think there's more upside here than typical.

And we're taking questions yet. I think at back, Walt, if you -- on the back, Walt.

Glenn Schorr, Evercore ISI. Eric, I think State Street's done a great job of evolving with client needs and demand on the asset servicing side, building out everything you've done. Perceptional reality, you've done less on the asset management side, you did add GE Asset Management, and that was a good deal. But in general, less and you're starting to see a lot more activity both organically and M&A in the asset management space. So I'm just curious. We talked about some of this on the earnings call, but what is the go-forward stand-alone plan for SSGA? Where are the areas that you're looking to build? How far does it extend across the active space?

SSGA, our asset management franchise, got almost $4 trillion of assets. So this is a scale business and an attractive one. Now it really operates in 3 areas, and you all know because many of you are actually in the asset management business itself, where one needs to have different pick your spots in asset management. It's too big, it's still a fragmented industry. But we've got dominant share in ETFs and I'll talk more about that. But a large institutional index, global index business to institutions around the world. And then we have a large cash management business, which is heavily integrated with our State Street servicing operations. So what you've seen us do over time is find ways to actually build off of that strong base, right? We don't want to go out and be an active retail mutual fund house. That's not what our DNA is, that's not where our expertise is. But if you think about ETFs, we pioneered the ETF a couple of decades back. But we spent more time in the last 3, 4 years. tucking in and building out the low-cost ETF franchise. We added -- we've got some of the preeminent equity sector funds. And we've added to that not only in the U.S., but we've added to that in Europe and said, look, we've got a franchise where the landgrab is well established in the U.S., but in Europe, it hasn't been. So how do we actually take some of those products to Europe. And there, we're quite a strong player commodities, right? We have one of the premier gold funds and how do we build around that. So I think in asset management, our view is we've got some very strong product or geographic capabilities. And the work we've got to do is continue to just build around those as we grow those areas. And then we've got to make sure we -- just like in the services business, drive top line growth and bottom line earnings as well. You saw us, I think, for a number of years, our revenue growth was so-so, and our margins were below par, and you've seen those get solidly into the 30%, 35% the last few quarters. And part of that is because I think we've done the right work on building out and supplementing what we have on the product or distribution side and then actively managing the cost base. So it's been an attractive growth opportunity for us and part of the portfolio.

Yes, yes.

I just had a question on the private market side. You guys recently announced the acquisition of Mercatus back in July. Can you talk about the opportunity there to deepen ties to those customers?

Yes. So this is back on the servicing side. On the servicing side, we service all the large segments, asset managers, insurance, asset owners and the private players. And the private players, both there's the hedge funds and then the more traditional private markets, private equity, some of the credit -- illiquid credit funds, real estate funds. So we have a series of different pieces in there. Our view is that's -- as you know, that's a very attractive industry. A lot of the investment managers are barbelling that -- and supplementing what they've got. We've seen a number of acquisitions there and a lot of money flowing in. And so what we found is that we should not only build but continue to invest in our franchise in those private market areas. Now we've got to do that area by area because private equity requires a certain type of servicing, commercial real estate funds, credit funds. And then it tends to be different region by region. What Mercatus brings to us is a set of more front office offerings where you can actually have greater visibility as the -- for the private player in terms of what the LPs are seeing, what the general partners are seeing and the kind of administration back into the servicing side. And so that's a way for us to add some technology and some front-end capabilities to the more traditional administration that we provide. And to be honest, it's one way for us to extend the alpha proposition. The alpha proposition is front to back primarily for asset managers. What Mercatus lets us do is go do something similar for the private market servicing as well.

Steve?

Yes, back to Asset Management. So I know this is a tricky question, but there have been press reports that you are interested in doing something with Invesco or UBS. And all of us in this room have done the analysis and nothing seems to make any sense. I mean, if you sold SSGA or sold at competitive market price and bought back stock, it seems like it's sort of earns neutral. If you bought something, which you said you don't really want, it would be horribly tangible book value dilutive. So please don't do that. And third, if you do a JV because of the restrictions that financial institutions uniquely have in terms of like CET1, concentrated equity investments, it just doesn't pencil out. So without maybe being specific, what do you think the -- why does this keep floating around? I mean is it people perceived that State Street thinks that you feel like SSGA needs to do something to stay relevant and competitive? And how does that -- I mean, a, do you agree where are the sort of strategic holes? And so if the 3 things I just mentioned don't seem to work, what other options are there?

I'm trying to think about whether you're referring to recent press reports or the ones from 2012. So I just don't even know where to start on this question. I think folks will always speculate about our business, like they do with others. Now do they do a little more with us? I don't know. I guess, I should have asked that question before joining, but they do. So let it be. I think you're generally right. Like the -- there's not an easy set of inorganic silver bullets and asset management. And you all who operate in the business have the same challenges. And as Ron and I have said, we're quite pleased with the performance of our asset management business. We've bolted on some properties in the past like GE Asset Management. We've said that in a careful calibrated capital thoughtful way, we -- that's one of the items that we've said we might do. But I think we're -- the speculation feels a little outsized relative to how we're operating and focus on the business. This is a business that we find attractive. It's -- I think the last couple of years in particular, we've seen strong inflows. We've seen strong top line growth. We saw good margin expansion, and we're quite pleased. And I think it's -- that's a lot. That's a lot.

Are there any holes, following up on Steve's question, that you guys do see within what you have that a certain plug of this type of product that may make sense at some point?

There are always areas that are related to what we do. So ETFs, you can kind of go through the product category, geography, but there are small franchises here or there, you always keep an eye out for those. I think the biggest area where we keep a sharp eye is on the institutional business. And we have a large institutional index business. We've got just established deep relationships around the world. We won a series of mandates recently in Australia. We do that in Europe and multiple jurisdictions on the continent and in the U.K. And I think there, if we can find something that overlaps well around fixed income, around LDI, that could give us a springboard. We can bring relationships. If we've got some expertise and we can add to it. But that's all -- I'll describe it as we just heard, speculation, right, where our view is you run your business, you run it thoughtfully, you work on sales force effectiveness, you work on distribution. We've done a lot of improvements in those areas. We do a lot of very in-depth monitoring around where we're winning, where do we have some leakage or some losses, how do we actually do better, how do we optimize the effectiveness of our business processes. And that's been the primary focus. We'll always keep an eye out for something. But it also has to be -- it's -- we're talking bolt-ons. We're not talking about more than that. Our primary goal is to return capital to shareholders and grow these businesses organically. That's what we're focused on.

Yes. Out back, back on number two.

It's Ken Usdin from Jefferies. Eric, two questions on the balance sheet, one strategic and then one more of a technical one, just from the 10-Q. So how -- what are you doing specifically to start to position the balance sheet towards an eventual rising rate environment? I'll start there, and then I'll ask you my follow-up.

I get a double question here. All right, all right.

I can say it right now.

Let's pace ourselves. The balance sheet is from a preparation standpoint. And remember, there's areas of overpreparing for rate rises and there's areas of underpreparing for rate rises. You got to be careful both ways. I think the first thing that we'd like to do is we like to be -- have a healthy and flush amount of deposits in -- at a time when rates will potentially rise because that will run an asset-sensitive position. There's a lot of opportunities as you think about the betas in doing so. And you don't want to be overinvested on the curve. And that means on the asset side, we're just being careful about the -- where on the curve you're wanting to play. Are you out there on a series of long 30-year, 20-year 10-year positions or a you a little further in? Where are you in BS, because you don't want to get caught on the wrong side of the convexity trade. So there's a -- I think there's a series of positioning that we are prepositioning that you're doing gently and then there is deposit management. And I think if we thought that rates would never rise, we'd say, look, you compress deposits even more, you need even less preferred securities. That's a good trade. But if you think that rates will rise, they'll say, look, let me see how much I can run with deposits without being too flushed and taking advantage of that. So those are probably the 2 areas to start with.

And the sensitivity to 100 basis points came down again in the second quarter in a row and the U.S. is now $500 million. I'm just wondering what causes that delta from that change in terms of -- is it the base forecast? Is it the balance sheet size, et cetera?

Yes. That's just -- I think it came down maybe 10% or so quarter-on-quarter. So it's fairly nominal. I think it's still up nicely year-on-year. So I think it's more a set of just whether MBS are rolling off or rolling on. You've got some of your U.S. investment positions. So there's -- I think, Ken, there's a fair amount of back and forth that goes on and volatility that goes on 1 quarter to the next. And I'd tell you, it's generally fairly asset sensitive to the balance sheet just because of how we're flushed with deposits and have a much more limited loan book. And it's a good place to be right now.

Just before the world got a little quiet a few years back, Ron was at a meeting and he talked about an initiative, I think, called Global Clients. He felt that the white space in the clients had been -- had some significant upside in it. I don't know if it has been measured or assessed. Do you have some sense beyond just adjectives, what really -- what sits inside the existing client base in terms of growth opportunity? And where we are today on the penetration of that?

Yes. And we actually, I think, back in June and put out some good materials on some of our client positions. We've got our Global Clients division, which has got 50, 60 largest clients and largest asset managers and asset owners around the world. We've got a group of preferred and group of premium clients. I think on the global clients, we've got share of wallets in the 30%, 35% range. And some of the midsize and smaller tends to be either you've got 80% or you got 10%. And so there's a broader range. But you go through these -- and so there's some good disclosure in some of the materials that we did back in June segment by segment. And what I'll tell you, there's real opportunity, but it's an execution. It's an execution process and which is one of the reason why we put that data out. And it's an execution at the CEO level, right, because some of these discussions are CEO, COO level discussions. Some of them are around very practical capabilities area by area, right? You have the ALTs part of the portfolio of a client, you have the mutual funds, you have the ETFs, you have the U.S., European offshore, et cetera, et cetera. And in some clients, you have very centralized decision-making, where they're willing to bring it all together. And in other clients, you might have 5 or 6 or 7 different buying groups who are making relatively different decisions. And you all know you've got the boutiques in the asset management space, and they are even more decentralized, there's not only by product by product, by geography, typically. So we see a lot of upside. I mean we're still in a position where 75%, 80% of our new wins come from existing clients because that upside exists. And in truth, that's part of the reason we're excited back to the Brown Brothers deal where on a combined basis, there's 21% share of wallet. That to us means there's upside to the -- on the revenue side, and that's where it really matters.

Go over here and then we'll come up here.

A general question about your technology and back office when you open up the hood at State Street. Are we looking at the engine of a Lamborghini or a Ford Pinto? So let me be specific then. And I'm not even sure which questions to ask, but we could say, how many data centers do you have? How does that compare to the past? Where do you expect that to go? And how does Brown Brothers play into that as far as data centers? What percentage of your operations are straight-through processing? And I'll have one follow-up.

So there's a lot in there, Mike, and you've written a lot on technology and banking that's, I think, quite forward thinking, right, because there's everything from, as you described, data centers, the stack that you run, the breadth of everything from mainframes to all the other set of offerings, how much you might have on your private cloud, how much you might have on an external cloud. And so -- and I think the data is fuzzy, which is some of what you've described, which is our disclosures aren't all the same, and it's not that easy to track. So I think it's well said. I don't think we're at either of the extremes, to be honest. I think there's a -- and as a CFO, I actually like not being at the extreme of a Lamborghini because that means there's a lot of upside as we transform our technology at State, right? There's upside in adding the right infrastructure. And the right infrastructure actually is a better way to manage our cost base. The right infrastructure lets us scale our operations. So as we grow, we can pump more through it. And I think there's a good bit for us to do there. And you've heard me talk around how a number of our productivity initiatives are not just around operational processing and kind of the fund accounting work. They're around actually consolidating data centers, consolidating space, consolidating platforms. We've been on record where we're trying to take applications down by 5%, 6%, 7% per year. Why? Because then you have less maintenance costs, less data center costs, less costs along the stack. So to me, there's a set of opportunities. And what I would tell you, the reason I see continued opportunities here is that you've seen us grow over the last 2 decades in a way that had a lot of bolt-ons, a lot of acquisitions, a lot of addition, which we left in a more federated state. And it wasn't until 2018, I think, we described when we started to fully functionalize our operations and put all of technology really in one place. Really, all of our operations really in one place where someone actually could then drive forward on a real specific plan. And that's what we're executing on. And that we see really brings benefits over time. But it's not the book ends and there's room here.

Just if you could just be a little bit more -- any specifics related to going for that federation of processing to more centralized the number of data centers or I mean, 5% to 7% less [indiscernible] per year, a little bit more meat on the bones. Any numbers you can give us? We're a room full of numbers of people. So...

Man, I think I need to do a conference just on this topic, that's the truth, right. No, seriously. I think, all right. I'll invite myself to one of your conferences, and we need to do something on open tech, and Mike, maybe should be here. But I think that's something we need to do. But we should do that with paper and pencil or do invites on a screen, right? Because I think that would give you the texture that you need as opposed to fly, bye-bye, Eric in 30 seconds, right? I think I got -- let me take a rain check on that with the right group.

Can I ask about crypto? Just State Street has been more open, maybe less skeptical than many other banks. Can I ask -- and you've also got that new digital finance unit. So can I ask what you're doing now? What you're planning to do? And what are the limits of what you would do? What would you not do?

So digital and crypto, I think, is one of those areas that comes every 10, 15 years where you said, look, there's something fundamentally new going on here. But we don't know exactly how it's going to shape out and develop. And so we've done a couple of things that are open ended, and we've done a couple of things that are actually quite deep and specific. The open-ended ones is we're working through where do we want to participate on the crypto value chain, right? So the everything from trading in crypto to you can record keep, you can do administration, you can custody, you can hold keys for crypto, right? You can launch ETFs in crypto, you can do as an asset manager. So there's a series of different opportunities and so we're certainly looking across those. There's also a set of what I'll describe as underlying technology, right, the blockchain and how to use that in a very -- in a more efficient way for your own processes. And that one is, I think, even more experimental because there are always good use cases, but can you scale them to something that covers 10%, 20% of your operations, I think, is -- that time hasn't come. Well, I described a number of those debts, so we do that through minority investments. We do that through technology development and building products and testing them with our clients, and we've got several of those live today. I think the other thing that we're doing is it's clear to us that crypto ETFs and exchange traded products are here to stay. Now in the U.S., they've not been approved yet. So you know the lineup as well as I do of the 1 to 2 dozens that have been announced that are in front of the SEC in Canada, in Australia, in Europe, in Germany, in Australia. There are a number that are actually either live or also on the docket. And you've seen us sign up, whatever, 35%, 40% of those as record keeper. And in our minds, that's -- there's a landgrab to be had there. It's a place we can participate because we're bringing our brand and trust and credibility to some of those ETFs. We understand ETF servicing probably better than any other. And it's our way to participate, to understand that there's a revenue opportunity there because record-keeping administration in ETF for crypto is not a thin fee business, it's attractive. And then it lets us think about we want to backward integrate into core crypto custody, which is -- which takes a lot of development, regulatory, compliance, et cetera, and technology where we want to stay in that record-keeping space. And I think that's an area where we've really leaned in actively. So there's a lot of optionality we're trying to create. But that's a particular one, ETF record-keeping administration that we think is here to stay and one where we place on our bets.

Yes. Walt up here, Betsy, we have time for one last question.

From the front.

Betsy Graseck, Morgan Stanley. A question on operating leverage. You stood out from a crowd, I think, during earnings season by highlighting that you are expecting that you'll be able to deliver positive operating leverage, even as you make these investments across the board here. Can you give us a sense as to whether or not that's just a function of rates moving up, and so that's a positive? Or is there more to it than that? And where do you really see driving the positive operating leverage? Is it from your new accounts? Is it from BVH? Is it from just expanding relationships you have with your current customers? Or is it more on the expense side?

See, let me kind of answer that, Betsy, in a couple of areas. I think the first is that we've been real clear that with our medium-term targets of 4% to 5% revenue growth, EPS growth in the 10% to 15% and margin expansion, not only the 30% but 31%, but we need to expand our margins over time. The only way to extend margin over time is to drive positive operating leverage. Now you'll try to drive more or less depending on what headwinds and tailwinds you have. But we're serious that we can bet on higher rates. We can bet on higher equity markets. We've got to execute our way with margin expansion and positive operating leverage, as we lift the top line growth of the company. So that's the broader perspective I'd give you. I'd say how do we get there? I think it's 2 parts. It's around sales and growth execution. You've seen us announce $3.2 trillion of AUC/A wins this year, year-to-date. I've said that we need about -- we need at least $1.5 trillion or so per year to actually drive core growth in net new business. And that's going to be -- that can be an asset manager, it can be in the U.S., it can be in Europe, there's a series of different substrategies below that and some of it is prospecting and a lot of it is deep right? And then at the same time, we've got to keep, as we do that, finding ways to drive productivity. I think what we're starting to do is not only drive productivity to reduce costs, we're trying to drive productivity to make sure we can continue to reinvest. And the point I made more recently on the earnings call is we want to reinvest behind the revenues not ahead of the revenues because we think that's a better way to manage the kind of franchise we have. And so we just need to do that carefully. So you'll see us do what we've done over the last couple of years is drive gross reductions in expenses. We've got to reinvest some of that. We've got to put some of that against the natural headwinds. And then we just want to make sure that as we do that, there's some real space between top line growth and expenses. And we got to do that without betting and just hoping interest rates will be the savior because that's not a good way to run.

With that, Eric, we've run out of time. So I want to thank you again for joining us. Great job. And please join me in a round of applause. Thank you, Eric.