State Street Corporation (STT) Earnings Call Transcript & Summary

All right. Good afternoon, everyone, and thanks for joining. My name is Rob Wildhack. I'll be leading our discussion today. I'm delighted that we have Ron O'Hanley and Eric Aboaf from State Street with us. Ron has been the CEO since 2019. And prior to that, he was the President and CEO of State Street Global Advisors. Eric has been the company's CFO since 2016, and he recently added the title of Vice Chairman to his portfolio as well. So congratulations on that, Eric. Ron is going to lead off with some prepared remarks. And then we'll dive into Q&A. But for now, I'll turn it over to Ron to get started. Go ahead.

Thanks, Rob, and good afternoon, everyone. It's good to be here in person. Let me get the disclosures and the disclaimers out of the way. Just to remind our audience that today's discussion may contain some forward-looking statements and that actual results may differ materially from these statements due to any of the number of a number of important factors, including the risk factors in our Form 10-K and our SEC filings. Our forward-looking statements speak only as of today, and we may not update them even if our views change. So with that, what I'm going to do today is, one, just talk a little bit about the operating environment. I think it's fair to say that it's an unusual one, but it presents not just challenges but opportunities for us. Secondly, I want to talk about our priorities and how we're executing against them. And then we'll -- I'll join Eric and Rob and we'll have Q&A. Let me begin with where we are today. State Street has a very clear focused business. You all know us very well, I believe. We're -- of all the G-SIFIs, we're the simplest of them. We're basically a two-business G-SIFI. And our purpose is clear in focus, it's to create better outcomes for the world's institutional investors and the people they serve. And that really defines what we do, both in our asset management and our asset servicing business. We have a multiyear strategy designed to optimize and advance our competitive position within those 2 businesses. And we've executed against that multiyear strategy, and there's quite a bit of evidence against that, whether it's our -- the successful deployment of our Alpha platform or the success that we're enjoying in our asset management business. And our goal is really to -- the desired outcomes we have here is to achieve and exceed our published multiyear financial targets around revenue growth, margin growth, EPS growth and our ROE and capital targets. So with that as an introduction, let me just talk about the environment that we're in. Certainly, we've seen just extraordinary market movements in 2022. And these really have been fueled by just a truly unusual array and confluence of geopolitical or other kinds of factors that are certainly above and beyond what occurs in any financial institution. And if you think about it, you have -- if you go back to 2020, we had COVID, we had the corresponding kind of monetary stimulus followed by fiscal stimulus, followed by supply chain disruptions, followed by inflation, followed by Ukraine, followed by yet another disruption to the energy markets, followed by an interest rate rise, and now Fed and other central bank response. We're navigating through that environment. Some of this is positive to us, some of it is challenging to us, but we're navigating successfully through that. We're working quite closely with our clients in all this and in some cases, helping them through it. Where the focus for us has been on the things that we can control, which is improving our operational capabilities and continuing to innovate, both on behalf of our clients and how we actually run our business. We remain confident in our ability to meet our medium-term targets. And in that regard, we expect that we will -- we can drive full year pretax margin expansion in 2022 as we did in 2021. And to do this, we're really focusing on 4 priorities in 2022. First is continued delivery of the Alpha platform and software for our clients. As those of you that have followed us for a while now, we announced in 2018 shortly after the acquisition of Charles River, what we call the Alpha front-to-back offering. At that time, it was a concept. We had all the piece parts, but the knitting together was a concept and we've executed against that. 20 clients have purchased a service for us, 12 of them are live now. And what we're -- what that's enabled us to do is, one, to access higher growth markets; two, it's enabled us to just broaden the offering that we have for each of our clients and really make the relationship much more sticky. We have become, as our clients have needed, an outsourcing option for them to be able to take things that they do internally and put off to a provider. We've been able to bring that to our client base. And we were the first custodian to make this strategic pivot. So this year, what's the priority? What's really about delivering the Alpha data platform, the data element of all this. If -- again, for those of you that have followed us, remember we talked about front, middle and back. And those are pieces, if you will, but they're still silos. What knits us together is the data platform. And we've been working on this software now for several years. The release comes out at the end of this year. Clients are purchasing this, first client is actually already on it. And this will actually enable us to provide the kind of data solutions that are complicated, investment managers and asset owners are seeking. This is a cloud-native platform that enables the centralization of data and also enables clients to manage their data in a way that they haven't been able to do before. And by outsourcing the trading analytics technology and operations to State Street, clients can remain focused on what they do best, right, which is invest and then serve and relationship manage their clients. As I said, today, we have a total of 20 Alpha clients. It's helped to drive a lot of momentum in our business. Last year, we reported about $3.5 trillion in AUC/A and wins. There's about $2.9 trillion of that to be installed and 12 of those 20 clients since inception are now live, as I said. Second priority is to complete the BBH Investor Services acquisition. BBH and the purchase of the assets of that Investment Services business is a very important complement to our business. It strengthens our market leadership. It expands and deepens our international reach. It propels our Alpha strategy because it brings along technology assets that we would have had to build out otherwise. So it enables us to, again, continue to round out the offering faster and quicker. We're working towards concluding the required regulatory reviews during the third quarter or sometime during the third quarter. But as we have previously indicated, we're very, very engaged in progressing on the ongoing dialogue with relevant U.S. banking regulators, but there can be no assurance as to the timing or outcome of resolving these reviews. But in the meantime, State Street and BBH continue to work closely together and planning integration, like Eric and I, Ilene, went to an event last night with our BBH -- our to-be partners at BBH. So we're excited about it, and we still expect the transaction to be accretive to earnings per share in the first year, post-closing. Third priority, operating model transformation. This is not new to us. This is an ongoing multiyear focus for us. And we've made measurable progress towards improving our operating model and driving efficiencies and within our business in recent years, and we must continue along this path. So for example, last year, 2021, we -- this transformation that we've had underway drove about $330 million of gross savings. Some of that, we reinvested in the business through a range of productivity enhancements. We continue to see more opportunities there. Some of that through reengineering processes, some of that from more automation, some of that through just simplifying the way an individual process might work. And we remain focused on these productivity initiatives and believe that it will continue to be accretive for us for several years to come. Last priority is continuing to execute on our State Street Global Advisors growth strategy. State Street Global Advisors, as we know it, SSGA, is the fourth largest asset manager by AUM with particular strengths in ETFs, institutional and cash. We have a very clear growth strategy that we've been executing against for a while now, that target growth wise in our areas of strength, which would be ETFs, ESG index, fixed income, defined contribution and money market funds. And it's a combination of continuing to broaden the offering, particularly in the ETF space. There's a lot of growth in that space. If you think about what happened over the last year, the real kind of new feature of ETFs has been the move towards active ETFs. We're one of the largest players in that, we see lots of growth there. And there's lots of growth outside the U.S. in ETFs. So we like that business. But also, we continue to see opportunities in the cash in the institutional business. And then lastly, if you go back to our purpose, serving institutional investors, we share that client base in both businesses. So we see more opportunity to implement a repeatable one State Street go-to-market approach, where we're actually bringing the best of State Street Global Advisors and the best of our investment services business to those clients. So maybe I'll draw this to a conclusion here. I'll return to our purpose, helping create better outcomes for the institutional investors of the world and the people they serve. We continue to execute and towards realizing that towards realizing that purpose. It's a challenging environment, but there's -- like I said, there's lots of opportunities in it. That challenging environment is also equally challenging to our clients, and it's causing them to come to the table and ask us what more can we do for them, what are the kinds of things that we can take off their plate, what are the kinds of outsourcing that we can do on their behalf. So to help us achieve this goal. We've got the priorities that I've just laid out. And why don't I stop there and we'll open it up to Q&A. Thank you.

Thanks, Ron. That was a great overview. And you touched on the challenging market environment today. I have in my notes, dynamic and volatile. So I think we're on the same page there. But you do have a front row seat all of that, your position in the market. What are your clients most focused on? And how do you respond to that need and to that demand?

So I think what -- if you think about our client base, it tends to be the larger, more sophisticated asset managers and asset owners, the asset owners that act like asset managers. And what they're looking at is operational complexity. And this certainly was on their minds before COVID, and there was a lot of outsourcing that we were starting to see, again, it spurred what we decided to do with the Alpha platform. COVID accelerated that. I mean at the beginning of COVID, I remember having conversations with Eric and just thinking that, oh, well, whatever sales forecast we had in place was actually going to go away. And if anything, it accelerated because I think institutions saw, again, cracks in what they were doing and cracks in their operating model. So I think the #1 thing that our clients are seeing is -- and it doesn't matter whether they're -- on the one hand, you've got clients that are, if you will, income statement challenge, so they're doing it to improve the income statement. If you look at our client base, we've also got the leading investment managers in the world. It's not an income statement issue, it's much more around, as I -- as an investment manager, I think where I want to spend my time and resources, I want to spend it on investing better and serving our clients better. The stuff on operations, I just don't want to do. And in particular, if they're facing some kind of technology change out, that tends to be a point of decision we're saying, really, do we want to do this again or do we want to think about some way to variabilize all this.

That makes sense. And as we move out of the pandemic and into a more normalized environment, how has competition changed, be that the competitive landscape, competitive intensity or even the set of competitors against whom you're competing? How has that evolved?

Yes. So I don't know that it's as much a function of moving out of COVID or what's happened over the last year or so. What we saw starting the 2016, 2017 timeframe is that in addition to the core competitors, the 6, 7, 8 large global custodians around the world, we saw some of these large software providers coming into the space. So the Aladdins and the Bloombergs. And that really was the point in which we said, do we want to be in the spot where we're doing, in effect, all of the dirty grungy work, the stuff that's really hard to do and then find ourselves where some of this front office activity and even worse, maybe the client relationship was going to be ceded to these providers. And you can always tell when somebody is knocking on your door and putting their arm around you and saying, "Hey, let's do a partnership," that there must be something that they're seeing that we're not. And that did lead us at that time to say, why shouldn't we be a front office provider. If you think about this from a data perspective. Ultimately, the data that matters is the data that we have, right? It's what gets reported externally. It's that end data. And we also have a lot of the data in the middle, right? We have the trade book of record, the investment book of record. So spurred by this idea of data, the thought was, let's get into this front office space, be able to have the full offering. So that's what led us to do that. We wanted to, one, differentiate ourselves from that core of 6 or 8 global custodians and to meet the challenge coming out of from these large technology providers. What we're seeing now, so fast forward 5 or 6 years, certainly, our competitors, I have nothing but respect to them, they're trying to respond to that, and they're all trying to round out their own offering. Usually, whether it's with partnerships with somebody like an MSCI, although these partnerships tends not to be exclusive kinds of things, or trying in some cases, to build out their own technology and software. We know that we're ahead, but we also have enough respect for our competitors that to remain ahead, we have to keep moving. So that's why you're seeing the kind of enhancements that I talked about in my opening remarks in terms of adding this cloud-based data platform to all this. We've worked very hard on the open architecture element to this. And that, from the very beginning is the way we design this. Some of the competitive offerings, Bloomberg and Aladdin in particular, were built in a closed architecture system. We made ours open architecture for a couple of reasons. One, if you think about the client base, they don't want to be told what to do, right? They're fine to say, yes, for 70%, 80%, you can use this, but they don't want to be told, I'm sorry, that risk-based system that you like, we can't accommodate it. So we've built it that way. we've developed partnerships with many of the leading providers. And we welcome new providers coming in because the first thing we do when we see something, we'll kick the tires. If we like it, we'll say to them, happy to plug you in and we need to negotiate a revenue share. So we think it's important for us to, again, acting like a true software provider, have the platform and then enable everything else to plug in.

Got it. And as you think about Alpha as it relates to the competing or substitute options for your clients, is it really that data integration and that open architecture that's the key differentiator? Or are there other capabilities that you have on top of that?

So it's the data integration, it's the open architecture, and it's the ability to actually outsource activities, right? We have what we call the middle office business. And if you're a fund manager, think of our middle office as your back office. We're taking over your back-office activities, creating some scale out of it. We do it for enough other asset managers now. So we're taking a cost away from you. We're taking a provider away from basically variabilize -- we're taking cost away from you, variabilizing that cost, and we're taking the need on your part to continue to upgrade this and upgrade the technology. So the outsourcing piece is the other very important element to all this.

Right, right. And then to jump to BBH, you highlighted that closing later this year. But how had the underlying trends been in that business, performing in line with expectations, a little bit better?

Yes. I mean it's -- I mean BBH was the exact opposite of a troubled property. I mean, this was a firm that was doing very well and very intelligently they've decided to sell while it was doing well, but when they realized that they were not -- I mean, they're facing the same trends the rest of us are, yet they're 1/8 of our size, closer to 1/10 actually of our size and weren't able to afford the constant kind of reinvestment in technology. But in terms of fees, fee revenue, the trends are playing out. Obviously, interest rates were in a very different place when we negotiated the deal in there right now. So that's useful. And the people remain there. And so the business is just as attractive, if not more so, now as it was then.

And then Rob, I'd just add that we have a close working partnership with the Brown Brothers team, right, as part of all our pre-closed preparations. So we do -- they do budgets, we review with them, they get monthly financials. Those get shared, right? So we've got a constant stream of information that gets passed back and forth, including all the pre-integration planning that we do, right, literally within the finance team, as an example. And so the current business performance is good. It's strong actually. A little higher on NII, right, driven by higher rates. Right now, equity market is a little lower. So that has a partial offset. But the underlying trends are in line with what we had expected, if not a little bit better. And that's -- they're continuing to operate a very strong and healthy franchise, a little more turnover on the headcount side, but everyone in the room facing that, but within some bands. And so healthy, and a healthy, I think, process that we have to monitor, to engage, discuss, to refine some of what they're doing in a very natural way.

While we're on the topic, can you just remind us of your financial expectations for that deal?

Yes. As we originally announced it back in September, we announced that it would be accretive in the first year. And by year 3, it would be around 4 points of accretion. Right now, as we've said, we're in the midst of refining, modifying some of what we've put in front of the regulators. We can see our way comfortably through a deal that's accretive again in the first year. And then we're working very hard towards preserving the kind of economics that we announced back in September, exactly how they'll shake out and exactly at what level is, will become clear here, I think, over the next couple of months. But we're conscious that we raised equity from our shareholders. We wanted to put it to use in a good way, and we need to make sure that we have the payback and the accretion that would warrant that kind of investment.

Got it. Got it. And sticking with core asset servicing, you recently broke out your reporting to include or to incorporate back office, middle office services. We touched on the front office already. What's the rationale behind that reporting change? What services end up bucketed in each of those categories? And then how are -- how is each of those categories trending?

Rob, let me start with that because it kind of gets at some of the strategic and the initiatives that Ron described. If you think about the business we operate in, 80% of it is core custody and accounting, right? And that's over time, become a very scale-oriented business. And in our minds, as we've looked at the last couple of years growing at around 4% per year. What you find is there are 2 other components of our businesses that we've built and expanded over time. There's the middle office business, which is about 10% of our revenues on the fee side in the Investment Servicing segment. And then there's the front office, the Charles River, which is another 10% or so. And what we find is middle office has a faster growth rate because there's a more accelerated outsourcing process happening there. That tends to grow at about 6% per year based on the last 2 years of data. And then the front office is growing at 9%, 10%, why because that is really at the coal face of where clients are investing. They're replacing old fragmented systems and have a real opportunity to take Charles River and actually build something a lot more functional. And then what Ron described is how we knit that together with the Alpha Services, the Alpha Data platform, which starts to bring those pieces together. But part of the rationale in our disclosure is to describe to you all as investors what our market segments are, which ones are growing at a faster pace or a slower pace, how we're trying to accelerate and, I'll say, average up into the faster-growing markets. while continuing to drive down the scale curve in the more mature, slower growth areas.

I guess what I'd also add to that, Rob, is there strategic differences in those businesses. If you think about the true back office business, custody and fund accounting, that's pretty much 100% penetrated, right? Everybody's got a custodian. And so you think about the dynamics of that business, it lends itself to scale for sure, right? But it's a switching business to enable to grow that business. The middle office, which again is somebody else's back office, that's a little bit harder to estimate penetration, but we think less than -- at most 25% of back offices are outsourced at this point. If you think about the front office, there's 2 big players in it. There's -- well, 3, if -- I mean, Bloomberg has a much narrower part of the front office, but let's give them credit, call it 3. And then there's this kind of highly fragmented set of other providers, small order management systems, self-grown proprietary system. So lots of opportunity there, too. So part of what we wanted to do is make sure our disclosure reflected how we're thinking about the business strategically and the opportunities that we're seeing.

Yes. And Eric, you've talked about the growth algorithm here being sort of plus 2 percentage points from each of markets, new business and client activity with typically a 2 percentage point headwind from pricing. Is that still intact and how you're thinking about it? And you're confident and comfortable that this is still a low or mid-single-digit revenue growth business in the long term?

Rob, we are. And I'd say that, that is true on average across our client segment, right? So on average equity market tailwinds, equity market appreciate, some of that comes through the fee schedule that's a tailwind client have flows and activity and there's a metering. That's 2% of a tailwind. There's net new business and you want to sell more than you might lose each year. And there's always a little bit of turnover. But that comes from the outsourcing or the better product offering differentiation and offset with just a natural 2% headwind on fees. I think what we do find though is just like there's a front, middle, back dimension to that, where the back office grows more slowly than that 2 plus 2 plus 2 minus 2 construct, the middle office a little faster in the front office much more quickly, you also have a segmentation, right? If you think about the private, the alternatives, the hedge fund areas, for example, those are growing from a top line standpoint in the business we do for them at 5%, 7%, 8%, 10% a year, depending on what subsegment right, privates and infrastructure, in some cases are in the low double digits, occasionally, hedge funds a little lighter, right, at the lower end of that range that I gave. So there are different segments. And part of what we're doing is actively driving product feature functionality differentiation and customer accounting for our large asset managers, helping support them in some of these faster-growing segments and then actually supporting directly and offering directly to the -- to some of the faster growth areas, like the alt providers. And that to us is a way to balance the growth opportunities as well as the productivity opportunities for our business.

Yes. And the other growth area that I would add to Eric's list is ESG, whatever you believe about to what extent your firm is going to invest in an ESG informed way, the realities are the regulators are going to just make a lot of decisions for us here. You're already seeing what the SEC is requiring for issuers. Next in line is what they're going to require from fund managers. There'll be lots of reporting out of that. If you go back, and this was at a much smaller scale, but when the SEC implemented the liquidity rules on various fund offerings that drove a lot of activity to us, right? We came up with what we call an SEC modernization kind of offering for it to enable, in this case, fund managers to meet that. But around the world, you'll see ESG kind of reporting disclosure risk analytics requirements that we think will drive much more business going forward.

Yes, we're certainly seeing the same thing with our client base, their emphasis on ESG, too. But maybe use this opportunity to switch to the balance sheet and to net interest income, it start with deposits relative to history, deposit levels are up significantly. How are you thinking about the mix there between operational and excess deposits?

Yes. We think about deposits in a number of different vantage points. There's operational excess. There is -- those that we think that have been driven by quantitative easing versus the core, more core deposits, and there's a whole currency dimension to deposits. Then there are different clients, some of whom want us to manage a lot of their deposits on our balance sheet, others who prefer to use money market sweep and other functionality. And our view is we have to offer the full range of those services. I think what we've seen over the last 2 years, we've seen our deposits tick up $60 billion, $70 billion on an originally base of $165 billion or so. So a significant uptick. Now part of that was driven, and we estimate about half by the growth in AUC/A, the underlying custodial assets that we have on our -- as part of our servicing. And the other half, we would ascribe to quantitative easing. And so our perspective and it's a guesstimate because we're in a new era world, we've got to see how it plays out. We estimate that there's probably $35 billion that over time will flow out as the Fed balance sheet goes from $9 trillion to call it, $5 trillion or $6 trillion. But we'll see, right? We need to live through that. It could be a little more, it could be a little less, it depends on a number of different actions that the Fed takes then how the market reacts, right? What level of interest rates we're operating at. But we think we at least have a rough sizing. In our view is we can operate at different levels there. It -- as the balance sheet compresses, we need less preferred security. So there's some side benefits and our leverage ratio rises and that's got some positive benefits. But it's a natural course of -- we're here for our clients and to the extent that they want to bring deposits on, we've accommodated that. And as they adjust their behavior, we'll accommodate that as well.

And I think in the past, you had outlined anywhere from $6 billion to $10 billion in deposit outflow for every $1 trillion in Fed balance sheet reduction. Now that we have a sense for the pace of QT and we're actually underway now, aren't we?

Starting today.

Any change with respect to that outlook or that relationship?

No, that's our current guesstimate, and I'll phrase it that way purposely because we don't really know. And I think it was always based on this pace of about $100 billion, right, at a clip that we thought the Fed would move towards. I think what we need to see is how that plays out, how clients react, what prevailing interest rate levels we're at, I think it's clear now, but how many more rate rises do we get, especially next year. And then how some of the more technical parts of the Fed balance sheet play out, the reverse repo operations and so forth, may have some influence. Hard to calibrate all that just now. But that's our current estimate of $6 billion to $10 billion per $1 trillion of Fed balance sheet.

Will there be any change to that? Or what do you think the impact would be if the Fed started to actively sell some of its assets, maybe MBS?

I think what will happen in that case is the Fed balance sheet will come down more quickly. So instead of $1 trillion a year, which is a rough estimate today, $1.5 trillion, and then you just multiply through in the deposits, may drift down at a pace that's in line with that. So -- but we kind of have to see, right? We'd like to see what the first 3 months have. As I've said, the deposits were roughly stable, the last couple of quarters here in that zone, plus or minus a few billion dollars here or there. So we just kind of have to see how it plays out. I wish I had a crystal ball on this one.

Me, too. You also highlighted several changes to the balance sheet with first quarter earnings in an effort to offset the impact of rising rates on AOCI. Can you walk us through those changes, the rationale behind them? And then given the moves we've seen intra-quarter, how is this quarter shaking out on the AOCI front with respect to 1Q or versus 1Q?

Yes. Let me describe that, Rob, because just to rewind the tape back in the first quarter, we, like many banks, right, had an investment portfolio that was impacting by rising rates. In our case, it was $1.3 billion of AOCI, that affected our capital ratios. And every bank had some amount depending on how they ran their portfolio. Up through -- through the last couple of days of May, we still had a decent rate rise, and it's been up/down and floating around. We'll see where it comes out. This quarter is much more modest at just over $300 million. So well in a much more contained level, and what we've done is, as we said in April when we reported earnings, is we've taken quite a few actions to actually mitigate the impact of AOCI on -- or AOCI, the risk of AOCI impacting capital. And so for example, over the last -- towards the meeting in the quarter, we moved about the middle -- the first month of the quarter, we moved about $20 billion more securities from AFS into held to maturity, right now held to maturity securities are about 57% of our investment portfolio. So we've moved from something in the 38% range to 57%, quite purposely to protect AOCI. We've reduced our AOCI at risk to rising rates by about 2/3 since the end of the first quarter. And why have we done that? It's because we want to operate in a much more, I think, protected way when it comes to these interest rate swings. We don't know if there's going to be another run-up of another 50, 100 basis points or for that matter, a fall at some point. But we want to be in a place where it's much more constrained. And so we've taken those actions. And truth, the good part of moving bonds from AFS to HTM is you still have the earnings, you still have the NII, you still have the uptick that we're expecting. And as you recall, we forecasted NII up on a full year basis, up 18% to 20% for the year. And the move of the securities lets us continue to deliver on that forecast.

That was my next question. So it sounds like the NII outlook is still intact, while we're on the topic, any other updates on the quarter over the rest of the year now that we're 2 months through 2Q?

Well, I think you're 2 months through, I'm still closing the books. I got another 2 days to close May, but no updates right now. I mean, I think for the time being, we've read April, May will come through in the next couple of days, and we'll take it from there.

Got it. Okay. Now let's turn to expenses and maybe Ron, we'll start with you. What are areas are you most focused on investing right now?

Where we're investing really reflects some of the strategic priorities that I talked about earlier. So certainly, we continue to invest heavily in the Alpha platform. We continue to -- we're investing in the areas that Eric just talked about. If you think about private, there was just this massive growth in privates. A lot of those operations are actually not fully outsourced yet, both the actual administration and custody but also the LP servicing of that. So we're investing in that offering. We're investing in the technology in our just technology infrastructure, and that's -- some of that's around classic resilience and those kinds of things that we all have to do to keep ahead of where we need to be. But we're also -- I talked a lot about productivity earlier. And if you -- as we think about this next wave of productivity, a lot of it will come out of automation. And this automation isn't new to us. I mean there's areas now that we've fully automated what used to be a very manual process. If you go back 20, 30 years ago and you hired fund accountants, used to talk about so many fund accountants per fund. Now it's a way around how many funds per fund account and that number is just going up and up and up because in some cases, you don't have a fund account, right? If you think about an equity portfolio today and end of day what happens. So 100% U.S. equity portfolio, U.S. equity mutual fund that's being priced automatically. It's being priced for the day. So at 4:00, when the market closes, it's nearly fully priced, except for whatever the last tick was, and then you move on. So there's more investment we need to be able to do that elsewhere. So it's that kind of automation. And what you're trying to do there is, one, take the manual elements out of the business; and two, to take the reconciliations out of this business because, again, going back to the front to back, if you think about the life of a trade, right? There's a pre-trade analysis, am I or am I not actually going to make this trade. Then there's the actual trade and you end up with a trade book of record, you accumulated a lot of trades at the end of the day, and you end up with an investment book of record. And then you take the whatever reporting period you have that 30 days or a quarter, and you have the accounting book of record. There's just a massive amount of reconciliation that occurs through that. And so this kind of automation that we're investing in is to be able to improve the accuracy, improve cycle times and lower the cost of what we're doing around that. So it's a combination of investing in the innovative offerings and then investing in our business to continue to improve productivity.

Got it. And you've committed to positive fee operating leverage this year, which I think the market and investors were very appreciative of. If things would get a little bit worse, which areas could you curtail spending and offer the optimistic option there, too? If things were a little bit better, Would it just be accelerated investment in automation? Or are there other areas that you would want to invest into?

Yes, let me start. I mean, the easiest thing to do is to accelerate investments or slow down investments. Now there's -- it's a double-edged sword on the slowdown because then you regret it the year after. So we're trying to be careful about that lever on the downside. On the upside, it's there are -- there's a series of back theories that we'd like to accelerate, whether it's in private, whether parts of Alpha for different segments, whether it's some of the underlying feature functionality in core custody, which we think creates a differentiation some of the markets technology which creates algos and interfaces for clients. So there's always a series of those, and they're rank ordered and ready to go. In a -- what we try to do is we also -- as we look at different market environments, right now, we're a little more of a swoon, we need to see if that sticks or if it comes back. We don't want to be too optimistic, but we don't want to avoid it either. There is some belt tightening that we can do, right? And that's the usual work that you see most companies do, it will be fair and adjust incentive comp, right, as necessary because that's when we want to reward people when we hit the ball out of the park with a very strong 2021. But we've got to re-up every year. So there are some levers, but we run a relatively fixed cost business, and we got to be careful, right, of shaping, I'll call it shaping the expense base during the course of the year. But we're always keeping an eye on for is our revenue is going to come in a little faster or a little slower, and then how do we adapt.

Got it. We have a couple of audience questions that have come in. If anybody in the room wants to submit, you can do so through a pigeon hole, I'll get them up here. Maybe one for you, Ron, what kind of organic growth opportunities do you find most exciting in your asset management business?

Lots of growth opportunities, but probably first is just the continued growth in the ETF business and this remarkable growth in active ETFs. And for us, our growth in that business, a little bit of it is what we do ourselves, so our own fund managers. But a whole lot of it is with -- because if you remember, you think about our fund management capabilities, it's largely around quantitative and passive. But we've got some partnerships with some very good asset managers that are -- we're seeing lots of growth in those active ETFs. So for example, the fastest-growing active ETF last year was the bank loan ETF that we have that were Blackstone manages for us. So we see lots of opportunities in the ETF space. We also, as I mentioned in my prepared remarks, I mean, the ETF marketplace is still quite young and quite nascent in many parts of the world. And it might look a little bit differently as it gets established and implemented in different markets, but we see more and more of that because this trend of moving away from -- in the U.S., it was the wirehouses in most of the rest of the world. It's a universal banks towards some kind of independent adviser. The RIAs, here the IFAs in other parts of the world. And the ETF is just such a great product for them. So we see lots of growth there. Secondly, we've got extraordinary client relationships in that business, because if we're serving an institution, we tend to be either the largest or the second largest manager because of [indiscernible] fact that we've got the passive base that puts us at every asset allocation table that's going on within our client base. And so there's ancillary products that we can help our clients fill in, in those areas. And we're trying to use that. I mean, it's a treasury -- these are treasury relationships that we have, so we don't want to misuse them. We think we have ability to actually sell more services to those clients.

Got it. And then another one here. Talk about your efforts on the digital asset and the cryptocurrency side.

Yes. I mean we are big believers in digital assets and digitalization of our business. Now you noticed I didn't use the word crypto. I mean, crypto is an element and a subsegment of digital assets. But frankly, it's only a part of it. And certainly, we're seeing many of our clients moving into that. Again, our client base is institutional investors, so they want to have an allocation there. So we're working with them to be able to do that. We are not a digital custodian at this point, we work with other digital custodians, but for -- mostly for regulatory reasons right now, that's not enabled in the U.S. And frankly, we have to make sure that the accounting actually works out now because some of the SEC interpretations that are being proposed would cause all of those assets to basically show up on our balance sheet, and that's obviously not acceptable to us. But there's lots of other things that we're doing. We're recordkeeping those assets, accounting for those assets. So that's one whole piece of it. But the second maybe even more exciting element of it is the tokenization of assets, which we -- this is coming. It makes all the sense in the world. If you think about complicated assets with complicated associated structures, real estate is maybe the best one. But even privates, I mean if you think about privates today, how much of it is manual, just the whole LPs and any of you that have ever signed an LP agreement, how complicated it is. And heaven forbid that you actually want to sell that thing into a secondary market, good luck with that. You're going to take a deep discount to that. I mean that doesn't make sense, right? So if you think about the digitization and the tokenization of these assets, they'll become more tradable, more liquid market to it. And again, somebody's got to be able to custody and service that. And the custody of those kinds of things, it's as much about custodying the keys as it is about the assets. And then last but not least, it's the digitization of our own business. If you think about custody today, custody today, I mean, a lot of it is in an automated or digital form, but it's not a whole lot different than it was 100 years ago, right? It's a form of safekeeping and I'll hold this asset on your behalf. That's changing. And if you think about digital contracts and blockchain and what that means for the movement of securities, we're so in the early innings of this. All of the activity around crypto, around blockchain, around this kind of digitization has really been around payments, right? But the market that's at least as big of that as the movement of money is the movement of securities. And so we would expect to see our business 10 years from now, looking quite differently than what it is now, which is why we stood up the division that we did because we'd like to be out ahead of that and be a leader in that space.

Yes, that's great. We had another audience question touches on capital, which is certainly something I wanted to hit on in our last few minutes, but can you say more about your balance sheet and how buybacks may or may not fit into your strategy, bearing in mind the valuation of your equity?

Sure. I mean the -- we've got a intention to restart and reinitiate our buyback program in the fourth quarter. Right now, we're in the process of -- as of the end of the first quarter, we're just shy of 12% capital ratios. We're building into an ability to comfortably close the Brown Brothers deal in the third quarter, and that's relatively straightforward for us. We accrete capital about 40 basis points per quarter. So I think 2Q, 3Q, it's 40 basis points. We're doing some work to optimize the risk-weighted asset balance sheet that we have and we've got some opportunities there. And part of it is we had deployed a little more in the first quarter, so we're running that in while still finding opportunities to drive revenue and revenue growth. And that RWA management creates another 20, 30 basis points of capital. And so we're quite comfortable with -- even with volatility in interest rates, and I mentioned how we've actually now mitigated the impact of that kind of volatility to comfortably close the Brown Brothers deal. We've got to get through all the regulatory process and it's now targeted for the third quarter. And then we'd like to restart our buybacks in the fourth quarter, because we think that's part of what we should be doing every quarter and take it from there.

Makes sense. And just about a minute left. So Ron, I'll close with a big picture question for you. And considering everything that we've discussed today, how do you and how should investors gauge your progress and your success on those strategic priorities you outlined for us at the top?

Yes, that's a good question because -- I mean, what you're first going to look at is, obviously, what are our financial results because none of this makes any sense if we're actually not creating returns for our shareholders. So we stand by our medium-term targets around revenue growth, around margin expansion, EPS growth and our capital targets. But in terms of what's the evidence that the strategy is actually working, I think that what you should be looking at is are we continuing to grow the Alpha front-to-back proposition, you're continuing to see our clients grow there. Are you actually seeing a movement of clients in the direction that 5 years ago, we said they were going to go, right, which is they're actually going to do more outsourcing. They're actually going to see a lot of activities that they used to do internally, externally. If you're seeing more and more evidence of that, I think that would be a second marker in all this. And then third, you should be looking at how are we doing in terms of retaining our clients and growing our client base. I said earlier that a part of this business is about share shift and a part of this is about capturing new market opportunities. And we believe that we can do both here in terms of -- and in fact, the latter will lead the former because as we have this proposition that we think is actually more attractive than everybody else that should result in share shift coming from other providers that come to us.

That's great. We're at the end of our time. So thank you, Ron. Thank you, Eric. Thank you, Ilene, and the rest of the State Street team. Thank you, everyone, for being here.

Yes, Rob, thank you and thank you all.

Thank you.

Thanks.