State Street Corporation (STT) Earnings Call Transcript & Summary

Moving right along. Very pleased to have State Street up next. From the company of luminary, President and Head of Investment Services; Eric Aboaf, Chairman -- Vice Chairman and Chief Financial Officer. So gentlemen, welcome. Before I have my first question, I'll let Eric do his disclaimer.

All right. Thanks, Jason. Good morning. Welcome, everyone. And just to remind everyone, as I get started, today's discussion may contain some forward-looking statements. And as you know, actual results may differ materially from those statements due to any number of important factors, including the risk factors in our 10-K and SEC filings. Our forward-looking statements speak only as of today, we may not update them even referred views change. And with that, we can begin.

Maybe the best place to start, Lou, you were appointed to President and Head of Investment Services, expanding some of your responsibilities back in May. Eric, at the same time, you got promoted to Vice Chairman, taking on Global Markets in addition to obviously being CFO. As you both kind of expanded your remits, any kind of observations, changes, just maybe big picture, what you think seeing, thinking.

Yes, let me start. So first of all, good morning, everybody, and thank you for having us, Jason. I think that it's a privilege and honor to be in these positions. I'm sure I'm speaking for Eric when I say that. I spent the last several months, some are really meeting with executives around the banks. And really, the focus has been, I go into these asking 3 questions, what's working, what is in and what should we stop doing? And what I would tell you, quick observations is that there is a lot that is working -- when I look at the sales momentum we had last year, when I look at the coverage organization, segment orientation that we've had, that is driven excellent revenue growth last year in 2021. Our Alpha strategy is clearly making an impact in working, so that's excellent. And then our focus on productivity around ops and IT has also been generating some really good results. So that's so good, what's the working part? I'd say the overarching theme from the teams where we can go faster. We can accelerate decision-making. We can accelerate the impact of the P&L by making decisions quicker, accelerating sales, accelerating onboarding. So a lot of the focus has been around that and how the organizational structure can enhance that. So that's what that result looks like. I'd tell you that it's not a -- we're not reinventing the wheel. This is not a major restructuring, where we're going to take a step back and reset nothing like that's happening. It's really about accelerating and decision-making in ways like that. Innovation is a big part of that. If we can accelerate the impact of the business statement and the P&L, I should say, then that would help us with innovating new products in digital and ESG and things like that. And I would say that I'm really excited about the growth opportunities around Alpha space of private markets, which we can unpack a little later. And I think if we can get that right, coupled with our productivity initiatives that will really help us to achieve our medium-term targets.

And then I think from my end, Jason, Global Markets is a special business for us. It's got real strong growth dynamics. It's continuing to expand geographically around the world. It's got a world-class research capability that drives in our clients and helps us deepen penetration. We've got product innovation happening in a number of different areas. So to me, it's about spending time with that team and actually just driving the next round of growth, next iteration of growth. I think from an institutional standpoint, our belief was if we could put our balance sheet businesses together and remember, I've had the treasury investment portfolio, I've run the lending business for the last 2 years. And now with Global Markets, we can actually drive both growth and returns at the same time. And just as an example, you've seen us continue to expand our lending business. It's been growing in the balances, low double-digit rates. And we've done that while we've taken returns from 7% to over 10%. And that's the kind of dynamic we want to see how do we drive more growth and more returns than that ends up being accretive to shareholders? I think though, to really summarize, this is our way with Ron to actually help drive real accountability and purpose in each of our businesses and our activities and drive the kind of results that we'd like to see.

Got it. Now maybe we could put up the first ARS question. I meant to ask us in the beginning. [Audio Gap] this current position in State Street. All right. And then we go to the next question. We're going to rank these at the end of the day. What's the most important driver of the investment thesis for State Street? I'm looking forward to this one. Scale number one, which that's going to help drive where we go next. Actually, on that vein, let's go to the next question, just because it ties in. Just what's your overall view of the Brown Brothers Harriman Investor Services transaction? So 42% enhances -- increase the scale. So that kind of ties together. But can't get this transaction closed. So last year, we had this conference, the deal was very recently announced. We talked about the benefits, talked about the compelling rationale. And now a year later, still hasn't closed. I guess last week, we extended the merger agreement, I'm not sure how long. Maybe just, I guess, first and foremost, maybe just talk to what's the holdup?

The core of the issue is that for large banks to do deals, and we're among others, in the large bank area, deals have to go through a regulatory process, and that's not a way straightforward and has evolved actually since the deal was announced, whether it's the head of the various agencies, whether it's the residential order and so forth. And so the core of this is, as we've engaged with our regulators, we've done some important listing and trying to better understand what kind of refinements on the legal entity structure of the operating model and so forth would be constructive from their standpoint. And as we described last week, we continue to work with Brown Brothers on those kinds of adjustments. Some legal entity adjustments have operating model adjustments, which then impact synergies and the pace by which synergies are realized. And as a result, we've also been clear with our investors that for us to proceed, will need some adjustment to the terms, the price to make this deployment of capital attractive.

Okay. I guess when would you kind of expect a resolution? Maybe how long was the agreement extended for?

The structure of the agreement is that either party can terminate the agreement, neither party has chosen to do that. And so I think that's a sign that the discussions are constructive. I think we'd like to find a way to get this, I'll say, get it done or get it sorted out, right, one way or the other in the near future. We originally said in the third quarter that kind of takes us up through earnings. But we'll see. It's got to be done sometime this fall. I think, is the core because there's a franchise there. It's an attractive franchise, got some strategic benefits, but franchises don't just season on their own, right? They need to be managed. And while it's been managed well, I think it's in our interest and theirs to be honest either to find a good way to proceed or to pause. So more to come.

And I guess, you previously talked about restarting share repurchase in the fourth quarter. If we don't have a resolution, would you expect the resolution by them. And even if we don't have a resolution by them, could you be back in the market ahead of figuring this out.

We're committed. I think we've been, I'll say, deeply committed to restarting our share repurchase in the fourth quarter. Capital ratios in the second quarter were quite strong. We found ways to carefully manage our balance sheet. So we expect them to continue to do so. So we're fully committed as an institution to restart capital return with or without deal announcement. And to be honest, to the extent that prices adjusted downwards, which is what we've communicated, that should suggest even more of a buyback than one would have expected.

I guess on the hypothetical situation, if the deal doesn't happen, you've already went out and raised the equity about a year ago at higher prices. Do you just turn around in buy back all the stock you issued? Or how do you kind of -- an interesting problem to have, but how do you go about that?

I don't think it's an interesting problem. I think we do what investors expect. We issued capital. We also built up capital. We have surplus capital and it doesn't do a lot of good for it to sit on our balance sheet. And so like as usual, we'd like to return capital to shareholders at an expeditious pace either with or without a deal because that's the kind of thing we should be doing.

Got it. Now I really want to get into the businesses, but we got to talk about guidance. You obviously gave some guidance on the second quarter earnings call. I called this your back-to-school conference. And now I feel like what my son must have felt like when he was in high school, and I was asking him about how he was doing in school. In school, like the first week is usually easy. And here, we're not going to make it that easy on you. We probably got 2 weeks to go in the quarter, help us out here.

Where do you want to start?

We could do net interest income, you talked, I think, up 5% to 9% sequentially, given what's going on the rates, rate pictures, some countries or some regions of the world have been different than others. Can we talk about what you're seeing on that front?

Yes. Maybe we'll start with rates, NII deposits, it sort of all related and then we can go to the rest of the P&L. The context is positive generally, right? Prevailing rates are 2.5% in the U.S. and likely to fill it up to 3.5% to 4%. We've seen some rapid movements around the world, including euros, which we're quite pleased with. And then the Fed's quantitative tightening has started to have an effect as it should. So we have tightening monetary conditions. As a result, our NII outlook is positive. If you remember, we had guided to up 5% to 9% quarter-on-quarter, but we'll likely come in at the upper end of that range, given higher rates, offset by some amount of slowdown in deposits. So one of the things we have seen is some deposit flows and rotation coming through. Deposits will probably be off about 5% adjusted for currency translation. Part of that is environmental and then part of it seems to be some factors that may or may not recur. So the environmental ones are easy. Quantitative tightening has started to come through. Rates are higher than we would have expected at this point in the cycle. And so those tend to draw deposits away. And then there are 2 other factors that are probably or potentially more transient. One is you have some summertime seasonality in deposits. And the other is we've had lower equity markets, right, with lower equity markets, funds, mutual funds, ETFs, warehouse less -- associated less cash as equity markets move. So we'll see. Those latter 2 factors are likely to bounce around or rebound but there's some amount of deposit rotations. I think the net of it though is that the NII is continuing to come in more positive than expected. Part of that is that we've, I think, shaped the balance sheet to monetize higher rates, whether that's at the front end or in the belly of the curve. And we see continued, strong NII performance. So I think on a full year basis, we had guided to full year NII, it was going to be up 24% to 27%. And we're likely to be at the upper end of that range as well.

And I guess, just because deposits is such a topic. You gave a good overview. Just maybe talk about in terms of what you're seeing with respect to both mix, noninterest-bearing versus interest-bearing and then kind of betas as the quarters progressed? And kind of have your expectations changed looking out just given kind of what you're seeing?

The mix is, as you'd expect, you see somewhat lower noninterest-bearing deposit balances. We think more of that is actually driven by equity market levels. Some of the interest-bearing deposit balances have been -- you've seen some of that price shopping come through, but all within the bounds of what we would expect. And obviously, the higher the rate levels, you'll see a little more of that deposit sensitivity. In terms of betas, they've stayed in line with expectations. Up until now, we've seen betas of about 35%. We'll likely hit about 50% betas in the next quarter and then by year-end, either fourth quarter, first quarter will be in the -- my guess, is 60%, 65% range. And they'll continue to float up until you get to terminal rates. But not higher than 75%. So it's a -- I think it's actually within the bounds of what we'd expect, just it's moved a little more quickly because rates move more quickly.

Got it. And then maybe turning to the fee side. I know you talked to fees down about 2% sequentially. Has that track of your expectations and maybe talk about asset servicing and asset management within that?

Sure, sure. So macroeconomic environment is a bit mixed. Average equity markets continue to trend lower. I think we see global equity markets down on average, right, because the average is better about 4%, which is a little down, a little less than we would have expected by a couple of points. And so fees which we had expected to be down 2% quarter-on-quarter, likely to be down about 1.5 points. And we still have the rest of September to book, but a little bit better than expected. And then within that, we had guided to down 4% sequentially, both for management fees and servicing fees. We're now seeing management fees to be a little bit better than down 4%, driven by lower -- less of a decline there in equity markets. And servicing fees actually a little worse than down 4% sequentially because we've seen more outflows in some of the packaged products, especially in Europe, which you would have seen from some of the industry data.

Makes sense. And then we've got to come back to expenses. So net of all this revenue is better than expected for the quarter. You talked to expenses, I think, up less than 1%. Despite some of these inflationary pressures that I think everyone is seeing, you mentioned productivity initiatives, so I guess, that helps offset. So maybe talk to kind of what your expectations are there.

Expenses, and we've been extremely focused on the expense line are in line with expectations. So down just -- I'm sorry, up just under 1%. We've seen -- we've continued to see wage headwinds in some select areas, merit increases, bid back, that kind of thing. I think you've seen. But we've also continued to drive forward on our productivity initiatives and just a discipline around both -- anything we can do on the broadly around taking advantage of noncomp spend and trying to do our best to manage. So, so far, so good on expenses.

Got it. And just lastly, I have to ask, and I hate to ask about this, but actually last quarter came in a lot lower than people expected. Any commentary you care to make there?

I think we guided to just under -- just around 20%, and I think we're going to come in, in that area. There's -- we always have tax planning strategies that we're working on, but there's nothing exceptional coming through this quarter.

Got it. All right. We'll come back to guidance we have more time at the end. But I think we're good for now. Maybe just put up the last ARS question as we kind of transition to kind of -- maybe talk more about the businesses. What do you think is the biggest headwind risk for State Street? So pricing pressure is number one. So we're going to start there and merger risk is number two. But I guess on the second quarter earnings call, State Street revealed kind of this comprehensive pricing, I guess, analysis across products. And I think with the hope and the ability to kind of increase pricing in the asset servicing space, something I've been doing this 20 years I've never seen before. Just maybe talk to, maybe just more context around kind of what you're doing, what areas you're focused on, what the client response has been to this? Is it possible to do in a competitive landscape that's being matched with a challenging kind of big-picture environment?

Yes, let me frame this for you a bit, and we have been going through a comprehensive analysis on the products across regions and segments, looking at the cost to serve. And I put it into 4 buckets, I think, is what I have here. So there are definitely some products and services that are labor-intensive. And you say, well, yes, that's been the industry. But there's some that are more acute. When you look at areas of private markets and bank loan processing, the industry is trafficking and a lot more complexity. And I can go into a bit why it's more complex versus traditional core servicing. So that's one lens to look through. And so when I think about private equity, private credit, real estate and infrastructure, tremendous growth there. But it's very much a knowledge-based business. And we all know that there's a war for talent and a war on talent going on around the world, we're all fighting to keep our knowledge workers. And so there's that dynamic there. The other dynamic that couples with that is that in some of these products for the very first time, I've been in this industry for a long time with different banks. The demand for the services are outpacing the capacity in the industry. So as an example, in private markets is a great example. And it's just there isn't enough demand to take on the growth there. And I could talk a little later why what is driving that growth. So that's an interesting characteristic. We have customers who have bespoke models with us that as we drive productivity and efficiency, if they can't get into our traditional scale version, then we need to charge them more. It's just is taking too much capacity, the ROI isn't there. And so that's one part of the conversation that we're having. Market Data is another one. And the market data charges, we've been largely absorbing this over the years as market data providers increase their charges almost every year. But it's just gotten to the point when you add that into the mix, it is definitely a headwind for us. So the way the conversations have been going, to date, we've had about 3 dozen-ish conversations. There are conversations every week. And as we look into this frame -- by the way, we're not repricing every product. There were straightened products that are mature and have scale. And if we went after that, the business would just move. And we're not in the interest -- we're not in the business of moving business away from ourselves. So we've been very thoughtful. The other thing I would tell you, Jason, is that these conversations are being held with very senior people. Executive Vice Presidents are having these conversations with clients because you just mentioned 20 years. You think about people in our industry -- in my organization that have been here 20, 25 years, they've never seen a climate like this where you have an inflationary environment like this, the opportunity to charge more for your services, sell value. And it's a very difficult conversation. So we've kept it at the top of the house right now, and we're going to be scaling that down a little bit later. So the conversations have been better than I thought. And so 3 dozen conversations, clients have signed up to it. There's a lot more to do. We have thousands of clients, and so how do you scale this and partition it out? They get it. They want great service and where they are these growth products that I just talked about, where there's limited capacity. They understand it takes skilled workers. They want us to invest. It's coupled with I'm just not charging anymore. I'm actually investing in the business. I'm using technology to be a tech-led operating model, not a people-in. So I want to build scale. I want to give you excellent service. I want to allow you to scale your business, but we have to make these adjustments in the business model. So -- it's got better than I thought. We continue to do it. It's early days, but it's for the very first time, like you said, and I've been in the industry for a while, not every product like this, the software side or the fintech side has always been able to -- like CRD has inflationary escalators built into their contracts. So that's sort of a normal escalator. But in these core servicing businesses, they just haven't been there. By the way, all of our new contracts going forward will have inflationary escalators built into the core services because we're now living through very different times. So, yes. So overall, good start and better than I thought.

So I mean we try to model everything. And I'm not sure, at early stages, I'm not sure how -- if you kind of try to quantify the benefit of it. I mean, maybe one way to ask is State Street used to talk about a 30% pretax margin. You bumped it up to 31 with the announcement of Brown Brothers. Does this initiative -- is it required to get to 30 -- to help you get to 31? Or is it -- could that number go higher with the benefits of this new program?

Let me take that, Jason. There are a number of factors, as you know, that go into our margin targets and a number of them are moving as headwinds, tailwinds, temporal, long-lasting. I'd say that what we're seeing here is a set of topics that we need to find ways to navigate through as part of delivering on our 30%, 31% margin targets with or without the acquisition of Brown Brothers. We've seen higher wage inflation this year. We've seen more turnover, which we need to replace. We've seen demand for services drive up. And so those are inflationary nature. And I think we think like many other companies outside of financial services and now in financial services, they came about how do you offset some of those with targeted and I think I'd emphasize targeted pricing. And so I think it will be part of the cocktail, the mix, right, of actions that we take, but it's one of, I think, a long list that started with top line growth, initiating and reinvigorating sales on one hand, retention, productivity, wage increases, pricing on every one of those accounts together.

So you're taking this initiative. You obviously have some competitors, 2 or 3 really big U.S-based ones at least. Are they, you think, undertaking something similar? Are they not going to do it and try and take share or State Street product so differentiated that you maybe now have some pricing power that didn't exist. And I'm thinking you have the CRD acquisition, the Alpha strategy, maybe if you can kind of help us flesh that out.

Yes. I can't speak to what our competitors are doing. But as I talked about earlier, that there are definitely some products and services where their capacity isn't in the marketplace. And some of the competitors aren't the traditional banks. They're smaller boutique administrators, that are out there around the world. And so -- and I could just tell you that as we look at trying to support the demand of our clients' growth and I could talk about that in a bit, we sometimes have to sequence when we can deal with that. And as clients come out -- go out to the market to look for capacity, they come back and say, nobody can take on my demand. So I could tell you that there's definitely an industry-wide shortage here. Now listen, the way out of this is going to be through a tech-led operating model, and I'm sure everyone's beavering away at trying to build a scale model. And then I think where we have very large complex relationships were very integral to those relationships, and we help power them up as it is just pure custody if you think about large middle office mandates where we're helping them drive their growth. We're very much an extension of your team. As our customers look to their left and their right, they look at their own operating model, they realize that the inflationary pressures are there, the turnover there in the industry, and they need to -- we need to protect the service model and serve them excellently. So as Eric said, it's very thoughtful. This is -- it will be meaningful enough that it's just not an interesting research science project here. It will have some impact to offset things. Market data is a huge one. We all have been feeling that, and we're now sort of passing back some of that, and we feel our customers need to absorb some of that market data increases. And we're giving them alternatives. So if they don't want to use alternative one that's very expensive, we can give them other alternatives, but we need to recoup some of that cost also. So it's a multipronged effort. And then the last thing I'd say, again Jason, where there is a bespoke model, clients actually don't want to be on those bespoke models. They may have been 10 years ago because it made sense for them, but now they want that scale. And so we're encouraging to get on to our more scale platform. And if they can't or for whatever reason or it's delayed, then we just need to cover the cost of supporting them well.

And just maybe delve deeper into kind of the Alpha strategy. It's been successful. Kind of how is that differentiated? And are you continuing to pick up share using that?

Yes. So I -- we're very excited about the strategy and how it's playing out. And when I reflect upon 2018, when Eric and I had to announce the acquisition of Charles River, I don't think anyone ever thought about this front, middle, back. What is this? What are you doing? The language wasn't used. The terminology wasn't used. So I think that today, we sit here and everyone is thinking front to back, and it really drives a few things for our customers. It certainly helps them be more efficient. They get to rent our scale, rent our resiliency, rent our expertise. And I'd say in this market where there's growth, there's labor shortage, there's demand capacity demand, as I said, they're looking to get more of that from us. And -- and then I think for ourselves, we're in a very unique position. We're -- as far as I can tell, the only firm in the world that has the technology components and transaction processing when I think about Charles River, the middle office, the back office settlement and clearing, we own all those tech assets. And so we're in a very unique position to actually help engineer efficiency for ourselves and for our clients. And in this world, building a good employee experience is also part of the mix. So we actually can give our customers as our employees a better value proposition and working at State Street by using technology. So that's going really well. We've announced 20 transactions. The pipeline is robust. The market is there because customers -- our customers are still under a lot of pressure to lower cost. Many CEOs are really examining what is really our core values and our core purpose here, and that's generating returns, distribution, managing risk. And so where can I rent as much scale and resiliency? So that's going well. The other areas of growth, I would say, is we've been innovating new products. So what's clear to us and was clear to us in the early stages and we started this in 2018 is that data is actually at the center of this problem that our clients are having. So we built something in 2018 is part of Alpha called Alpha Data Platform. But what it is, is a cloud-based solution where we're actually helping to co-source the word I use with our customers, we'll curate their data, we'll bring all their information together. It's their instance on the cloud, and then we can actually integrate other custodial data of the third-party data, actually, have over 100 different partners on the platform today, whether they're tech partners, liquidity partners. So we bring it all together for them in a homogeneous environment on the cloud where they can actually ingest it for client reporting or internal reporting. And so it's another component that we built that we're now cross-selling into the Alpha clients. I'd say that roughly out of the 20 clients, 14 of them subsequent to the transaction has subscribed to new business, new global markets business, they bought back office services or front office services. So that flywheel continue to spend where we can add more value around the platform. And then the other area of growth that's emerging is I talked about private markets. And last year, we purchased another small fintech called Mercatus. And again, we have seen the trend in private markets, probably for the last 4 years, and we recognize that not only their growth here, there will be a need to bring together the private and public market information set for asset owners and asset managers. So we've purchased a company called Mercatus. It lives under Charles River. It's part of Alpha now and the vision there is to build a front-to-back solution for the private markets business. It will capture deal flow, it will manage the deal flow and then through Alpha datas where we'll co-mingle the back office, I'm sorry, the private markets and the public data. So it's been -- the strategy is working great. I think we're getting more mature at it. We're getting -- we're speeding up our implementations. We're getting more standardized with that, but we're also adding new capabilities. And lastly, as you all know, these are very sticky relationships. Once customers are on the platform, these are long-term relationships, long-term contracts where we are just an extension of their business operating model. So we're really excited about it. It just continues to propel our growth.

So I guess we add all this up and we see $3.6 trillion in assets remaining to be installed in future periods at the end of the second quarter, at least.

Big number. Eric, how do we think about that translating into revenues? How long does it take? What's the correlation? How do we think about that?

Yes. The -- and we tried to give a little bit of texture during earnings because we've had a couple of these, I'll call them, blockbuster deals, right? We had a couple in the middle last year. We just had one in the first half of this year. If you think about the $3.6 trillion, we expect about 1/3 of that on an AUC/A basis to be implemented by the end of next year. So that kind of gives you a sense of the larger the deal. It takes time to embed because remember, clients actually have to adapt their operating model to something that's more standardized and robust for them. And so that takes time to play through. And then of that, at the same time, about half of the revenue is attributed with those deals should come through by the end of next year. We have said in the past, Jason, that as we think about our wins in asset servicing, we run asset servicing fee rate in the 1.3 basis point range, fee revenues in proportion to AUC/A, the larger deals tend to be priced with a little more scale, right? So a little bit lighter than that. But these are all in the zone of what we would have expected in terms of revenue and price and the kind of accretion that they can bring to the company from a margin standpoint. And so we're looking forward as we kind of pull through implementation and it's kind of one by one where you'll see that.

Let me make 2 points, Jason, if I could. So any back office backlog revenue is moving along at its regular pace. So there's no blockage there. And with respect to Alpha, I just said this earlier. For the first 3 transactions where we announced the acquisition in 2018. We had new clients in 2019. We were building and configuring platform. At the same time, we're dealing with some very large complicated mandates. So the first 3, we took a little bit of time to digest. But what we're seeing now is, as we move through it, there's a version of the platform and the newer clients are going on that version, subscribing to the standard inputs and outputs and configuration that we have. So that actually should -- you should start to see the newer clients move through the pipeline faster as we build out those capabilities. And I should say the first 3 clients have brought tremendous capabilities is a very -- some of them are public, very prominent in certain asset classes that will make us very credible as we compete in the marketplace with other providers. So maturity is coming through. We have more people. We have partners that understand how to onboard Alpha. And so my expectation is, like I said, the new deals will go through faster.

Great. Maybe shift over to the asset management business. Eric, every time I hang up the phone with you, there's another headline merger, sale, JV, I don't even whatever you could think of. Can you maybe just talk to kind of where you are with that business. Strategically, obviously, the market environment's a bit challenging. But just talk to kind of what you think of scale in that business, the right product set and just what you're doing on that front?

Jason, we're -- the core of our strategy in asset management is organic growth and I think we've been delivering on that nicely. You've seen revenues trend up, obviously, with the ebbs and flows in equity markets. You've seen that $4 trillion asset manager. You've seen us monetize the growth that we've had and expand margin. Margins are in the low 30% range, so right in line with what you'd expect, and that's up 7, 8, 9 points depending on how you look at different points history. I think what's really made the difference there is probably 3 areas. We've continued to deepen and expand the ETF franchise. [Audio Gap] We have sector funds, but we've broadened that offering. Active fixed income ETFs are the latest offering. Europe continues to be an area of growth for us and some of our low-cost funds. So ETFs have been strong. Cash has actually been quite a strong performer. You've seen us gain a notch in the rankings of the money market funds. That's kind of a good way to track performance there. And that's highly tied to what we're doing. It's tied to what we're doing in global markets, right, for -- because you have tech lending collateral pools. You've got the broader franchise that State Street has. And so we go to market together with the investment services business. That's been accretive. And then I think the core institutional franchise that we have historically has been an equity in fixed income index franchise. We've continued to refine that. In the U.S., it's around target date funds and solutions. Internationally, especially in Europe, it's around ESG. Our ESG assets in our asset management complex is north of $500 billion and that's all sorts of different kind of forms and types of ESG, and that's been particularly strong in Europe and in Asia. So I think there are 3 strong verticals there. The core of what we do is organic growth. We'll obviously look at a bolt-on here a bolt-on there, but it's not our priority. And as we talked about earlier in the session, we're busy in other areas. But we'd like to continue to reinvest in the franchise, drive growth. And at the same time, as I said before, return capital to our shareholders, it's an asset-light business.

Helpful. I'll pull up here. We have about 2 minutes left here or any questions from the audience. I see one in the stage left second row.

Eric, just a simple question for you. Just with the rate environment improving so much and you alluded to it in your earlier comments, why is your target for BBH only to have the same level of accretion as you initially did considering the tailwind of rates even if you do restructure the deal and maybe relatedly, should the bar be higher, right? If fed fund is 4%, should shareholders kind of expect a better accretion number because there's perhaps a risk that we go back to zero interest rate policy in the future?

Yes. I think there are a couple of moving parts with -- as we look at the economics of the Brown Brothers franchise. One is interest rate environment is higher. Equity markets are lower, right? So there's a partial offset there. And the NII, to be honest, is to some extent transient, right? It's going to peak and then lighten as you get some of the impact of quantitative tightening and then stabilize. And so I think that's -- if we can get to a structure that work if we can design in a responsive way, the regulators then get to a price that's appropriate here, there's a scenario where you get actually a little more of an upfront accretion, but it's about what is years 2, 3, 4 and so forth look like that we really want to work through. And I think we're as focused on the medium-term accretion as any short-term level. And so there's a lot coming together and there's a lot of timing involved there, but we're certainly going to try to do what we think is appropriate for shareholders in this regard.

And I know there's other question, but we are out of time. So please join me in thanking Lou and Eric for their time today. Next up in this room is Citizen's Financial.