State Street Corporation (STT) Earnings Call Transcript & Summary

I'm showing 9:00, so we'll get the party started. For those that weren't at breakfast, I'm Jason Goldberg. I cover the U.S. large-cap bank stocks here at Barclays. And thank you for coming to our 21st Annual Global Financial Services Conference. Kind of kicking off the company presentations, very pleased at State Street, a company that you all know that kind of plays globally throughout the financial services industry. So I'm very pleased to have them kick off the agenda this morning. Louis Maiuri, President and Chief Financial Officer; and Eric Aboaf, Vice Chairman and Chief Financial Officer, who is going to start us off with a presentation, and then we'll open it up to questions. So thank you.

Great. Good morning, everyone, and thank you, Jason, for having us here today. As President and Chief Operating Officer and Head of Investment Services for State Street, I'm responsible for our products, sales and client management, State Street Alpha, Charles River Development, operations and technology, all of which form our Investment Services business. So in today's presentation, I'll basically talk about 5 areas of which our strategy that will enhance or drive our revenue growth for shareholders. Before I get started, today's discussion will contain some forward-looking statements. Actual results may differ materially from those statements due to any number of important factors, including the risk factors in our Form 10-K and other SEC filings. Our forward-looking statements speak only as of today, and we may not update them even if our views change. Let me turn to Slide 3. So I'm not going to spend much time on this first slide, but to set the stage for what I'm going to cover today, as many of you are aware, Investment Services is State Street's largest business. Alongside our Asset Management and Global Markets business, we aim to help provide better outcomes to the world investors and the people they serve. Now in 2022, Investment Services, including its associated net interest income represented 65% of State Street's total revenue, servicing $37 trillion of AUC/A or 10% of the world's assets at year-end. Its revenues are composed of offerings that span across the investment servicing value chain, and these include back and middle office servicing fees, front office, commercial, software and data servicing fees as well as net interest income from investing clients' deposits. Now moving to Slide 4, I'll briefly speak to some of the key trends and opportunities in our industry to share where we see growth potential. Now as one of the world's largest asset services, we are witnessed to a number of global trends, including the continual growth of private markets, driven by the need for higher investment returns, a shift towards lower-cost investment vehicles, an increase in the volume and complexity of investment data and our clients' need for greater outsourcing solutions to drive improved efficiency for their own growth. We believe we are well positioned to capitalize on private markets growth given our capabilities in this area and the extension of our Alpha front-to-back offering for the segment, the first in the industry. We have been market leaders in the ETF domain for years due to our expertise, global technology platform and interoperability with market participants and are now leveraging our experience through the same in collective investment trust and separately managed accounts. In addition, we believe that the data layer underlaying our Alpha platform is the best solution for our clients to connect their front, middle and back-office operations, reducing friction, connected fragmented systems and interact with third-party providers. And finally, our positioning as an enterprise outsourcer with the scale and level of efficiencies we create allows us to be the preferred partner for our clients. Now many of these industry trends here on Slide 5. We're focusing to enhance our strategy, which we expect will allow us to capitalize on the opportunities and further grow the company. So let me just cover these quickly. First, driving revenue growth in our Core Investment Services; two, capturing the private markets growth in the industry; number three, continual growth in value driven by our Alpha offering. Number four, continued focus on strategic shifts for deposit pricing and volume management; and lastly, our continued commitment to improve productivity and create efficiencies. Now on Slide 6 here, you can see Investment Services recent performance and opportunities both from a product and regional industry growth lens. There are a number of areas where we delivered above-market growth but also areas where we need to better to drive to grow where we strive for and we've underperformed. Back office is our most mature market, representing our largest revenue pool and growing at low single digits. While we underperformed over the past 2 years as onboarding took longer than expected for some of our alpha implementations as well as weaker sales in North America, you will hear as I move on in this discussion, plans we believe will increase North American market share and a slight pivot in our Alpha commercial strategy. Now turning to private markets, which has experienced the highest growth. We outperformed given our leading capabilities in this market, it's our expectation that we will continue to outpace industry growth projections as a result. Middle office, we underperformed the market primarily due to impact of weaker fixed income markets on asset values and subdued client activity. Given projected stabilization in market levels, coupled with already contracted business, we are expecting to see revenue growth in this area. And similar to private markets, Front Office continues to be a bright spot for us as its strong growth in revenues is expected to continue over the next few years. And lastly, from a regional perspective, while we grew in North America, which is our largest revenue pool by region, we did not grow as fast as the market. And as such, we are intervening and intend to replicate the success we've achieved in international regions in North America. And our expectation is the rate of growth in the industry will increase in the next 3 years, driven by higher levels of outsourcing. And I'd like next to focus on what we're going to do to further grow our Core Investment Services at a faster pace. Spent a little time on this slide. Slide 7 outlines how we plan to reinvigorate our growth. Now following the impact of COVID-19 pandemic in 2020, servicing fee sales increased notably averaging $250 million annually over the subsequent 2 years. And during this period, the composition of our sales shifted driven by the evolving demands of our clients towards alternatives and middle office solutions. And while both the relevant growth areas for our Servicing business, we need to improve Back Office custody sales as it is our largest revenue pool, installs more quickly, has significant scale and drives high-margin ancillary revenues. Our first focus area consists of improving sales capacity, we are targeting an increase in our servicing fee sales to $300 million this year and are aiming to reach $350 million to $400 million in 2024. The level we estimate would allow us to achieve a 2% to 3% organic servicing fee rate upon installation. To support this growth, we are focusing on the size and the effectiveness of the sales team. We've started to hire high-quality and experienced salespeople in targeted regions and products where we see the biggest opportunities. And to improve team effectiveness, we're taking a few actions. We've restructured our sales and relationship management teams, appointed new management to our Global Clients division and our primary client segments. We created a team dedicated to just identifying and prospecting new clients to increase our client base and grow additional market share and segmenting this from our traditional commercial activities to better focus our teams on expected outcomes. We strengthened the sales support function, implemented new workflow tools, centralized administration of an analytics task. This is all in service to freeing up salespeople so they can really focus on the capacity and the commercial activity. Another key focus area is the realignment of incentives and accountability. We have adopted best practices from international regions installing a new Head of Global and North America sales and client management. Importantly, we are changing the compensation structure for relationship managers to reward net servicing fee sales to better promote behaviors aimed at incremental revenue growth. We expect that this combination of the new incentives and the new regional accountability will ultimately deliver a 20-plus percent year-over-year sales growth in North America for 2024. The third area of focus is to accelerate revenue installation. We are focused on prioritizing and standardizing offering construct to achieve faster onboarding. We're also changing the way our sales teams operate to accelerate faster time to market with revenue products like Back Office when negotiating a deal. And finally, it's imperative to manage revenue retention. Client losses must be kept to a minimum. In the last year, we've improved our service levels and continued deepening our client relationships. We saw this reflected in the metrics that we used to track client satisfaction and expect an improved revenue retention rate, excluding our previously disclosed client transition of 97% for 2023 versus the historical 96% measured as an average in the past 4 years. And as such, we expect to maintain the improved level of retention in 2024 as well. On Slide 8, I'd like to focus on 2 smaller but fast-growing business areas, Private Markets and Alpha. Private Markets is a growth engine for our Back Office business, State Street has been an established leader in this space and our growth has exceeded the overall market in 2022. We saw exceptional levels of demand for our offering as we doubled sales. For a little while, our capacity couldn't keep up with the demand. So we had to invest more in servicing talent, and these actions are now in place as we deploy new technology to build scale and capabilities and augmented our expertise through targeted hirings, all of which helped improve capacity to match the business growth we are seeing today. We're seeing the results of these efforts with year-over-year growth expected to exceed 15% this year and next. We also expect the multiyear development plan to result in the consolidation of our leading platform position, enabling us to define the standards for the industry. Next, Alpha is a key differentiator for us in the marketplace. Meeting clients' needs for solutions that integrate and harmonize an increasing amount of data volume and connecting systems. We have successfully deepened client relationships and Alpha has enabled us to retain key Back Office clients, starting to support expansion for key Back Office relationships. In recent years, we have developed a platform, and we are now pivoting our sales strategy to sequence back office products for us with the intent to accelerate servicing fee growth. We'll also continue to develop our capabilities, starting with our latest release that will expand our fixed income functionality, and we expect to win about 6 to 8 mandates in 2024. Now in addition to pivoting our sales strategy for Alpha, we are laser-focused on accelerating onboarding to expedite revenue realization. Based on what we've learned from our initial set of Alpha mandates, the next generation of mandates should be installed quicker as we begun to streamline various integration components and, in some cases, further build on capacity. And this should all result in a reduction of approximately 2 to 3 months in the average onboarding timeliness, providing clients do not ask us to slow down their implementations. Turning to Slide 9. We are focused on better client deposit management to achieve improved client profitability. The last few years have been volatile, with dramatic policy actions by global central banks, State Street benefited from large inflows of deposits during the COVID-19 pandemic. But along with industry peers have since experienced both pricing and deposit level impacts from dramatically higher global interest rates and quantitative tightening. As we look ahead, we are enhancing our deposit pricing governance to better incentivize clients to maintain deposits with us in a higher rate environment. We have established an executive review committee to drive these objectives and govern our balance sheet and NII objectives. And while we have always had processes to efficiently utilize our balance sheet, we will further integrate balance sheet management into our client relationships. We already integrate deposit discussions into sales negotiations. However, we will further address balance sheet usage considerations such as clients, transaction volumes, deposit rates, overdraft pricing as part of the clients' overall product profitability. We believe these actions should enable us to optimize deposit pricing as well as see total average deposits stabilize at around $200 billion to $210 billion in 2024. Turning to Slide 10, and I want to finish today's discussion by focusing on productivity and simplification, which are key for us to achieve positive fee operating leverage in 2024. Across operations and technology, we continue to make progress through 3 key pillars: operating model simplification, process automation and resource optimization in order to create efficiencies and opportunities to reduce expenses while maintaining service levels and resiliency. Let me dive a little deeper into each of the focus areas. On simplifying our operating model, we have consolidated core operation functions while rationalizing 35% of our legacy applications. Additionally, we recently announced an agreement to assume ownership of a joint venture with Atos Group, which will bring additional scale and opportunity to better integrate certain operational processes. Looking ahead, we will further simplify our operating model due to more efficient organizational design and modernization of technology, which we expect to reduce our legacy applications by another 5%, and the number of data centers by 20%. Now Process automation is key for us to create the scale to grow. We've increased our adoption of artificial intelligence and other technology tools, reducing the number of manual transactions we process down by 20% to date from 2021 and an estimated 80% reduction in total by 2024. As well as an estimated 60% to 65% of manually matched reconciliation items in total by 2024 from 2022, which will all lead to more streamlined processing. Our resource optimization is the final pillar of our transformation program. Our hiring and investments are dedicated to high-growth areas, and we're optimizing and redeploying resources, optimizing third-party spend, creating scale through in-sourcing and deploying workload balancing technology. We expect that these productivity actions as well as the revenue-generating plans I outlined earlier will drive positive fee operating leverage for us in 2024. And we'll update you on our progress in these critical areas of work as we continue to execute. And with that, I'm going to turn it back to Jason for some Q&A. Thank you.

Awesome. Louis, I appreciate that. A lot in there. Some of it you dove into detail, some of you kind of glossed over. So I want to maybe keep back a couple of things. I guess on Slide 9, I guess the first thing that jumped out to me when you talked about managing NII, it said including recent portfolio repositioning, maybe that's more for Eric. But can you maybe just expand upon that?

Sure, Jason. We've covered a lot of ground, right? We're very focused on our organic growth, our revenue objectives. Louis covered a lot of that just now, we can dive in. In parallel with that, right, we continue to actively manage our balance sheet. Some of it is around client deposits and how we manage client deposits to client pricing. And the other is how we manage the asset side of the portfolio, which is our lending activity in our securities portfolio. This quarter, we decided to reposition the portfolio. We sold about $4 billion of bonds across U.S. and some of the other developed markets. We did that because we saw higher levels of prevailing rates that are actually MBS spreads in a couple of markets and then we're able to move around the duration position a bit that will put us in an attractive position. What we've done, the impact is that we've crystallized a $300 million loss for the quarter. Now that's already been through capital, right, because it was sitting in AOCI, so there's no impact on capital. And in fact, the trade is actually certainly capital accretive because we're taking out a few higher RWA securities. And then what it will do is it will give us a payback on that -- on that as we reinvest those bonds at higher rates, more than 300 basis points higher than what they've been sitting at. And that will give us a payback within about 3 years, which will I think, be economically constructive. But it's -- in our minds it's a way to think about how do we want to position for rates, where are we, what are the current levels, and this is a good time to make that kind of change.

And I guess the other thing on that slide that jumped out to me was is kind of expecting deposits to stabilize in $200 billion to $210 billion. I think that's roughly 10-percentage below at the midpoint where we were in the second quarter. I guess -- what gives you confidence in that outlook? Clearly, deposits, I think particularly Non-interest-bearing kind of underperformed expectations so far this year? Kind of what maybe just, give us more color around that?

Why don't I start a little bit on the Non-interest-bearing deposits, and I think then we may cover a little bit of the broader deposit landscape. Non-interest-bearing deposits have been one of those deposit areas that's actually seen very large fluctuations, right? Couple of years back, we're in the $30 billion range. They peaked at $50 billion, and they've been coming down consistently over the last 3, 4 quarters in particular. We had estimated this quarter to see $5 billion of net interest-bearing deposit decline, we're in the $4 billion to $5 billion range, so kind of in line with our expectation. That's a bit lower than the $7 billion decline that we saw from the first quarter to the second quarter. And what we're starting to see is some burnout in Non-interest-bearing deposits. The largest clients with the most at stake have largely moved a lot of their Non-interest-bearing deposits into interest-bearing. Some of the smaller ones, there's a little more movement there to go. So we're starting to see some burn out, I think we've been at a place where it will begin to stabilize probably in the fourth quarter, certainly into the first quarter of next year. But this is all about how do we -- how we respond to clients in the right way, at the same time, if client for many prefer to have Non-interest-bearing deposits, remember those are small, the clients don't want to deal with the tax consequences of those accounts by having interest-bearing, and so they've been in this kind of a different category for many years. That will stay with us as well, I think, as we level off.

Yes. The only thing I'd add is I sort of mentioned this, but I'll put more texture on it. I talked about this enhanced oversight committee. It's really about agility. It's a very competitive environment out there. We're having conversations with our clients holistically. We look at profitability. We always have done that, but given the recent changes, this is more of a quick intervention. So we have 3 or 4 executives that get to make decisions every single day. Corporates, we spend a lot of [ money ] with corporates, and we're looking for the balance of trade here. So where we're getting services from large corporate providers, we're looking to see a balance of [ trade ] deposits sitting on the balance sheet. And again, we're looking at overdraft usage, deposit rates, and profitability and having the holistic conversations. So we've activated that several months ago, and it's getting traction. So we feel good about it.

And then, I guess, I guess, Louis, you kind of mentioned expectations, I guess, 2% to 3% kind of organic growth next year. I guess the kind of the wind we hear about each earnings call are kind of big numbers, like how much, I guess, 2 to 3 is kind of [ 40s from stuff, one ], and then just how do we think about what kind of gives you confidence in your ability to actually start to grow in line to outgrow the market after lagging some of the South and major segments last year.

Yes. So let me go through that again. So I think the thing to think about -- and I'll just do this in the quarter, we have $200 million of revenue sitting to be installed, and about $120 million of that is -- think of that as Back Office alternatives. And the way to think about the revenue realization. The Back Office side of products, and again, that's more than [ custody or ] accounting administration. It generally takes 0 to 12 months to install. So a faster time of realization. Your middle front office are a little harder but much more stickier and those take 12 to 36 months. So I mentioned up there that we want to get that mix of Back, Front and Middle Office, if you will, and the sales pipeline balanced out so that we can start to realize. And we're also in our Alpha proposition which is a very differentiating proposition to clients, ensuring that we get the Back Office custody in those mandates, and they come first. So we can see that revenue realization. Of course, Back Offices, like I said, generates a lot of ancillary revenues, deposits. It feeds Eric's business in global markets. It helps our GA business. So it really is built in for scale and a velocity [ of the dollars ] to State Street. We've had a nice progression of sales. So if you have the slide in front of you, it has showed you that in '19 and '20, we had about mid-100s in back-office servicing fee bookings. We've been up that in '21 to '22 to about $250 million. This year, we're targeting to $300 million and tracking pretty well. So we feel very confident that the market is there. We've had to make some adjustments. As I said, we've hired better people, put some different management in and change incentives to get that. So the addressable market is there, just our execution was uneven. You saw that in Europe and Latam, it was very, very good performance. We announced some very large custody deals in Australia this year. So it's really applying the same techniques that we've used elsewhere in here. Private market side is growing at 15%. We're pretty excited about that. And like I said, at one point, demand was outpacing supply. And so we just had a -- train up people and get it to the market. So that's been very good. Alpha continues to grow. And then the other thing I'd say is anything we're selling this quarter, next quarter, first quarter of '24 and second, there's also a realization in there. We're getting back office mandates. We can install those, sometimes as quickly as 36 months. So when you add all that up there, we feel pretty good. And then if you add Charles River's performance and SSGA's performance and you add Global Markets performance, we feel very comfortable that we can get into that range of growth that we're seeking.

Got it. I guess, Eric, you opened the door up to this, but you mentioned average Non-interest-bearing deposits running down $4 billion to $5 billion, but for the third quarter, I think you talked about $5 billion on the earnings call, that's a touch better. Why don't we kind of run through kind of what you're seeing for the third quarter so far?

Sure. So let me update and I think you'll see this is largely in line with our expectations. We expect third quarter fee revenue outlook to be in line with our prior outlook range of up 4% year-on-year and down [ 1.5% ] sequentially with some puts and takes on some of the line item geography. Quarter-on-quarter, we expect servicing fees to come in at the better end of the prior range of down 1% to 2% as average quarter-to-date equity market levels have been a bit better than expected. As a reminder, the sequential decline is sort of due to the previously announced client transition. Management fees is expected to be up 2% to 3%, which is also better than our prior guide, driven by stronger quarter-to-date organic growth and better average quarter-to-date equity market levels. Front Office software & data is expected to be down more than our prior guide of down 7% quarter-on-quarter as the timing of some of the previously expected go-lives and on-premise renewals is being pushed out to the fourth quarter. Turning to NII, due to the management of the client deposits and our expectation that some deposit pricing changes will be coming in, in fourth quarter rather than in the third quarter as well as a slight benefit from the portfolio repositioning, I mentioned earlier, we now expect third quarter NII to be comfortably at the better end of the prior range of down 12% to 18% quarter-on-quarter. Lastly on expenses, ex notables, we expect third quarter to be slightly higher than our prior guide and come in relatively flat quarter-on-quarter. The uptick reflects higher revenue-related expenses associated with the improvement in the management fees and some broker costs associated with our repo volumes. We continue to be highly focused on planning expenses and our previously announced hiring freeze is in full force with only limited expecting for sales and several other requirements. And then finally, just to note that while it will be a notable or not, part of our guide, we do expect that FDIC special assessment to come through, but probably in the fourth quarter, not the third quarter at this point.

And then, I got you, anything on tax rate or buyback?

No, tax rate is roughly in line with what we had previously guided to. Buyback is on track. If you recall, we had an authorization of $4.5 billion for the year. We did another $1 billion this quarter, which we're pleased to have returned to our shareholders in the form of buybacks. We continue to expect full -- some buyback in the fourth quarter as well.

Okay. Maybe a couple of things to follow up on is, one, with respect to [ net ] interest income, you talked about potential deposit pricing actions coming through the fourth quarter. Maybe just expand upon that?

Yes. You recall, we had guided that third quarter would have NII [ of ] 18%, in the fourth quarter, down 2% to 6% from there. And what was coming through is pricing changes in the back book, the deposit back book. Some of those that were expected in the third quarter are actually going to come through in the fourth quarter. So what we'll see is a more level decline between the two quarters in terms of NII. I think as we look forward though, we're starting to think fourth quarter is likely the trough in NII, part of that is that deposits are Non-interest-bearing deposits [indiscernible] starting to burn through and stabilize. And we expect that to probably be the turning point. I want to be careful of that. And then we did guide to quarterly NII into next year, right, in the $560 million to $600 million range. And now based on some of our portfolio actions, we're likely to be at the upper end of that range and knock on wood, see some stability in the NII line.

Answered a bunch of my follow-up questions in that. Just maybe just one more though. So not to pinpoint you, but if 3Q was down the better end of that 12% to 18% on the 4Q down 2% to 6% of NII, do you want to maybe give us something more tangible to think about that?

We'll have a better sense in a month's time when we do fourth quarter earnings. But for the better end now for the third quarter likely to be at the worse than in fourth quarter, but you kind of get roughly a straight line through those. We could also take the, I guess, the third and the fourth quarter decline right by something of that range. And then I think we're starting to see some leveling off at that point and some uptick into the first quarter. But let us get through the next couple of weeks. What we really want to do is see how deposit levels come in, some of the deposit raising actions that we described in our kind of pricing management have the effects we'd like and we'll know more. It's one of the hardest lines to predict, but I know one of the more appealing ones to ask about.

And then I guess on expenses, it sounds like a touch worse in the third quarter, but Louis, I think did a good job with Slide 10, just kind of talking about how you're thinking about the expense base. It sounds like there's a lot of opportunity still despite the fact you've done a lot. You've kind of signed up for positive fee operating leverage for next year. But as you kind of approach the 2024 budgeting season, you talked about you need to hire more salespeople in the U.S. How should we kind of think about kind of the absolute -- kind of growth rate of expenses?

I think the context I give you is to kind of go back over the last few years, Jason, we went through a couple of years in 2019, 2020, '21, where we really kept expenses were either down or flat or up 1 or 2 percentage points. I think you saw during this kind of the second part of the COVID era, we had very dramatic inflationary increases in wage rates, in some of our vendor costs. Our expenses for us and actually for the whole industry, we're north of 4%. We're 5% year-on-year, in certain quarters, 5.5%. And so you're building a quarterly growth rate in expenses of 1% to 2% almost, which is very different than the business that we had tried to configure for several years. You've seen us, as Louis described, can tune down the path of process and optimization, automation, improvements. And as we've sort of done our planning for next year, we're kind of going back to where we were. How do we manage our expenses to be flattish for a couple of quarters. That's what we're expecting for third quarter. We're probably going to expect flattish into the fourth quarter as well. And so that, to us, creates a better trajectory into next year. I'm sure we'll have some merit increases. We need to continue to reinvest in some of the businesses. Privates, we need to install if they're going to grow 15%, 10%, 15% a year on top line, right? We're going to actually be adding staff there. But at the same time, we want to kind of configure the organization. So we have some natural attrition, let's take advantage of that if we've got some additions needed from a staffing standpoint in Private. Can we reallocate work from other areas. So I don't know, I don't want to get out ahead of our 2024 planning. We're doing that right now with our strategic planning work. We'll do our budgeting starting in October. But I think there's an intense focus on how do we actually slow the expense growth rate that we've seen over the last year? And then how do we configure it within a fee operating leverage range. And so a lot of intensity and focus on managing expenses and just becoming -- finding ways to be disciplined quarter after quarter after quarter.

Great. And then could we get the first ARS question. So what I meant to do this in the beginning, but my excitement to get the conference going, I forgot. For each company, we're going to put up this question and actually the second question also and just get your take. There's [ clickers ] in front of you having to respond. We do these every year. We got a pretty good data set. What's your current position of State Street and you can kind of read the answers there. I guess, Louis. As we're responding on the second quarter earnings call, I thought it was interesting, Ron kind of characterize the results as below potential, declared there was a need to demonstrate fee growth every quarter. It sounds like 3Q will also kind of below potential on the fee side. You've kind of talked about some of the actions you're taking to kind of get back to potential, but kind of how would you define full potential? And what are the key drivers to get there? And when do you expect you can get there?

Yes. I think that what we had covered on that slide where we spent a little bit more time was that increasing the sales effectiveness is one of those. So I always think of this as really simple. You need to obtain more, retain more, you need to realize more. So on the obtain more, we talked a lot about how we're improving the sales capacity, unlocking those capabilities there. On the retained more, it comes down to service quality first and foremost. We've done a great job over the last 12, 18 months, improving service quality. We see that in our NPS scores. And so that allows us not only to retain but also to grow our share of wallet with clients and that's part of it. It sounds like a simple thing, but it's a very complicated nuance business that we're in. We talked about the Alpha mandates and the realization that just isn't trying harder. We've invested in the products. And I wanted to add something to the next point is that all that productivity that we just talked about, we're taking those dividends and reinvesting it, right? So we have a platform and Alpha that needs constant technology enhancements and functionality. And so that's helping us to improve service levels as well as speed up onboarding. Private markets is a great growth opportunity, but I need scale, and we're investing in that also so those dividends are helping us there. So we really feel that those are the components, get our North American sales team. We're really built, if you think about State Street's history, products that is built for this region. So the fact that we've underperformed is not a product issue. It's really an execution issue, which we're highly focused on and feel very comfortable. The market is still there. Our customers are -- when I think about institutional asset owners and asset managers, they're still under a lot of pressure. They're under deep pressure, they're under growth pressure. They're looking to rent more scale, rent more capabilities and skills, they're going into different product sets, traditionals are leaning into private markets, some traditional asset managers are dipping into the wealth channel to see can we go down market to separately manage accounts. And those are scale gains. And so that's where we can actually play a role to help them. So the addressable market is there, the opportunity is there, it's really those factors I gave you around, execution, obtain more, retain more and realize more is what we're focused on.

Helpful. And why don't we put up the next ARS, we're going to ask for everyone, but what impact do you expect on RWAs from the recent [ deposit ] proposals relative to Q2. So it's going to be obviously different answers for different business models. When I think about the State Street business model, not a ton of credit risk [ from market ] relative to other GCIBs. Obviously, the introduction of operating risk in -- operational risk into kind of standardized RWAs could have an impact, maybe just talk about maybe if you want to size it, size it. But just what are the potential kind of implications of the recent proposal. It looks like the up 10% to 15% is the more [indiscernible]. I don't know if you want to give your view there, thoughts appreciated.

Jason, I think the survey is actually a good indication of what we're looking at. As you said, there'll be some headwinds and tailwinds for us in the Basel III endgame rules. And in truth, they haven't really analyzed, There's specific that matter for us as a trust and custody bank. Operational risk will be the big addition. Credit risk will be -- will come down some of the drag on securities finance, right, where we indemnify treasuries, which never made a lot of sense, will be -- we'll see a positive offset. There's still a little bit of work to be done in the nuances, how does lending to regulated public mutual funds come through in the risk-weighted asset calculation. So there's some areas that are important to us, which is what's going to move us up and down the board here. But this is in the range. And in truth, as we step back, there's an implementation period that goes on for a number of years, we are highly capital generative. So we can continue our dividend, a good amount of buyback and still accrete over time for the Basel III end game. But in our minds, this isn't something that we've got to do tomorrow. Right? This is something that, first, we've got to get our feedback to the Fed on. We've got to work with some of the industry associations to try to make sure that the proposals as logical as it could be for the industry, right, because we're working in the industry with the regulators. And then we'll work into it over several years and take it from there.

Got it. Maybe we'll go to the next ARS question, is what do you think is the biggest headwinds for State Street. I guess maybe while they're answering, maybe just you wanted them as acquisitions, but how do you think about acquisitions kind of post BBH SocGen, maybe looking to do something, it's a...

Yes. I mean we are incredibly focused on organic growth, right? We've done 1 material acquisition 5 years ago, we do a little bolt-ons here and there, but we're primarily focused on organic growth. I think, as Ron has said that acquisitions are not a strategy. They are a way to occasionally supplement what we do to either build scale, add a product capability, participate in a new market. So we'll always take a look. We did one in the Alpha area and data services with a small company called Mercatus to try to add some capability for private markets for Alpha offering. We did the CF Global acquisition, which we announced, which is on track to close at the end of the year, which is small, but it's for outsourced trading, right, and bring in another $35 million to $45 million of revenues a year. And that really serves our client base, think about the small and midsized asset managers who shouldn't be running trading desks around the world, where we can provide that offering. So I mean, those are the ones that we're primarily doing a little bit here a little bit there. But by and large, it's around how do you continue to grow the organic franchise and occasionally will act. But we're pretty focused on organic growth, buybacks and then going forward from there.

And the final minute, maybe you could address the #1 response in terms of pricing pressures. Few years ago was outsize, kind of appears to just maybe stabilized more recently. Maybe just talk in terms of just what you're seeing in the current landscape.

I think there's -- as we've declared earlier, that's usually around 2% headwinds for us in pricing pressures. So everything I've talked about today increasing our sales production, we believe that's roughly, if you do the math, 8% of bookings if you will to offset some of the headwinds that we see. And I think in the second quarter, we saw it perform a little bit better. We think it will normalize in the third quarter, but it's pretty much in line with what we expect, and that's why we've just got to produce more and then more to deal with that offsetting. I think on the revenue retention part, that's something we can control by service quality and cross-selling and things like that. But yes, I think that one is right in line with what we've always said 2% generally is the headwind.

Perfect. With that, please join me in thanking Louis and Eric for their time today.