State Street Corporation (STT) Earnings Call Transcript & Summary

As you know, Eric really doesn't need any introduction, but Eric Aboaf is the Chief Financial Officer at State Street. Prior to his role at State Street, he was the CFO at Citizens Bank here in town. And then prior to that, he spent many years in the treasurer's office, if I recall, at Citigroup. But before we start with questions, Eric does have a disclaimer that he'd like to disclose.

This is the annual legal disclosure. So Gerard, thanks for hosting, as always. And just to remind everyone, today's discussion may contain some forward-looking statements. And as you know, those actual results may differ materially from those statements to any number of important factors, including the risk factors in our 10-K and our other SEC filings. Our forward-looking statements speak only as of today. We may not update them even if our views change. And with that...

Great. Super. One of the key metrics for State Street, of course, is the winning of new business, particularly in the servicing fee sales area. And I think you benchmark for '23, $300 million, and you're moving that up for 2024 to $350 million to $400 million. How are you tracking toward those goals? And how does it correlate between assets under custody assets under administration?

Gerard, over time, we've felt like it was important to expand our disclosure of the servicing business. It's a big business, but it's not easy to count. You don't count the number of checking accounts or the number of loans at a certain yield. It's more nuance. And there's a number of different elements of it. There's custody, there's accounting, there's performance analytics, there's middle office, so there are different components. And I think the language is actually not terribly consistent across the industry. So over the last 2 years, we've really added 2 types of disclosure around servicing fees in particular. One is, you all know, we've got about $40 trillion of assets under custody administration. And we set for us to have good, strong organic growth. We'd like to win about $1.5 trillion of assets a year. And that was created kind of what we'll describe as a volume benchmark. What we've said over time, and we say, regularly is when you win a piece of business, sometimes it has a high fee rate and that's a low fee rate. It could be based on the type of product, it could be based on the number of products. And so we found that was helpful for investors, but not as conclusive as it could have been. So more recently, what we've done is described the amount of fee revenue that we'd expect to be able to win each year. And so against $5 billion of servicing fees, we set a healthy amount of wins each year would be about $300 million for this year, and we'd like to actually take that up even higher to $350 million to $400 million next year. And that gives you a sense of kind of gross wins. There's always some -- we need to retain business. There are other factors, but that gives you an indication. And as part of that disclosure, we disclosed that third quarter that we had won just north of $90 million of servicing fee revenues $150 billion of assets under custody, but I think the fee revenues are the easiest to understand. In terms of your question, year-to-date, we've won about $200 million of servicing fee revenues. And we described in third quarter and continue to feel comfortable that we've got good business momentum. It's been building through the year, and we have some -- we have good line of sight and visibility into delivering around $300 million in servicing fee wins for the full year 2023.

Maybe expanding upon that a little further, Eric, is there a targeted area in terms of size of customers when you approach to win new business, is it only large financial institutions that you're focused on? Or is it midsized institutions? And how is that spread out between here domestically in the U.S., North America versus international?

It's really a range. And part of the reason is that when you're $40 trillion of assets under custody and you custody 10% of the world's assets. You want to be tackling a good bit of the market just to continue that growth trajectory. So I'd say there's a wide range, large, medium, some smaller asset managers, asset owners, alternative providers, sovereign wealth funds and official institutions. So there's a real breadth and the international mix is probably around 40%, 45% of the business. The rest is domestic to the U.S., but it's quite global in nature. I think what you've seen us do is, over the years, we've leaned into areas more intensely than others. So I think we'll continue to cover the full market. That is what we do. We see opportunities in every one of those segments, regions and products, but we've clearly leaned more heavily into privates. Probably it's a ballooning market where private market assets are growing 10% a year. We see an ability to grow at 15% in terms of fee revenue and private market assets. So that's an area we've leaned into -- you've seen with our alpha proposition, right, which brings the back office, the middle office and the front office sort of management system and knits them together for clients, which is a real benefit. Some of that has been with the largest asset managers. Some of it with the midsize asset managers who really want to consolidate and perhaps bring their boutiques together, right? And actually -- and so that one is really around, I think, asset managers, in particular, asset managers sometimes within an insurance wrapper. And then more recently, we've innovated to do alpha for private markets. I announced our first deal this past quarter. So I think there's a way we're leaning into the kind of product feature functionality and offering that we've created, that is actually helping us to build some of the sales momentum we just talked out.

And do you find that when you have these wins, how important is pricing versus just your reputation, your service, the quality of the product? How was that dynamic interplay with one another.

I think the way I describe it is pricing is kind of table stakes in our market. We know what it is. It benchmarks, there's history behind it. The real differentiator in our market is some amount of feature functionality. And in truth, it's the confidence that clients have and your willingness and ability to reinvest in the business and actually always bring them new features and services over time because think about it, clients don't really love the idea of switching their custodian, right? That's inherent risk for them or their accountant or change the way they do their mutual fund prospectuses and what's in the disclosures, right? They'd rather keep that consistent. So what we found is one of the reasons in ways we actually compete with some of the multiline firms is we're narrowing deep, right? We're in custody. We're in asset management and we're in capital markets. But we're not going to milk one business to drive growth in another. We're going to keep reinvesting in custody. And that actually brings clients back to us and keeps them with us, right? That's one of the core elements of retention. And what we need to do is just deliver on that. right? And so there's always something new that we're refreshing. And that's why part of -- as we've described, our expense trajectory each year, right? We talk about reinvestment plans. We talk about variable costs, merit and so forth, then we talk about productivity, but that's because we always want to refresh the offer.

Yes. So we're talking about the servicing wins. Can you walk us through -- you get the win, everybody is obviously excited. What's the onboarding process? How long does it take before it actually hits the P&L, the wins that you have achieved?

The answer is it varies. So every deal is different and partly a private markets deal will take some time, right, because the fund actually has to start investing. And that's when you'll earn more and more as that capital gets deployed. Middle office could take a little more time because it's actually complicated to onboard custody [ since it ] happen very quickly. And then sometimes folks are just lifting and moving business even in alts, and that creates different cadence. And so maybe just to give you some insight of where we are today, we said earlier that we won just north of $90 million of servicing fees this year in third quarter right, just in 3 months of the third quarter. Most of that will actually implement over the next year, right? Partly just that's the nature of the mix of what we have. We also said that as part of that $91 million, we had a backlog of servicing fees about $255 million, which includes the $91 million, right, sitting on our books. And we see that about implementing about 10% for the rest of the year, fourth quarter, about 60% next year, and then the balance the year after. So it kind of depends -- bigger, more complicated take longer, simpler and more unidimensional, you can get through a little more quickly. And sometimes it depends on the clients. So there's more complicated work. The client needs to adjust their processes, systems, approaches sometimes. And so it's not only we who need to configure, but there needs to be joint configuration. And there are times when we want to take some of the extra time clients want you because then they actually get the full set of benefits. They get the feature functionality, but they might also get the effectiveness and efficiency benefits coming though.

So they have to pull out the fax machines then, right.

Moving on -- coming back to these wins, which obviously are very important. What percentage do you think -- or I think you now come from existing customers, adding more features to what they currently subscribe from you versus just a totally new customer to State Street. You've not done business with them before.

It's still just because we're -- we cut 10% of those assets. We've got some amount of business with almost every one, right. It's the large majority, the vast majority come from existing clients. There are some new wins. Ron described in the third quarter that we won a back office mandate. That had been a client we met over Zoom during COVID. And first, we start with front office and middle office. Now we have the back office, a global asset manager. And so there are some new clients there, but all of them count in our minds.

Coming back to Alpha, you mentioned you have some wins there this quarter. Can you talk about how this is gaining traction with clients? And what are some of the next stages of development that you guys might be working on for Alpha.

Alpha has been a journey for us. I think folks early on were really intrigued with the offering, right, not only the back office, the mid office but the front office and actually knitting together and everything from the what the portfolio manager has as a desktop and a work bench, all the way back to the custodial operations seeing where their cash, what they can land out, all sorts of configurations were valuable for them. What we found over time, though was that it actually took some real transformation at the client, and it actually took some standardization on our part because it was so new and different. And so, you saw we announced some big wins in Alpha and early on in 2020, 2021 was a banner year. Some of those implementations took 2, 3 years and are coming through now, right? In size. So what we found is there's a significant amount of appeal and interest. Sometimes it's a global asset manager. Sometimes it's one of the boutiques, right? So different configurations work. What we found is we've become better and more effective and actually standardizing not only the offering, but also the implementation. So that's starting to build additional momentum. And we've also found that each part of the functionality that we offer can be freshened and expanded. Charles River, which is part of the Alpha proposition, had our heritage in equities. There's an excellent offering in [indiscernible] had the heritage in fixed income. We've actually gotten to a point this year where we've had one large release. We have another one coming through right now that we think is going to put those on parity. And it's terrific at both as well now, but it's grown up into that. And so we've continued to add feature functionality. And I think now, we feel like we have an offering that can address the large equity-oriented managers, a large fixed income oriented managers with real the kind of capabilities they'd like. And so as a result, you saw in some of our disclosures we made back in September. We've said we've been winning 4 to 5 Alpha deals a year. That's pretty good, given that a lot of them are quite -- they're either medium or large. And we've said that over the course of the next year, we'd like to take that to 6 to 8 a year, right? So we're starting to feel that the traction, I'll say the demand's there, the way to satisfy it, is broadening because we're building out the feature functionality and our ability to implement, I think, is accelerating as well. And so a lot of things coming together there. Now we've got to deliver on that. That's what we do. We do every quarter. But there's some -- that's another area of momentum for us.

Yes. You've announced, you've been talking about initiatives about growing -- the strategies to put in to grow your servicing business organically. Can you expand upon those and how they will help offset some of the previously announced, the client transition business that you've talked about in the past?

Yes. Sales and growth acceleration always comes in multiple ways, right? And so maybe I'll describe it in several. One is, over the years, we've refined our go-to-market sales coverage, regions, segments, the assignments, create sales capacity for inside sales versus the front facing. And we've done some more work there, that we think is starting to show some real benefit. We've had very strong years in Europe and Asia. And North America has been a little slower. And part of that is because we're -- we've actually now found I think a better sales structure, to create more throughput capacity in Europe that we're actually rolling out to North America. So part of it is, I'll describe as sales configuration. We've been more intensely focused on retention, right? Part of it is the discussion, we had earlier about taking advantage of being more of a focused player on custody, retention. Several years back was 96%. We've ticked that up to 97%. I want to keep it there. And that's -- the percentage point of retention is as good as a percentage point of new wins, right? So it counts. And then a little bit of the discussion we've described, where are we leaning in private markets. The offering is unrivaled relative to others, and it's a growing market. And it's interesting. It's not only the specialized alternative firms, but it's the multiline, who are all barbelling to some extent. And private markets is there's a lot there, right? It's not just private equity anymore. It's real estate, private credit, infrastructure, right? They're all sorts of different constructs. But each have a different functionality base. And then there's Alpha, which we just covered. So part of it is how we go to market. Part of it is the offering. And part of it is the other levers, that we're heavily focused on.

Pivoting over to the balance sheet for a moment. Your company, as well as your peers, probably were most impacted by quantitative easing and quantitative tightening by deposits doing what they've done over the last 3 to 4 years. Can you share with us, what are you seeing now? Is there a stabilization on the deposit levels? How about deposit repricing, what are you seeing so far this quarter? What are your thoughts about 2024 in deposits?

Deposits has been a journey. Now it will always be a journey and cyclical, in the banking business, as you described. And I think with the COVID events of 2020, even the -- some of what happened in that retail banking space earlier this year, that are leased in the Fed participation. We've said that deposits have come up pretty dramatically. They've been floating back down, noninterest-bearing deposits have rotated out. We continue to expect some rotation to continue. We said also that overall deposits are roughly flattish, third quarter to fourth quarter. And over time, we think we're starting to see the pricing catch up, will slow down over the next couple of quarters and deposits we see stabilizing, right? And that's given us some confidence that we think fourth quarter, more likely than not to be the lower point in NII and then some tick up into the quarters. But it's hard to -- hard to be sure. We navigate daily, and it's hard to call a turn perfectly. Maybe we want to offer an extra one of those beach bags to have out there to the CFO that calls the turn with the precision and applaud them.

And it'll have a nice bottle of whiskey in there, too, for them.

I think they deserve that, and [indiscernible] cut from last year.

You got a good memory -- that's good. Speaking of NII, you've recently said that we could see NII up at that $550 million to $600 million quarterly range, due to the repositioning that you guys did, of course. Now with the bond rates, obviously, they moved up a bunch in the last 48 hours. They have come down a bunch. So what are you thinking from that perspective?

Our thinking is roughly in line with where we were during our third quarter earnings call. We think we'll be in somewhere in the middle of that range in 3Q. Tick up to the upper end of that range, as we get into 2024. It's just -- we're at that inflection point of headwinds and tailwinds, right? The headwinds of the deposits and the noninterest-bearing deposits floating down and starting to -- we're starting to see that slow. The question is where is exactly the turn? The pricing we earned quite a bit for a while, and then we had to -- we had some -- the betas floated up and then we had to use some catch-up pricing in the back book. That's what happens over time. That, we said we'd see some in second quarter, third quarter, fourth quarter, moves around by quarter a bit. So no new information there, really. And then I think what happens is, as those headwinds attenuate the ongoing tailwind of the investment portfolio being reinvested at 5-plus percent and rolling off at 2% or 3% is the tailwind that will actually create a lift. And so there's a little bit of when do those lines cross matters. And then it does bode well for even the out years because in the out years, we're still going to be tractoring through that investment portfolio. Ideally, we have some stability in the underlying deposit pricing and so forth, which we all expect because we're going through a phase. But that will give us some medium-term -- medium-term lift that will be encouraging and constructive.

Yes. Before we open it up to questions to the audience, just one further question about the investment portfolio. Obviously, you took the restructuring last quarter. And you just talked about the -- taking the cash now going into much higher-yielding securities. Any more thoughts about that kind of thinking of why you did it? And then also, could we see further repositioning of the portfolio as we go forward?

We always take a look. I think we're quite pleased at the opportunity that we really took on in the end of August, beginning of September, right? Rates had just come up. We like the curve had started to flatten. We thought there were some opportunities, including at the overnight portion of the curve, plus in the belly. And to us, it was a nice time to do a cleanup. It wasn't large, I mean it was $4 billion or so of bonds, but it's also accretive to future NII, and it's already out of capital. So I don't think we do that every quarter frequently, but we'll always keep an eye on it. But there's going to be a good reason, right? There's got to be something that changes in the environment. We see some -- we actually took out some capital-intensive securities. So we're just keeping an eye on what else could be, what else might change that might encourage us. But there's nothing on the horizon now. We're pretty comfortable, we think the portfolio is yielding quite nicely. I think I've said that about $5 billion of bonds rolls off a quarter, we can reinvest those. There's opportunities in dollars, there's opportunities with a little bit of convexity in MBS. Spreads are a little wider than they had been at least through the averages in different sectors. You want to pick up some prepayment protected bonds typically. And then because we have a global footprint, right? It's really appealing. It doesn't mean we have to be in bonds, but there's some other very high-grade sovereigns there. We can work across currencies, we can also swap between currencies and actually invest and take advantage of some of the opportunities. So -- so for us, it's -- we've got a fair amount that actually, we can redeploy each quarter, and that's where we're really focused.

Speaking of the burn-out of the $5 billion or so, you mentioned on the repositioning, exiting some lower coupon, lower-yielding securities into these. What are you seeing now on the money that's coming out of the portfolio due to maturities, what kind of yields are those coming out at? And then what are you then reinvesting what kind of yields are you finding today?

Yes. Typically, it's in the range. Our average durations in the 2.5-year range, plus or minus some. So you kind of think about the bonds that any of us would have bought back then. And we're not always buying the same maturities, but there's always some amount of stability, that we have always tried to create in the portfolio. But the roll-off yields are in the 2% to 3% typically and the new yields are in the high 4s, 5s, at least in the U.S. dollar book. European book, U.K., Canadian dollar, Australia, all somewhat different, right, the kind of the coupons, both the roll-off and roll-on are lower, but the spread is still sizable. Yes, we still find that 200 to 300 basis points, typically, not every bond, but it's typically.

With that, let me see if there are any questions from the -- Julian. Over here. I'm sorry. We'll go here first.

Two questions actually. One is you've got a catbird seat on fund flows, custodian. So between asset classes, bonds of stocks and so forth as well as active to passive. Can you comment on what the impact is on your business in terms of the profitability of the passive strategies materially different in terms of margins to you or similar between stocks and bonds or any other asset classes that you see?

Yes. The -- I think there are 2 trends that are important, as we think of the kind of what we see as custodian, right, in the $40 trillion that we custody. One is around active to passive. There's one around cash holdings, sort of money market, cash. And then actually, there's the third one, which is private versus, I'll call it, non-private. And each of those has a different flavor to them. So let me take them. The active to passive, which tends to be a little more secular, right, not always there's some cyclicality, but tend to be a little more secular, tends to come with similar margin percentages, but lower margin dollars, right? Why is that? Because the fee rate is lower? On passive, but we're so large in passive, the expense base is also lower for us. So as that happens, we need to win new business, either in that category or another category. And find ways to actually -- that'll be neutral margin, but we want it to be neutral or positive to EBIT, right? And so we're working that and continue to expand. On cash. Cash, I think, tends to be cyclical. And we, through our Global Markets Research arm, do a lot of work around cash holdings, moving back between equities, bonds, cash and so forth, and we provide insights and indicators there, risk and risk indicators, turbulence, indicators and so forth. And cash tends to just have a lower fee structure than the noncash, but that one comes and goes. And so part of what we're looking at is, that might be -- that might be a slowdown, but it will likely come back. Private is very high on the fee rate. It's got very solid margins. It also comes with more costs, right, because it's a very manual-intensive process. Think about the waterfalls, Think about the funds of funds and some of their intricacies with underlying, think about the side cars. Those are all wonderfully organized structures, but when you put them into a system, there's a lot of manual intensivity of there. And so that, to us, there's a real fee rate opportunity, but there's a real margin and EBIT opportunity for growth. So there's a lot going on. And then I think the last one, that I mentioned, which is related to flows but a little different is that, as we see higher or lower levels of volatility in client trading, that tends to come through our fee line as well in the servicing side. And you saw that this year, we found that Servicing fees were lower by, I think we talked year-to-date by 2% plus because of lower levels of client activity because there's less just less trading going on. Folks are more on the sidelines as far as that is relating to what they hold in cash. Part of it is just related to their uncertainty and not being willing to reinvest. And we think that tends to be more cyclical. So the question is when does the market become more active, is hard to predict. But that will have an effect as well.

I just had one follow-up. So on the -- did you say that margins were lower and passive, but the dollars were lower as well. I would have thought that the passive money was so huge that the dollars would be bigger, even though the margins might be lower.

Let me try to be precise about it. So the margins, the margin percentage is about the same in passive versus active. For the same amount of 100 units of passive versus active, the margin percentages will be the same, but the margin dollars will be lower because the fee rate and the expenses are both lower. Then you have the point that you made, which there's more growth in passive. And so you're trying to make up for the lower EBIT dollars, with growth and EBIT dollar growth. So you got to factor all those in, and I wasn't sure if you had been asking before about kind of apples-to-apples or with the kind of market growth, which is quite different.

You outsourced a lot of cost of India and so forth. Can you comment maybe on client turnover and so forth in the context of that?

We run a global footprint. We have operations in India and Poland, which are quite effective for us. But we have multiple operations here in the Boston area, in Kansas City. We have operations, Ireland, Luxembourg. So we have a real breadth of platform, partly is because that's a way for us to deliver resiliency for clients and part of it is to deliver a fall-to-sun model, evaluation and handoff. So it's actually quite broad. And we find that clients actually find that appealing. And you've got to do it well, right? Wherever you hire or grow, you need to do that well. But the capabilities we can find, whether it's here in Quincy, we've got very talented staff. We can find very talented staff and grow very talented staff, in some of these other markets like Poland and India, I've got finance teams around the world. And I got to tell you, there's great talent. There's great talent. And that is what clients are looking for. I think they're much -- maybe 10, 15 years ago, they were -- where is the staff. But now they just want talented staff. Talented staff, automated processes and that comes together nicely for them.

Can I ask about fee pressure. So let's say I'm guessing over the last 5 years, it might have been 2% or 3% a year. If you think about the next 5 years, what are the theoretical reasons why it might be higher or lower than what it's been past? And then the extra question is, if there's a downturn in markets, does that increase the fee pressure, as in your asset management clients are under more pressure, and therefore, they're demanding more discounts?

Yes, there's fee pressure in this industry, has been around for decades, right? The last -- and I think we've had a wave in 2019 -- 2018, 2019 that we navigated through and part of it is how do you prepare and organize for that and deliver against that. I think the fundamental reason why there is a set of fee renegotiations happen is because equity in bond markets tend to rise over time. Our fee schedules are partially indexed to that. And so clients are kind of saying to us, hey, equity and fee and bond markets went up, we're paying you more. Can we have some of that back as a share? That's literally because they're saying, "Hey, you're doing similar work. And we're saying, well, we're also adding some feature functionality, and we have some flat rate. And so the industry actually has this cadence of, well, can I get a share of the upside. That's come through. And that comes through as a fee discussion. So as a result, for decades, there's been some -- it's been about 2% a year over the last 3, 4 years. We had a bit of a wave in 2019, that we navigated through where I think we're a bit unprepared. And I think that was actually a real inflection point for asset managers, in particular, who really saw the move to passive, very quickly, and we're kind of in a tipping point. I think now we're in a market, where asset managers are navigating. They're barbelling right? Buying large, to some extent or to a large extent, there are asset owners and insurers, who work through as asset managers in effect. And I don't see something dramatically different than what we've seen over the last 4, 5 years, around 2% right now. You do have a little bit of this question of what happens when equity markets go up, clients will ask, but then we'll sit with them and say, "Okay. So if you want a larger than fee concession now, when markets are going to go down, are you wanting to reverse that and be symmetric. And I don't mean to be flipping, but like those are C-suite conversations, and that's over the Head of Operations and the Head of our Investment Services business. And folks in truth want a strong partner. I want a strong partner they want to feel like, they're well supported, fair pricing be there for the long-term, reinvest. And we think that's what actually navigates through the ups and downs of the market. But we'll -- I mean, folks will always on the margin ask for a little more, we'll say, hey, we're doing more. Can we get pay a little more.

Eric, you talked about the sales reconfiguration -- and its non-U.S. right now. And then you also said something about it starting to show a benefit. I don't know if you can give us the nature of the benefits, maybe some scope and scale of the benefits. And then when you turn your eye towards the U.S. or North American marketplaces, what this might mean for the U.S. operation?

Yes. The -- I think what we've seen is continued strength in the sales successes in Europe and Asia, booked $90 million, a little bit more than $90 million of servicing fee wins in third quarter. I said year-to-date about [ $200 billion ]. So that means there's another $110 million for the first half of the year, so less on quarterly. And you're seeing kind of an upward pattern, and we demonstrated or we described confidence, we have into the fourth quarter of trying to get from the $200 million cumulative to the $300 million goal. So we're seeing momentum in sales. It's every sale is different. So it's hard to be perfectly predictive of its driver. But part of this is that the European and Asia market coverage and sales groups continue to perform well. We've seen some additional kind of momentum rebuilding in the U.S. We've seen strength in private sales, which has been really good. I mean that's -- as we talked about earlier, the fee rate and the margins are quite healthy, partly because it's very manually intensive, so it's hard -- hard work, Alpha sales continue to come through. So there's good indicators. But to be honest, part of the reason we put some of those benchmarks and metrics out there is we want to challenge ourselves to deliver on those every quarter and every year, and you guys be able to kind of see. But the indications are positive.

Last question, Ken?

The first one, Eric, is just on capital. Have you gotten any refined view about just what the prospective RW inflation might be under the proposed Basel III games? And then what are your hopes, if any, for potential changes as the data has been pushed back on the comment period?

Yes. Basel III and you've seen the commentary from others, there's some, who are seeing what as high as 35% increases, others maybe in the 5%, 10%. And everyone's book is a bit different. The kind of rough math because it's rough, right, based on the -- on what we've seen. For us, could be around 15%. But I think this is going to evolve, more so than some of the previous iterations, probably ops risk, how much do you want to load up a bank for operational risk when that's actually a reflection of the stability in a bank? So some amount makes sense, but with the right levels. There's also some real questions around for the custodial banks, the listed -- the lending to listed companies and do listed companies include mutual funds, that are listed, but in a different SEC construct. So there's actually some pieces there. I think you've heard from others, some of the energy transition, the Green Energy Investment credits actually get hit hard, which actually is kind of contradictory to what I think actually government policy is, to actually encourage that. And most of that's actually pretty well contained from a risk standpoint. So I don't know, we're optimistic there'll be some improvements. And we think our supervisors are thoughtful. They want to try to do the right thing. And I think it's constructive. They've extended the comment period. They can hear from us, they can hear from academics. They can do more research and assessment. And so we think, it will come in better than at least what it could be. But the most of it is manageable. I mean, it's -- I think the question is what's the right amount of capital in the system, right? Because put too much capital in the system and all your you're doing is just slowing down economic growth and you're actually not insulating banks. You're insulating them, you're over insulating them and what's the point there. And so I think that's also part of the conversation that's going to play out.

Yes. The second was just about you guys are in such a good position still even with that type of RWA inflation on capital. You did a lot this year -- just how do you think -- how do we think about just -- I don't think people expect that to be a run rate. So I just wanted to say ask like, how do we think about like the right zone of thinking about how you want to live in ratios and capital return, given what we're talking about.

Yes. What we've said -- obviously, we had a large authorization this year because we had more capital than we needed. We wanted to get it back as quickly at pace to shareholders, and we've done that and continue to do so into this quarter. I think we're now getting back into more of a, I'll call it, Business As Usual mode. We've got a target range of 10% to 11%. And you kind of tend to say where do you want to end up in that range, the higher end, when things are a little more uncertain out there, maybe the lower end, when things are benign. It's -- and what we've said in the third quarter. We'd like to get to the middle range and then take it from there. And then once we do that, I think we're back to some of our medium-term targets, right, trying to return 80% plus of earnings back to investors in the form of dividends and buybacks. We need a little bit to grow the balance sheet for our markets activities and our lending activities because those actually then encourage clients to bring more servicing and administrative servicing fees and business to us. So that's linked. But there's a good -- the capital-light model is intact here. And we'll effectively go back to our medium-term targets with regular way capital distributions.

And with that, please join me in a round of applause, thanking Eric for coming.