State Street Corporation (STT) Earnings Call Transcript & Summary

We have State Street. From State Street, we have EVP and CFO, John Woods. So John, thank you so much for joining us.

Pleasure to be here.

And I think as promised to Liz, this is the last time you're going to be asked this question. But just...

No need to hear what this is.

But still relatively early days for you in terms of moving from Citizens and regional bank to State. Just talk to us in terms of the first few months, like the early learnings, and even for you in terms of what's been different and what's been the same with regard to your prior role.

Yes, really good question. I mean, I think -- before I joined State Street, I think what I was thinking about has been confirmed really here in the first -- I guess I'm in the second full quarter of being on the platform. But first and foremost, scaled interconnected businesses around the world, it's just exceptional. There are 100-plus locations around the world, very different than a U.S.-based kind of regional bank. But it's been really impressive to understand the scale and reach of the businesses at State Street. And it's just been really helpful to basically dig in there. Basically, the other point that I would say, and that's, I guess, one of the key differences. The other point that's pretty similar is a significant focus on a portfolio of distinctive strategic initiatives to really drive performance over time. And so when you list out the handful of things that we've launched and that we're driving, whether it's private markets, digital assets, the work we're doing in wealth, more broadly in Alpha, CRD. This is a platform that's driving distinctive growth-oriented initiatives. And I think that's, frankly, pretty similar to where I've been. And then the other point I'll throw out is a significant opportunity from a transformation standpoint. And I was thinking about that on the transition, and it's been confirmed that there's a huge amount of opportunity in that space. And then you wrap it all together, the opportunity to grow margins and returns over time is significant. So I mean, I think those are some of the early learnings. Certainly was expecting that to be the case. But when you get here, you're confirming that all of those things are true, and it's been really fun to do that in the first quarter or 2.

Got it. So maybe just let's -- maybe you could start there in terms of the transformation. And as you mentioned, means, again, State Street has a storied franchise, but complex global. When you think about the transformation opportunity, just talk to us in terms of how do you kind of condense that into actionable items that you can execute on?

Yes. I mean, I guess I'd put it in maybe 3 overall categories, maybe a fourth with an asterisk. But the first one that you think about is the technology platform itself. And what we're working on there is rationalizing our applications in a migration to a hybrid cloud strategy. That's been a multiyear process. There's also been a multiyear process on reducing our data center footprint. But the likelihood of our ability to accelerate that in the coming years is really right in front of us, and that's part of the plan is to accelerate all of those actions to create a much more efficient technology platform. And I think where you'll see it is articulating the reduction in both applications and data centers and some of the tangible benefits you'll see on the technology side, which we'll be able to communicate down the line. The second big category is basically artificial intelligence, and you hear that everywhere, right? But I think from that standpoint, we're going to be scaling our agentic capabilities significantly in 2026. So we're launching an internal foundational ability to drive agents into the platform. So as you get into the second half of 2026, the proliferation of agents across the platform is going to really ramp. So that's the second big category, and we'll start talking about what that means in terms of delivery and efficiency. But you put all that together in the third big category that is our operating model. And with the technology platform and the capabilities and accelerant that AI brings, I think what we're -- we're putting that together in transforming the way we work. And so that means becoming fully agile in terms of agile ways of working, but doing it in a hybrid human agentic way. And that increases the speed of releases, features and functionality for consumers and for our customers that we serve. And so those are the 3 big categories, and it simplifies our client delivery, and that's kind of how we put it all together. I'm putting an asterisk on the fourth category. It's just kind of the -- not necessarily transformation, but recurring productivity will nevertheless continue to contribute as well, whether it's simplifying your organizational processes, your business processes, third-party spend, all of that. So I kind of think of it as a fourth category that still contributes, but the first 3 are really about transformation.

Got it. And just talk to us about the Agentic AI. And it's one thing for a software company or a start-up to bring in AI and use Agentic AI to sort of do processes, it's very different, my sense is, when you bring it into a large complex regulated bank. Like how easy is it from like the concept to implementation that you -- is it a 1-year process, is it a 3-year process? Just how do you think about that?

Yes. I mean, it's not a 3-year process. It's something that, with the right foundation and controls in place and guardrails, it's something that could be done in a matter of months. You can create agents from that perspective. And so we see agents -- we've already launched agents this year. It's just how can we ramp them and do it at scale. I think that's what we're talking about. And I think you can do -- you have guardrails and controls, but they need to be treated as employees. And that means supervision, controls, human in the loop type things that -- and you adopt it as part of a workforce. If you have an agile team that's operating all humans, what we're talking about is basically replacing some of the humans with agents, and that allows the humans to basically level up and focus on kind of higher value-added activities while repetitive-type stuff gets handled by the agents.

Got it. And do we have enough visibility around what an agent costs? Or is that still a work in progress? And I think it's not a State question, industry-wide. I'm just wondering, is there enough visibility to know what it costs to have an agent?

Yes. I think that's to come, but I will say that the marginal cost of an agent is going to be low. It's just the fully loaded cost of the foundational investments, you've got to get that and get that adopted and delivered, marginal cost as well.

Understood. Got it. I guess maybe just pivoting to revenue growth and sort of the business outlook there. Just talk to us in terms of -- obviously, you gave us an update last month. But when we think about fee revenue growth or within Investment Services, you talk about the wins. Just what's the momentum in the business feel like? What's the headwind versus tailwind to growing that revenue stream?

Yes. I mean we're actually feeling very good about Investment Services growth. Organic growth has been strong. I think it was around 2% in 2025. Organic, we had a lot of lift from a markets perspective as well. But organic growth was strong in 2025. We expect organic growth again in 2026. Pipelines look good. I think the sales culture pivot about 3 years ago was really important. And so we've been driving north of $300 million of sales over the last 3 years. We expect to do that again in 2026, where we have a target of $350 million to $400 million, and that's really important. I mean, not just the size and quantity of sales is important, but also the mix. And so the quality of that sales activity is very good. It leans heavily to the back office space, which tends to install a little faster. And there's a huge chunk of private markets business that's in there as well, which tends to be a bit more profitable and higher growth. So we really like the quantity and the quality of what we're seeing on the servicing side. And just broadly, what underpins all of that is the multiyear strategic initiatives that I talked about earlier in the private market space and what we're doing with Alpha, CRD and even in the wealth servicing space. So lots to like about that. And I would be regretful if I didn't add digital as one of the tailwinds that I see on a multiyear basis going forward in the Investment Services space.

And what gets us to -- so you mentioned the $350 million to $400 million on a quarterly basis. Like what gets us stair-step higher to that level, to that $400 million? Is it just -- can you see that in terms of the pipeline, whether that's coming through? Or like what is needed to rebase higher?

Yes. I mean, I think it's the maturation of strategic initiatives. So I mean, when you look at the higher growth aspects of the Investment Services business, I'd focus in privates and in digital and in wealth services. I think that's where you would see higher growth. And as our mix shifts into those higher-growth platforms, that would be one of the ways that you could see that sales activity picking up. But for now, focused on 2026, where our outlook is $350 million to $400 million.

Got it. And when you look through those 3 verticals you mentioned, do you need more investments in headcount or the right people or technology in order to sort of realize your goals?

Yes. Well, I mean, maybe just using, not necessarily headcount, I'd say capabilities, but increasingly, those capabilities can come digitally or will come through agents. I mean, private markets happens to be a place where we're going to be investing in agents to support some of that growth. Maybe just picking up on digital. We launched our digital asset platform recently. Very excited about that. Creates a digitally native foundational approach to supporting digital assets, custody and fund accounting and administration going forward. And that's not as much really focused on an army of people. It's basically creating the technology platform that allows us to launch products. And those products, as we're looking towards the first products coming off of that being tokenized money funds as an example, and the ability to interact with our clients with digital cash, whether it's moving back and forth between fiat and stablecoin, and down the line, tokenized deposits as well. So I mean, you put all that together, and that is one of the underpinnings of the bullishness on the Investment Services business over the medium term is the higher growth aspects of what we're going to be doing in digital and the higher growth aspects and higher profitability that we have in private markets, not necessarily investing in armies of people. It's more about technological capability.

Understood. And maybe if you don't mind, John, just spend time on the digital piece and tokenization, where there's a healthy debate in terms of what are we trying to solve? Like what does the tokenized money market solve for? Just give us -- I mean, obviously, you all have done a lot of work here. So what does it solve for the client and kind of how much more can this technology spread into beyond just money market funds?

Yes. I mean, if you think about the customers in this space, and we're following customer demand here, and the demand early on seems to be in tokenized money fund capabilities with interoperability with stablecoin and fiat. So that's really going to be the first launch here. And I think what we're trying to solve on behalf of the customer, which would be a fund complex or a fund itself, is the ability to facilitate distribution to digitally native customer segments. So if you operate in the DeFi world and you can offer an on-chain product, there are customers there that will engage with your product. So we're expanding the -- we're facilitating the customers' expansion of distribution, first and foremost, by providing this digital asset capability. I mean, I think secondly, why tokenized money funds is, if you want to deliver those products and you're in stablecoin, the ability to go from stablecoin back into tokenized money funds provides very efficient collateralization opportunities if they need collateral, a good collateral that can be posted. And it also maximizes earnings, right? So stablecoins -- I think we're still working on this. Do they pay interest? Do they pay rewards? What happens? I know that we've got the GENIUS Act. But if you can move seamlessly from stablecoin into tokenized money funds, tokenized money funds will have interest. And so first and foremost, we're facilitating distribution expansion to opening up more ultimate clients for our customers and then making it very efficient for them to maximize yield while they're operating in stablecoin and in the digital asset space. That's really the high-level use case that we're starting with.

And last question on this, but you mentioned stable coins. Do you care if it's a stablecoin or a tokenized deposit? Are those interchangeable or...

Yes. In talking to clients, it seems the demand is really in the stablecoin space, and that's where we're going. But tokenized deposits is on the product road map as well. And down the line, we'll be offering that as an opportunity as well. It's our vision that we'll be able to move seamlessly in digital cash across all 3, fiat, stablecoin, and tokenized deposits, and we'll go where our customers want to go. Early on, stablecoin and fiat seems to be the demand with a fast follower on tokenized deposits.

And how important is the market infrastructure bill that's being debated in Congress, like passage of that to your strategy? Does it impact it? Or does it...

I think GENIUS was the most important thing to get going. And I know that there's conversations there, but I don't think that, that bill will have a huge impact on the ultimate direction of travel here on digital assets that we can see.

Got it. Maybe, I guess, just pivoting to the Investment Management business. Just talk to us in terms of when you think about asset growth there, like what are the drivers? What needs to be done to accelerate that growth even more?

Yes. I mean we're really excited about the investment management business as well. So this is 2 incredible businesses with global scale, right? And so what's been nice to see, another theme here is, in the last 3 years, the investment management has had a net new asset growth of over 3%, and that's been great to see. And so the momentum there has been really, really good. I think what's nice about investment management, we're extremely well positioned for global trends. I mean, I think the migration into the passive space and ETFs in general, we're a huge leader in the ETF space. And so we've been benefiting from that. We have also great capabilities in the institutional retirement space and in cash products broadly. So I mean, that has been -- so a scaled business that's been growing extremely well over the last 3 years that's well positioned for the trends that you see unfolding over time. And then just here and now, just in the fourth quarter, I mean, I think what drives this is innovation and product development, and we launched 37 new products in the fourth quarter alone. And so the momentum there is good. We have very strong partnerships that are driving the private markets capabilities. So the trend in democratization of private markets, which gives broader access, which was previously only available to sort of high net worth individuals is getting much broader access, and we're right at the forefront of that. And finally, just geographic expansion around the world in Asia Pacific and in the Middle East, which has been very successful. And I think that's where the growth continues to come from. We're positioned well for megatrends that are unfolding, the big wealth transfers and the ETF space, but also innovation in terms of our products and then just being where growth seems to be taking off in certain geographies as well. So I put all that together, pretty bullish on investment management also.

Understood.

And before I let that go, I just covered the top 2 fee generators for State Street. And it just occurs to me that when you think about that and you take a step back, I think we mentioned -- when I think about 2026, we mentioned our 4% to 6% range for fees. Just the power of those 2 franchises, if you just look at where markets are at the end of January, and even if markets stay flat for the rest of the year, we'll be at the upper end of that 4% to 6% range. And I think just kind of making sure it's clear what those sensitivities produce. So it's really encouraging to see those tailwinds in investment servicing and investment management and just how we benefit not just from our organic growth, but also what's happening in the marketplace. So upper end of 4% to 6% with markets flat from the end of January is a pretty good place to be.

It's a good place to be. All right. That's a nice little update. And the fee growth is trending well, maybe I guess, let's just talk about the other component of revenue growth on the net interest income on the spread revenues. Just one, I think maybe talk about the balance sheet. I think you've talked about sort of balance sheet optimization. Just what are you thinking on the optimization front? And then just how do you think about deposit growth?

Yes. I mean, I think a couple of things related to balance sheet optimization. First, I want to basically make it clear that our objective here is that balance sheet optimization is consistent with net interest income growth, both now and in the future. So we grew net interest income, NII. We grew that in '25. It's primarily balance sheet led. We're planning to grow that again in 2026, primarily net interest margin led. When you get out into '27, maybe looking for opportunities for each of them to contribute and maybe have some compounding effects when you get out past 2026, which is more of a transition year from that standpoint. But nevertheless, our objective is to grow NII. We took some actions in the fourth quarter, which were able to kind of create immediate inflection, if you will, in net interest margin and have nice NII growth in that quarter. The full year effect of that will play through into 2026. But I think it's just good hygiene to focus on every component of the balance sheet, be highly disciplined with respect to what gets on the balance sheet and ensure that it's efficient. And when you go around the horn in terms of the components, the ones that pop out that we think about and getting the best bang for your buck is the loan portfolio, making sure that when we have credit capital that's been extended, that it's extended to really strong and deep customer relationships. And to the extent that if any customer relationships are not strong and deep and -- virtually all of them are, but to the extent that any of them aren't, we look at that as opportunities to bring back the capital, and we know what to do with that capital. We can use it to fund other clients' needs or we can use it to fund buybacks, right? So we want to be very focused and having a high bar on what capital ends up on the balance sheet versus what's available for buybacks. And then as we mentioned, we want to ensure that the mix of the balance sheet is really strong and that deposits are a bigger percentage of funding going forward than they have been in the past and just being really judicious with respect to wholesale funding when it's noncustomer related. You mentioned deposit growth. I think that it is certainly our objective. And when you think about a lot of our strategic initiatives in Investment Services to grow AUC/A, that will be consistent with a tailwind to grow customer deposits over time. And that's the objective. I think there's some carryover effect from some surge deposits in '25 that are normalizing in '26, which drove that outlook for '26. But over the medium term, there are a number of tailwinds that we're excited about that will allow us to see deposit growth when you look out on a multiyear basis.

And by when do you expect those deposits to normalize?

Yes. I mentioned that we're broadly stable in 2026. So that's basically early '26 is when we see that. And then I think we'll start seeing some -- maybe as you get out into '27, you start seeing the opportunity to grow deposits at that point.

And you see deposit growth, just from a medium standpoint, consistent with just overall AUC growth, like...

It's a combination of things. I would say that if you have a healthy economy, you start off with nominal GDP being consistent with directionally high correlation with deposit growth as long as the Fed is not messing around with the balance sheet too significantly. I mean, I think the fact that quantitative tightening seems to have ended, we'll see where that goes with the new Fed Chair. But the lack of a headwind is if you can think of as sort of a tailwind when quantitative tightening kind of ending kind of takes that off the table as a headwind. And then you can let the economy see deposit formation. At the system level, the bank deposits were flattish in '25, but you can imagine that overall banking deposits growing in '26 and beyond if the economy continues to chug along, if the Fed's balance sheet is not being wound down too quickly. And as we continue to grow AUC/A, you start seeing a lot of those forces building as you get into the end of '26, and that would be consistent with deposit growth over the medium term.

And the pricing environment on deposits, how would you characterize that?

I think it's competitive, but fair. Nothing kind of extreme that I'm seeing. I mean, I think it's more consistent with bundled products being provided with our customers and clients and nothing exceptional that I'm seeing on the pricing side.

And you mentioned the Fed balance sheet. I guess, the Fed nominee, Kevin Warsh, has plans to potentially shrink the Fed balance sheet. What does that mean for you? Like would that create more growth -- deposit growth? Or like does that balance sheet come sort of to the private sector and banks and the trust? I'm just wondering how do you think about it?

Yes. I mean, I think it's just one of the many factors to consider. I mean, I think we've lived through a period, in the last year or 2, of quantitative tightening. So we know what that's like. And it tends to have a -- even with positive GDP, it tends to basically kind of be an offset to bank deposit growth, which would otherwise be growing. And so we'll see where it comes out. But rates falling, quantitative tightening either not happening at all or happening at a lower pace, and strong GDP and growing AUC/A are all things that can come into the mix. And like I said, I think that '26 is a year where our NII is net interest margin led. I would see '27 and beyond being an opportunity for both balance sheet and ongoing net interest margin contributions to the NII construct in '27 and beyond.

And just remind us, John, is there much left from an asset side when we think about just back book repricing? Or is that kind of...

No, there's several years left on that. I mean I think we've got -- you've got the multiyear effect of asset repricing, and there's also terminated hedges that are running off for us as well. So you've got 2 items that click along on a quarter-by-quarter basis and is multiyear in nature. And that's a nice underpinning to the net interest margin along with just ensuring that we have good hygiene related to deposit pricing and downward betas when and if the Fed cuts rates, and deploying that profitably on the asset side of the balance sheet. So I do think there's some opportunity to continue to grow net interest margin, as I mentioned, again, and we'll put all that together in a medium-term kind of way, as I mentioned in January.

Got it. And just switching to on the expense side. When we think about you've been getting a lot of savings, which have been used to fund the business as we look forward. When we think about -- so you talked about the revenue side, the digital platform, et cetera, where you think there are productivity opportunities. But when you think about the absolute cost save opportunities, is there a lot of low-hanging fruit as you sort of go through the bank? And like how meaningful could that be?

Yes. I mean the way we try to frame that is that in '26, we're growing -- we've articulated that we will grow expenses 3% to 4%. But there's a lot of moving parts underneath that. And so within that 3% to 4%, round number is about 5 percentage points of savings from a productivity standpoint that are expected to be delivered in 2026. And so what that allows us to do is to accomplish 2 very important goals. One is to fund this distinctive strategic portfolio that we have, which is very exciting and is really the source of where a lot of the upsized opportunities for growth will be, again, over the medium term. And at the same time, achieve our goal to be delivering positive operating leverage at or above -- or actually above 100 basis points. So it's a combination of the 2. And we've been doing that over the last couple of years. We've been able to generate $500 million or so a year. I think connecting it back, it's essential to basically -- and it's connected to transformation. As transformation begins to accelerate and deliver on the areas I mentioned before, which is accelerating on the technology side, scaling agentic, and kind of transforming our operating model and the ways that we work, we'll see, as we're getting in the end of '26, more and more of it coming from those things than more of the traditional sources and levers that we pulled over the last couple of years. And so that solidifies that productivity and has an opportunity to grow that productivity for multiple years down the line, so that we can continue to invest in strategic initiatives and continue to drive positive operating leverage.

So I guess -- I don't want to put words in your mouth, but I think you talked about providing maybe an update on strategic targets at some point later in the year. But it feels like you're optimizing the balance sheet, margin expansion should be good just when we think about from a return profile, productivity initiatives, all of that. Like how should we think about just the -- early days, but how do you think about the profitability of the franchise when we think about the pretax margin, et cetera? I don't want to front run your own update, but...

Yes. No, I think it's an important point. So in the last couple of years, we've grown pretax margin into 2024 -- from '23 to '24. We grew pretax margin again from '24 to '25. Our guide for 2026 implies that we're going to grow pretax margin again in 2026. So it's a multiyear growth in pretax margin. And so the trends are there and a nice pivot a few years ago from that standpoint. And so we think there is significant opportunity to communicate what we believe the potential of this platform really is. And we think there is meaningful opportunity to grow pretax margin and returns on equity and ROE as you get out over the medium term. And I think it's a natural evolution of the franchise to get to the point where I think in the second half of '25, we delivered 30% margin or a little better. And again, the '26 implies that. So that's a good starting point in terms of the 30%. And I think what you'll see us do reasonably soon is that you'll end up with seeing that 30% pretax margin and seeing what the significant increase could be off of that out over the medium term. So likely to be something that you'll hear about, call it, I think it would probably be pretty consistent with our typical strategy planning cycle, which happens middle of the year around July.

Got it. That's helpful. I guess maybe one last question around capital deployment and just capital management priorities. But actually, before I get to that, from a regulatory standpoint, I think there's an expectation we'll get some more proposals out of the Fed over the coming months. When you think about State, are there aspects to the liquidity rules that could be changed or altered, particularly for the trust banks that would actually have an impact on the business? Like is there -- or...

Yes, it doesn't appear -- nothing that appears to be worrisome from a liquidity standpoint that I can see. I mean, I think...

Something more -- in terms of something that could be positive.

Yes. I mean, we don't feel significantly constrained currently. And from what I can tell, the direction of travel is pretty consistent with how we're trying to run. Whether it's liquidity or capital, there's nothing that's overly worrisome. I mean, I think that we have exceptionally strong liquidity and capital, and what seems to be coming down the regulatory pike wouldn't have a meaningful impact on us one way or the other.

Got it. And I guess just lastly, from a capital deployment standpoint, as you look through all of this, just give us your thoughts around buybacks, buybacks relative to stock valuation, how do you think about all of that?

Sure. Yes. I mean, I think I'd go back to what I said at the beginning, which was we've got an exceptional opportunity to deliver against the strategic initiative portfolio that's very distinctive, plus I'm very excited about transformation. You put it together, with a medium-term outlook that we believe is going to be very attractive and that, you put that together. And I think that you've got an attractive valuation in the stock, right? And so we've been buyers of our stock from that standpoint, and we will continue to be. And I think what we tend to try to balance is being very capital disciplined and ensuring that the hurdle rates and the expectations, both strategically and financially, are done in the context of how attractive the stock is, right? So from that standpoint. And we have the plan, and the outlook for '26 is to be around 80% of earnings. That other 20% is really allocated to the expectation to be able to deploy RWA consistent with the strategic initiatives we've been talking about. And the big one there is private markets. So serving our private markets clients and those where we are, from a bundled standpoint, bringing both credit products as well as fee-based products to bear with respect to our private markets clients. The returns from a financial standpoint typically justify basically deploying that organically. And strategically, it's right on where we want it to be. So that's where we are for now to the extent that as we get throughout the year. If some of those opportunities don't hurdle or if some of those opportunities don't seem quite as attractive, then we would adjust that 80% as applicable, and we'll stay flexible on that front.

So what I was trying to figure out is in a world where you're optimizing the balance sheet, you are going to reduce the RWA to some extent?

Well, I think that you're going to see RWA grow in '26. But it's not going to grow by as much as it otherwise would had we not been optimizing. So for example, if we're going to basically pull back some RWA, if it's basically not being deployed well, and we're going to help fund some of that front book, so that we're being efficient. But nevertheless, net-net, we're going to grow -- our plan is to grow RWA in 2026.

And just one last one in terms of capital deployment. When you think about inorganic, and you talked through a lot of great opportunities that State Street has, like are there aspects where you could do something inorganic that would accelerate sort of product growth or revenue growth in a certain area?

Yes. I mean I think that our waterfall is supporting a growing and strong dividend, organic RWA growth, which I just articulated, which is directly focused on private markets, so highly strategic. I think there are bolt-on acquisitions small-ish or kind of to accelerate strategic capabilities is something we think about. But again, high bar and anything beyond that, exceptionally high bar for deployment of capital. But I mean, I think the word that we want to leave you with is extremely focused on capital discipline and where it's not being deployed profitably, we're going to give it back to shareholders.

Capital discipline and updated strategic targets. All right. With that, John, thank you so much.

Yes. Thank you.