State Street Corporation ($STT)

With State Street, as many of you know, State Street is one of the lead largest custody banks in the world with $54 trillion of assets under custody and about $5.7 trillion of assets under management. Today with us is Donna Milrod, Chief Product Officer of State Street. She's responsible for leading the strategy and value propositions growth of State Street's Investment Services businesses. She's also a part of the executive committee and she's been with the company for over -- or more than 25 years. To her immediate left is Mark Keating, who's the Head of State Street's Strategic Finance area, responsible for shaping the firm's financial strategy and long-term performance. He's with us last year. So welcome back, and thank you for joining us, and is also a member of the Executive Committee. So maybe, Donna, we could start off with you and talk about a broad question about the strategic areas that the Chief Product Officer focuses in on. And can you talk a little bit more about your role and what you do in the daily life at State Street?

So thanks so much. Good afternoon, everyone, and thanks for having us here, Gerard. So first of all, let me just correct you. I've been at State Street for about 7 years.

Oh, I'm sorry. Thank you. That's a good correction.

But I have been here for 35, so it kind of average.

But I have been in the financial services industry for over 25. So there you go. Yes, no worries. So I did start in State Street back in 2018 to build the Global Clients division, which is the franchise part of State Street that's very much focused on our biggest and global and most complex clients, of which one I see sitting in the front row here. And after that, I ran our global asset manager segment business and did all that before I became our Chief Product Officer. Before that, I was at Deutsche Bank for many years and then also stent at the Depository Trust and Clearing Corporation. So, anyway, thank you very much. In terms of the Powerwall, as you said, we're very much focused on defining and executing on the firm's global product strategy. And what does that actually mean? That means we basically start with our clients. We very much focus on our clients and what their needs are. We also look at kind of trends where the business is going, where the industry is going and always keep our eye towards the future. And really, if you think about it, our client base is extremely diverse. We have not just the biggest asset managers globally, but also asset owners, sovereign wealth funds, official institutions, insurance companies, private market players. So we really have a broad base of clients to really look through to really understand what trends are happening in the industry. So when we talk about keeping an eye towards the future, we really are talking about like where is this industry going. And product really brings is the primary source of innovation that we bring into our products and services. So we are also looking at -- when I say trends, I mean, both from an innovation point of view as well as market structure. So we really focus on building platforms, our capabilities, and we always make sure there's a commercial purpose behind what we're doing. And that means that we really bring a discipline around how we bring innovation and what we invest in, in terms of how we prioritize. So we work across the organization. You'll hear I'm sure, about a lot of One State Street efforts, and that is certainly true in the product innovation arena where we really work across our markets business, our IS business, the Investment Services business. Our investment management business and of course, the wealth business, which hopefully we'll talk about a little bit. But we also work with our partners within the firm in a very agile way. So not just the product organization, but our operations and technology partners as well. And I'll give you two examples. So if you think about core custody, which I know everybody here is thinking about on the regular, we have been living through a couple of years of global market change -- market structure change, moving to accelerated settlement. So from a product perspective, we ensure that we, of course, comply with all of that on behalf of our clients and on behalf of the enterprise, but there's new innovations coming out every day in order for us to achieve that accelerated settlement process. So whether it be robotics in our reconciliation process -- processes, which we have brought into the bank or innovation and new technology on how we do corporate actions or how we do core custody and settlement clearing. So hopefully, that gives you a bit of an example. And the same is true in our private market space. where we look to bring innovations into the firm that has a commercial purpose across all of One State Street. So I just, I guess, maybe would end with over the past 3 years since I've been in this role, we have seen an incredibly high uptick of innovation that we brought into the organization. That has helped reduce time to market of how we bring our products out and bring those capabilities to our clients. And I suppose you could see those results as you think about how we've done from a new sales perspective, you've seen a step change in that over the past 3 years. I'd like to think we're part of that story. I'd like to take all the credit. I can't take all the credit. But I think all that innovation and product -- new product launches and new services has helped support all of that growth.

Got it. And as a follow-up, when you spend time with clients, what are they looking for from State Street and how does that shape the growth priorities for the company?

Yes. So I talked a little bit about that already, and I'm so glad you asked because we do spend a ton of time with our clients. And as I said, it's a pretty great base to start from. So the client really is focused not only on their own strategies and what they need to achieve in order to meet them, but also they're thinking about the future, too, and they depend on us to help them with that and we guide them there. So when you put it together and you think about -- or we think about how we prioritize our investments, the first thing we think about is how we can help our clients meet their strategic goals, but also modernizing our core platform. So we want to make sure we're improving the client experience all the time and also bringing operating leverage to the firm. So this could be, again, through new technology that we either build or that we buy. We're always on the lookout for new financial technology companies out there that are doing something specific that we need. So we're responsible for that build versus buy analysis. I talked about having some discipline around that. Second, we also are focused on where we can expand into high-growth, high-value areas. Private markets is a great example. Alternatives is a great example, but also data and analytics. We've launched our data intelligence business last year as a part of that theme. So these are areas where, especially in the private market space where there's increasing complexity that's driving even greater demand for service providers like ourselves, where we can help clients achieve their strategic goals. But also we bring One State Street to all of that. So how do we leverage our balance sheet on behalf of our clients, our financing capabilities. Those are kind of unique propositions as we compete out there. And then lastly, I'd say we always are looking to invest in emerging technologies and emerging infrastructure. So we'll talk about digital assets, I'm sure. So that would be a good example. And of course, you can't get through a day without talking about AI. And of course, AI is part of that. I talked a little bit about robotics, but AI is true as well. So you couple that all with this disciplined investment approach and how we do prioritization because we're really focused on not only how do we get more operating leverage, but also durable fee growth.

Coming back to the digital asset platform. How important is it to have the hybrid model that you guys have that the digital assets co-exist with the traditional finance infrastructure for your organization?

Yes. So first of all, I'd just say digital assets are here. So anybody who thinks that I know AI is crowding out all the kind of head space that people have, but really, digital assets are kind of here and in the execution mode as well. It's a central theme of all of our clients. conversations. And I'd say, first of all, we've been in the digital asset space for almost a decade. And at the beginning of that time, let's say, 8, 9, 10 years ago, it was a curiosity. Clients were kind of asking what is this, then it moved into, well, how is that going to impact my business? What are the opportunities for us? And now it's really about how is it going to reshape the financial markets. And there's definitely a convergence happening on the kind of -- I talked earlier about the past 2 years being about accelerated settlement. Well, I'd say that the market and our clients are looking for constant ways to focus on real-time everything, real-time cash, real-time positioning, daily NAVs, more liquidity, transparency and mobility and blockchain or distributed ledger technology is right in the heart of all of that. But at the same time, so you see this convergence with the technology and these market demands. But at the same time, there is no way we're getting out of traditional finance anytime soon. So those of us who are banking analysts, for example, you don't worry. You're not going to be replaced by DLT, you might be replaced by AI. But that's -- that's a different panel. But -- so we really truly believe that we're going to be living in this hybrid world for time to come. You have this side-by-side digital rail and traditional rail. And really, if you think about what State Street does and what our clients are depending on this for is exactly that. They are really not interested in operational disruptions because of this duality or this hybrid role. So they want us to handle that for them. And really, if you also think about it, every time there's big technology innovation, there's always fragmentation that happens. And then people spend careers trying to figure out how to fix that fragmentation. But really, it's our job to navigate through that fragmentation. And insulate our clients from it. So we announced in January the launch of our digital asset platform that's been in the works for some time. I'll talk about that, hopefully, in a minute. But what you would expect from a company like State Street. It's scalable, it's secure, it's interoperable, and it really helps us insulate our clients because that's essentially what we do. and it digitizes the entire value chain from issuance all the way through settlement. And it is flexible enough that if you choose to have kind of a digital front end but use all the traditional kind of infrastructure behind it, it can handle that. It's plugged into everything that we have, both on the traditional side as well as on the digital side, but it also can provide an entirely on chain experience, which by the way, is quite unique. That's not what you see out there. What you see out there is more of a digital front end without the connectivity to the back end. So I guess, at the heart of it, what I'd say is what we're doing in that digital space. is very much true to the principles of core custody, which is you got to keep your clients asset segregated and protected, you have to separate financial activities from safekeeping from market-facing activities and then ensuring proper control so that when beneficial owner changes, you can still audit -- you have an audit trail for all of that.

You've given us the digital capabilities today. What's the road map for new products and how that's going to evolve over the near and medium term?

Yes. So as I mentioned already, we've been at in the digital asset space for almost a decade now. We provide fund admin and accounting for digital assets, be they crypto, digitally native securities or tokens all along and we continue to do that at scale. The digital asset platform that I talked about really started a while ago. I'd say at the beginning, we always thought we could rent those capabilities. So while it management, tokenization, all of those things, digital asset custody. And about 3 years ago, we determined that we needed to really own our own platform. So we entered into a partnership with a company called Taurus, which is a blockchain service provider. And that has really is at the core technology of our digital asset platform, but there's a lot around it as well. And as I said, it's a secure, scalable platform that has tokenization capabilities so we can tokenize cash assets or funds. It has wallet management capabilities. It has a digital asset transfer agency. As part of that platform. It can support digital cash. It can support Fiat, it can support stablecoins. And as I said, it can provide an entirely on chain experience from issuance to settlement and that's true across jurisdictions. So that's what we've got. And then in 2026, this year, we are really focused on launching products off of that platform and the very first product that we're focused on as a tokenized money fund money market fund. Thank you. And we can talk about that in a minute as well. But along with that comes both Fiat and stablecoins being able to take that for the payment rail, and we are co-creating with clients as we speak. We have about two or three clients right now that we're focused on, but a very large pipeline behind that. I would say following that, we will get to ETFs. I'm sure we're going to be tokenizing ETFs as well as deposits. And then we'll look at different asset coverage and then spread out by jurisdiction based on regulatory changes.

Yes. Mark, I will get to you in a second, but following up on the tokenization. Can you explain the folks actually what is tokenization, not everybody understands what it is and then what the benefits are particularly to the tokenized money market mutual funds that you just touched on and any other use cases that you see coming? You mentioned ETFs, but anything else?

Yes, sure. So first of all, tokenization is really a digital representation of an asset on a blockchain or distributed ledger. And each token really represents a claim or a share -- a fraction of a share of the underlying asset. And it's -- in tokenized form, it's just easier to store transfer and trade in a very secure way. And I'd say the general benefits of tokenization are really fractional ownership always on 24/7 activity as well as near instant settlement. We like to call that atomic settlement. Everybody chuckles at that, but that's -- it's near instantaneous, which is very much aligned to what I talked about in terms of how the market is going in terms of everything trying to get to real time. So why money market tokenization first. Well, I'd say there's three real benefits that -- and they have real commercial value to our client base. The first is what's going on in stable coins. There are -- money market funds are a natural cash equivalent for stablecoins, right now, they cannot earn interest. Also stablecoins are really used for gas fees for crypto transactions. So there's a lot of rhetoric in the market about them being -- stablecoins being used for payment rails. That isn't really true yet, but that will come. And really, if you think about the opportunity for a stablecoin. So stablecoin is investing in money funds, they will then earn interest. So that's clearly one use case that has real commercial value. And I'll talk in a minute about like what does that mean? What is the upside? What's the opportunity? The second use case is really about distribution. So, this allows money market fund sponsors to reach digitally native investors. So there's an opportunity there. Think of that as another wrapper just like an ETF or a mutual fund. So -- and we know wrappers, like we're the #1 servicer in ETFs. We know a thing to you about this. So we bring our expertise to the market there. And then the third use case is really about using these tokens as collateral. So if you think back to 2022 with the U.K. Gilt crisis that turned into an LDI crisis, that was really because counterparties need to post more collateral they had to liquidate their money funds to get to the underlying assets, and that just took time and therefore, that just made the crisis not much worse. If they were able to post tokens of their money funds, which were just a representation of the same value, we would not have had such a deep crisis. So real commercial utility there. So if you think about the opportunity, you have a $10 trillion money market mutual fund market. In terms of what's been tokenized so far, it's less than $1 billion or right around $1 billion, just 1% change is pretty enormous. So there's like plenty of room to grow. And then in terms of that first use case on stable coins, there's about 300 -- just under $300 billion in stable coins out there. The prediction is that, that will go quickly to $500 billion in the next couple of years. on its way to almost $3 trillion in 5 years, and that's all without paying interest. So imagine if you can provide a vehicle that will pay interest, and you can see an enormous explosion in this money market tokenization world. Then you asked about what might be next. I talked about ETFs a little bit. But if you think about what tokenization does and what smart contracts do it really removes a lot of friction. So a use case that people are talking a lot about as private assets, private markets. definitely can see utility there. However, there's some fundamental issues within private market servicing and activity that makes it difficult for both AI as well as an opportunity for both AI and blockchain. And that is -- it's a very bespoke world. There's still a lot of spreadsheets happening. I'm not saying at State Street. I'm saying generally and not a lot of standards. Not a lot of standard terms and contracts, et cetera. you see a lot of work happening, dealing with the data elements within private markets. And that really needs to get, I'd say, more at scale, and that's something that we are very much working on bringing that innovation lens that I talked about. And as one of the largest service alternative assets and funds, we have a really good perspective about how this is going to go. There's no doubt that smart contracts will help but we have some work to do before them.

One other question is investors always like to try to assess progress. Can you share with us how we should assess the progress you're making in the digital asset strategy? And how does it differentiate you from your competitors?

Well, I'll start with your second part first because I like to talk about how we differentiate and then we can talk about measure our success. Well, simply put, I mean, we'll bring more funds to market that you can measure our success. And then eventually, we'll have to figure out, again, as an industry commercial model around tokenization and digital assets. But I think given our scale and infrastructure as a globally systemic bank, I think that's far and away our biggest advantage our clients come to us, they really want us to help them through this time of transition. And they want to be partnered with the same stability and trust that they've come to expect. So how you pair that blockchain connectivity with robust security and controls and global servicing expertise. So I'd say that's a very large differentiator for us. Our client base is also another differentiator. I talked a little bit about how diverse it is, but they're large and sophisticated clients. So their expectation of us is high. They know that we like to co-create with them I talked already about what we're doing to co-create with clients right now in the tokenized money market fund space. And I can't emphasize enough how foundational that is, not just for us but for them. And then I'd say the fact that our platform is very much integrated into our existing service environment. Again, this point of having TADF or Traditional Finance and Digital Finance side-by-side, you need to have these places where we can work across both of those rails, but also deal with all the other fragmentation between different regulatory jurisdictions as well as different blockchains. There's new ones appearing every day. So clients really don't want to have to deal with that. That's really our problem. And our platform, thankfully, is blockchain agnostic. So we designed it that way. and we're open and interoperable, which I also think is really important. So we -- as I said, we support multiple blockchains as well. And then lastly, I'd say we have a history of first. We were there 100 years ago to develop the first mutual fund similarly with -- we have a long history of democratizing finance. This is another way that, that happens. We were the first middle office outsourcer in scale. The whole notion of front-to-back, which is commonly discussed today about connecting the front office to the back office. We actually created that. So we know how to do this. We know how to innovate.

Yes, very true. And to give you a break, going to Mark for a moment. From the perspective of the Global Head of Strategic Finance and following up on some of Don's comments, how strategically important are digital assets State Street's investment priorities.

Yes, sure. Thanks for that. And maybe just to take a step back before we talk about digital, and I think you can take away from what Donna is saying is there's a lot of things to invest in. right? There's a lot of really great opportunities for us. And I would think about the framework for how we think about making strategic investments at State Street really aligns across three key things for us: First, it's about driving long-term growth; second, it's about the client experience and a lot of what Donna was getting at today; then the third is around modernization of our technology and simplifying our operational platform. So those are the key kind of three things that we think about when we're thinking about how to deploy our investment capacity. At the same time that we're doing that, we're very mindful of what the revenue environment is that we're operating in, and we've talked about that over the last year or 2 in terms of what the scenarios are. But when we are looking at what we're going to invest in, we're pairing that up with also driving long-term productivity and savings as an organization so that we're able to create that capacity that flywheel so that we're investing and as we've talked about, $300 million or $400 million, $500 million a year of incremental investment to go into all the great things that Don is talking about. So maybe bringing it back to digital. I mean I agree with Donna and what you've said about it's a hybrid model. Our job is to make sure that we are able to insulate our clients from any kind of friction or potential fragmentation between traditional finance and decentralized finance and all the things we've talked about. And as Donna said, we have a very long and storied history of being innovative, being there for our clients. And when you think about service for us, it's really trust, it's really technology and then it's really service excellence. And those are the things that we do all the time every day, and we need to do it on digital, and we will. And that's kind of how we'll be successful there.

Got it. And stepping back for a second, it's still early in the year. What are your thoughts about the current operating environment. And when you think back to January when you laid out your macro assumptions, now grant that nobody was expecting what happened a couple of weeks ago in the Middle East, of course. But how are you looking at it now?

I was thinking as I was getting ready for this. Last year when I was here with you, it was on the eve of tariffs and Liberation Day and now -- so it's kind of -- seems like an annual event.

It is at this conference.

So certainly, it's very dynamic. It's almost a tale of 2 halves of the quarter to some extent. So if you -- and just as a reminder for everybody, right? So our full year outlook in January was really based on a stable kind of flat to year-end global equity market assumption, which would have implied on average markets being up about 11%. And through the year. Through the end of February, markets were running somewhat ahead of that pace, driven by the strength mostly in non-U.S. markets and conditions certainly have softened somewhat, as you mentioned over the last couple of weeks, and we're going to have to see how the quarter and how the year plays out. But overall, markets are generally remain constructive to our kind of base case. Turning to interest rates. Certainly, the rate curve continues to move around, especially in recent weeks. As we stand here today, it looks like rates may be somewhat higher than what we had initially expected. But again, we'll have to see how that continues to evolve. I'd also highlight that the U.S. dollar which has strengthened kind of recently. Looking back at a quarter a year ago, a quarter has weakened pretty considerably that's a factor in terms of our performance, and I can talk about that a little bit more. So again, it's very early in the year. We'll continue to reassess our overall macro assumptions. We know very well how all of those play through our business. And -- but overall, the operating environment has been generally supportive relative to our initial expectations year-to-date.

Got it. Maybe with that as a backdrop, can you share with us how you're thinking about the first quarter as it's shaping up now?

Yes, sure. Yes. Thanks, Gerard. So yes, let me unpack that, give you a little bit of color in terms of how we're seeing the first quarter come together. And as always, I'd just remind folks that our outlook is on an ex notables basis, so against the market backdrop, I outlined, we've seen very good momentum in our core servicing and investment management fees. We talked a lot about momentum being built in 2025. We exited in a very good place. We've seen that continue into 2026. So solid organic growth. I mentioned the kind of supportive average market levels, so that's a positive. In addition, we're seeing some additional positive tailwinds and drivers in Q1 relative to our initial expectations, including higher volatility and higher client volumes. Both of those benefit are FX trading revenues as well as we've seen a more favorable deposit mix, which is benefiting our NII. So if you stand back and take those kind of together, while there's still a few weeks to go in the quarter, right now, we're currently expecting the first quarter total revenue revenues to increase in the low teens on a year-over-year basis, supported by similar growth in both fees and NII. And for the quarter. Importantly, we expect to generate roughly 400 basis points of total operating leverage, so that's total operating leverage on the back of the stronger revenue outlook. Obviously, there's going to be some higher revenue-related costs and the continued strategic investments that we've been talking about today that we continue to make and how we drive future growth and transform our operating model. So I'll also mention that back to the currency point.

Yes, thank you.

So while weakened dollar is relatively neutral to our overall operating leverage. We do expect a couple of percentage points of impact on both revenue and expense. On a year-over-year basis. So you want to take that into consideration and a little extra color there. So overall, to wrap up, results are expected to be better what we envisioned for the first quarter back in January and although it continues to be a dynamic operating environment and as that continues to evolve, I'd note that some of the positive trends that are driving results higher this quarter may or may not persist ongoing after Q1. And the final point I'll make on the back of what I've just said around the first quarter is that we remain confident in our ability to deliver another year of positive total operating leverage and pretax margin expansion across a range of scenarios. And we'll have a lot more to say in share on our full year expectations when we get back together again in about a month in mid-April to talk about the Q1 results.

Very good, Mark. We're running out of time. So maybe coming back to you, Donna, just to wrap up, what's the core message you want to leave with investors? You gave us a lot of good insights. But if you had to wrap it up, what's the message you want to leave with us today?

Yes. So I guess maybe I would just say that I'm super excited about the pace of change that's happening in our markets that we all operate in. It's not just technology. It's just the -- you call it a flywheel. The flywheel of change is I've never seen it in all my as being in the business, which is super exciting. They are super opportunities for us. And I think State Street is really well positioned. We have been around for a really long time, but we've always been at the vanguard of change and that has been consistent. I highlighted some of those areas, but there's so many more. We don't necessarily talk about that much, but we have our record speaks for itself. So I would just say super excited about the opportunities in front of us. I mean I think about all of our platform businesses from alpha to our alternatives platform, our new wealth platform and now our digital platform. There's a lot going on, and there's a lot to really be excited about. And I think we're differentiated across all of those areas.

Very good. Please join me in around the applause thanking Donna and Mark for joining us.