State Street Corporation (STT) Earnings Call Transcript & Summary

Good morning, and welcome to State Street Corporation's Second Quarter 2026 Earnings Conference Call and Webcast. Today's call will be hosted by Elizabeth Lynn, Head of Investor Relations at State Street. [Operator Instructions] Today's discussion is being broadcast live on State Street's website at investors.statestreet.com. This conference call is also being recorded for replay. State Street's conference call is copyrighted and all rights are reserved. This call may not be recorded for rebroadcast or distribution in part or in whole without the express written authorization from State Street Corporation. The only authorized broadcast of this call will be on the State Street website. Now I would like to hand the call over to Elizabeth Lynn.

Good morning, and thank you all for joining us. On today's call are CEO, Ron O'Hanley, and our CFO, John Woods, who will review our second quarter 2026 results and provide an update on our medium-term financial outlook. Both are included in our earnings presentation, which is available in the Investor Relations section of our website at investors.statestreet.com. Following prepared remarks, we will be happy to take your questions. Before we get started, I'd like to remind you that today's presentation will include results presented on a basis that excludes or adjusts one or more items from GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the earnings release addendum. In addition, today's call will contain forward-looking statements. Actual results may differ materially from those statements due to a variety of important factors, such as those referenced in our discussion today and in our SEC filings, including the Risk Factors section in our Form 10-K. Our forward-looking statements speak only as of today, and we disclaim any obligation to update them even if our views should change. With that, let me turn it over to Ron.

Thank you, Liz. Good morning, everyone, and thank you for joining us. Today, we'll focus on 2 key topics. First, we'll review our strong second quarter performance, the momentum we continue to build across the franchise and our improving outlook for 2026. We'll then discuss our new medium-term financial targets, which we released this morning. We are excited to outline the strategic pillars that will drive this next phase of State Street's growth the significant opportunities we see to further strengthen our compelling value proposition and competitive position and the actions we are taking to further transform our operating model. Together, these initiatives reinforce our confidence in our ability to deliver sustained growth, expand margins and returns and create long-term value for our clients and shareholders. But first, let me begin with our second quarter highlights on Slide 3. We delivered a strong set of financial results in the second quarter, driven by disciplined execution, deep client engagement and continued momentum across our businesses. These results reflect the strength of our platform and position us well for continued progress as we look ahead. Second quarter EPS was $3.65, up from $2.17 in 2Q '25. Excluding prior year notable items, we delivered significant earnings growth of 44% year-over-year driven by record quarterly fee revenue, including record servicing, management and FX trading revenues together with record NII, driving total quarterly revenue up 17% year-over-year to an all-time high. This performance drove continued margin expansion and stronger returns. Taking a step back, this quarter's results reinforce the durability of our franchise and the sustained progress in our financial performance. 2Q marks our tenth consecutive quarter of positive operating leverage, excluding notable items, reflecting disciplined execution and the momentum we're building across the business. In addition to our strong 2Q financial results, we also meaningfully advanced our strategic agenda in the second quarter, further strengthening our franchises and positioning us for continued growth. Within Investment Services, innovation continues to be a key driver of future growth. For example, our digital asset platform is always on financial infrastructure that will enable clients to rapidly bridge from traditional to digital finance, and we continue to make strong progress in advancing this strategy. In 2Q, we announced our intention to deliver a tokenized fund servicing capability by year-end, subject to regulatory approval. Following a competitive process, a leading European asset manager selected State Street to service tokenized money market funds expected to launch later this year. Importantly, State Street Investment Management is also expected to be an early adopter of this offering, underscoring the strength of our One State Street approach. Our investment management business continued its focus on innovation and product capability to position the franchise for sustained growth, and it demonstrated further evidence of the power of our franchises working together as an integrated One State Street. In 2Q, 91, a State Street Alpha client entered into a strategic partnership with State Street Investment Management, paving the way for a suite of active co-branded ETFs. This is a clear example of how we bring the value of our combined firm to clients for our One State Street approach as well as how we drive innovation within the industry deploying our extensive expertise and capabilities to identify and create solutions for the world's investors. We also recently announced that SPYM, our low-cost S&P 500 ETF has been selected by the U.S. Department of the Treasury as the exclusive default ETF for Trump accounts. These accounts are designed to make investing simple and accessible giving children a straightforward opportunity to begin early in life as asset owners, benefit from the power of compounding and stay invested over time to build wealth. We're proud to help Americans through that journey with SPYM. Turning to State Street markets. We continue to demonstrate the strength of our integrated liquidity and financing capabilities, driving strong client activity. We experienced record FX trading volumes and revenues in the second quarter with securities lending also up significantly year-over-year. Our markets franchise provides industry-leading capabilities to our investment services clients. deepening client relationships, while driving revenue diversification and earnings growth. Before I turn the call over to John, let me briefly touch on the strength of our capital position. which was reflected in the Federal Reserve's recent stress test. Following the release of those results, we announced an increase to our quarterly common stock dividend of 10% to $0.92 per share beginning in the third quarter. Dividend growth remains an important component of our capital return as demonstrated by the double-digit average dividend growth per share growth we've delivered over the last 4 years. In closing, we delivered a strong second quarter, driven by disciplined execution, deep client engagement and broad-based momentum across the franchise. Our results highlight the strength of our businesses both individually and as One State Street and the role innovation plays in driving performance today and growth ahead. We are encouraged by our progress and confident in our ability to continue delivering improved performance for the balance of the year and over the medium term, supported by solid financial and strategic momentum. With that, I'll turn it over to John to walk through the quarter in more detail.

Thank you, Ron, and good morning, everyone. Starting on Slide 4. Our second quarter results, excluding the impact of notable items in the prior year period, reflect continued momentum across the franchise with broad-based revenue growth driving 645 basis points of positive operating leverage. Total revenue increased 17% year-over-year to a record $4 billion. Fee revenue of $3.2 billion increased 16% year-over-year, reflecting strong performance across investment services, investment management and markets while net interest income of $860 million increased 18%, driven by a 17 basis point increase in net interest margin to 113 basis points. Against the backdrop of strong revenue performance, expenses of $2.7 billion increased 10% year-over-year, primarily reflecting higher revenue-related costs as well as continued strategic investment in the franchise. These results drove another quarter of improved profitability, with pretax margin expanding 470 basis points year-over-year to 34% and ROTCE increasing over 6 percentage points to approximately 26%. Turning to Slide 5. Servicing fees were $1.5 billion in the second quarter, up 13% year-over-year primarily reflecting organic growth of approximately 7%, driven by client activity, flows and net new business with the remainder from higher average market levels and currency translation. ACA ended the quarter at a record $57.9 trillion, up 18% year-over-year, reflecting higher period end market levels, blend flows and net new business. Servicing fee sales totaled $87 million in the second quarter, reflecting continued client demand across regions and strength in strategic growth areas, including alternatives. Turning to Slide 6. Management fees were $772 million in the second quarter, up 29% year-over-year, reflecting approximately 9% organic growth and strong support from higher average market levels. Assets under management ended the quarter at a record $6.3 trillion, up 23% year-over-year, supported by higher period end market levels and positive net flows. Net inflows totaled $114 billion in the quarter, marking our fifth consecutive quarter of positive organic growth. This performance was primarily driven by strong index ETF and cash net inflows of $66 billion and $35 billion, respectively. Net inflows were broad-based across geographies, led by the Americas and complemented by solid contributions from Asia Pacific and EMEA. We launched 38 new products and solutions during the quarter, including a tokenized money market solution and a stable coin in reserves fund further advancing our digital asset strategy. As Ron mentioned, SPYM was selected as the exclusive default ETF for Trump accounts, expanding access to investing for U.S. children. Beyond the near-term asset gathering opportunity, the program introduces a new generation of investors to State Street Investment Management and reinforces our position in the growing U.S. wealth market. Turning to Slide 7. our global client franchise continued to support healthy activity across our markets business in the second quarter. FX trading services revenue increased 27% year-over-year, excluding a notable item in the prior year period, to $494 million, driven by record high client volumes. These volumes reflect both our distinctive capabilities and the continued deepening of relationships with clients. Asia Pacific was a particular area of strength with robust equity market activity in a number of markets across the region, supporting client volumes. Securities finance revenue increased 19% year-over-year, reflecting higher client lending balances. Turning to Slide 8. software services revenue declined 14% year-over-year in the second quarter, excluding a notable item in the prior year period, reflecting elevated on-premises renewal activity last year. That said, underlying trends were strong, with software and data revenue up 10% year-over-year, driven by client onboarding and conversions. In addition, annual recurring revenue increased approximately 14% and revenue backlog grew 6% year-over-year, reflecting continued SaaS implementations and conversions as well as ongoing sales momentum across the software platform. Turning now to Slide 9. Net interest income of $860 million increased 18% year-over-year, driven by a 17 basis point expansion in net interest margin to 113 basis points. The improvement in NIM reflected a more favorable funding mix, continued benefits from investment portfolio repricing and the runoff of terminated hedges, partially offset by lower average market rates. Average interest-earning assets of $305 billion were largely stable from the prior year quarter as growth in deposit balances was partially offset by lower short-term borrowings. Moving to expenses on Slide 10. Expenses increased 10% year-over-year in the second quarter, excluding notable items, primarily reflecting strong revenue performance. The majority of expense growth in the quarter was tied to higher business activity with revenue-related costs contributing approximately 6 percentage points. Additionally, we continue to invest in our business, including capabilities, products, AI and technology. These strategic investments contributed an additional 2.5 percentage points, while underlying run-the-bank costs, net of productivity savings accounted for the remaining 1.5 percentage points. Headcount was down approximately 3% from a year ago, consistent with our focus on productivity and disciplined resource allocation across the enterprise. Turning to Slide 11. Our capital position remained robust at quarter end, providing flexibility to support client activity, invest in the business and return capital to shareholders. Our standardized CET1 and Tier 1 leverage ratios were 10.8% and 5.3%, respectively, broadly stable relative to the first quarter. We returned $631 million to shareholders during the quarter consisting of $400 million of common share repurchases and $231 million in declared common stock dividends for a total payout ratio of 62% and bringing our year-to-date payout ratio to approximately 73%. As Ron noted, we announced a 10% increase in our quarterly common dividend per share beginning in the third quarter, reflecting the strength and resiliency of our business. Let's turn to our full year outlook on Slide 12, which, as a reminder, excludes notable items. Our outlook assumes global equity markets remain flat on a point-to-point basis from the end of 2Q through year-end. Our rate outlook is broadly aligned with forward curves and assumes the Fed and BOE remain on hold, while the ECB delivers one additional rate hike this year. We now expect fee revenue growth of 12% to 13%, up from our prior outlook of 7% to 9% reflecting continued organic growth across servicing and management fees as well as healthy client activity in markets. We expect NII growth of 14% to 15%, up from our prior outlook of 8% to 10% primarily reflecting stronger average deposit balances. Consistent with our stronger revenue outlook, expenses are expected to increase by roughly 8%, up from our prior outlook of 5% to 6% and reflecting higher revenue-related costs and continued investment. Based on our current outlook, we expect to deliver roughly 500 basis points of positive operating leverage in 2026 and implying a pretax margin of approximately 32%. Finally, we continue to expect an effective tax rate of approximately 22% for the full year and a total payout ratio of roughly 80%, and subject to Board approval and other factors. Our strong first half results and improved outlook for 2026 reflect the strength of our franchise and continued execution against our strategic priorities. With that, I'll turn it back over to Ron to discuss our medium-term financial targets.

Thank you, John. Let me turn to the second part of our discussion on Slide 14. Our strong execution in the second quarter, combined with our improved outlook for 2026, provides meaningful momentum as we begin the next phase of our journey towards achieving new medium-term targets. State Street is well positioned for its next phase of growth and value creation. That begins with the scale and strength of our franchises. The breadth of our platform is substantial, enabling us to compete and serve clients from a position of strength. Globally, we are the second largest custodian, largest ETF servicer and a partner to the world's largest asset managers and asset owners, entrusted with more than 10% of the world's financial assets. and we operate in more than 100 markets worldwide. We are the fourth largest asset manager and the third largest ETF manager globally. And in our Markets franchise, we are the #1 provider of FX to asset managers as well as the top 3 securities lender with capabilities that are deeply integrated with our investment services business and client relationships. Not only do these businesses hold leading market positions, they come together as a powerful One State Street, an integrated firm creating meaningful synergies and delivering greater value for both our clients and our shareholders. Importantly, our businesses are integrated, not just in how they go to market, but also on how they serve a shared client base across asset managers, asset owners and wealth managers. As illustrated on the right side of the page, we service an essential and trusted services and investment partner to the world's leading investors. As a result, we are strategically aligned with firms positioned to grow enabling us to drive further value as we broaden and deepen our relationships and participate in their growth in the years ahead. This One State Street is the foundation for everything you will hear from us today. And it is the platform from which we will deliver the medium-term financial targets. Without understanding of who we are and how we go to market as One State Street, let me turn to what all of this translates into strategically and financially starting with our track record and where we're committing to take the franchise from here. Turning to Slide 15. In recent years, State Street has delivered structural improvement across the metrics that matter most. Excluding notable items and over the past 2 years through the end of 2025, pretax margin expanded by approximately 300 basis points and return on tangible common equity increased to approximately 20% supported by revenue growth of more than 14%. That strong performance continued into the first half of this year. As you can see on the left of this slide, year-to-date pretax margin improved to approximately 32% and ROTCE increased to roughly 23%, excluding notable items. This reflects the deliberate choices we have made in recent years to strengthen the franchise, improve operating efficiency and invest in the areas that positioned us for durable growth. As we look ahead, our continued momentum and next phase of growth will be driven by 3 key strategic pillars which are outlined on the center of the slide. First, our core businesses. Many of our most compelling growth opportunities lie within the franchises we already lead. These are businesses where we have built deep capabilities, operate at scale and enjoy strong competitive positions. We remain focused on strategically investing to accelerate these opportunities and executing with discipline to deepen client engagement and deliver durable growth over the medium term. Second, to complement the growth of our core franchises, we are prioritizing 3 strategic growth initiatives: alternatives, digital assets and wealth services that span and connect our investment services, investment management and markets franchises, creating opportunities across the breadth of the firm. These 3 initiatives are adjacencies that align us with evolving client demand and some of the fastest-growing and most attractive revenue pools, while also deepening our essential role to our clients as the industry evolves. Importantly, these initiatives are diversified across the maturity curve, driving growth from our already strong position today in alternatives, positioning us for the next phase of market structure and digital assets and enabling access to the largest and fastest growing pools of client demand through wealth services and investment solutions. And third, our next phase of technology and AI-enabled transformation will be a critical enabler, simplifying how we operate, accelerating time to market and fundamentally improving productivity through a more integrated product platform model, which John will speak to shortly. Finally, as we execute against these 3 strategic pillars, we believe the firm is advantaged by the interconnected capabilities across investment services, investment management and markets, enabling us to deliver through a One State Street model that provides whole portfolio of solutions at scale rather than just stand-alone products. Taken together, our consistent track record of stronger financial performance positions us well for the next phase of growth. We entered that phase with positive momentum supported by the continued strength of our global franchises, a differentiated portfolio, strategic investments spanning multiple stages of maturity and the evolution of our operating model through technology and AI-driven transformation. These efforts underpin the new medium-term targets we are announcing today, which include the milestones of expanding our pretax margin to 35% and increasing return on tangible common equity to the mid-20s over the cycle. We are confident in our ability to achieve these ambitious targets as we build on our strong momentum and continued improvement in financial performance. With a clear path to sustained organic revenue growth and positive operating leverage, we believe we are well positioned to unlock long-term value for our shareholders. With that, let me turn it over to John, who will walk through our path to achieving these objectives in greater detail.

Thanks, Ron. Turning to Slide 16. The pretax margin expansion we expect to achieve over the medium term is broad-based with contributions across investment services, investment management and markets. In Investment Services, the approximately 300 basis point contribution to enterprise margin expansion is expected to be driven by a combination of organic revenue growth and productivity initiatives. On the revenue side, we see opportunities to deepen our existing client partnerships. Our key growth priorities include extending our ETF servicing leadership, broadening our reach across key international markets, expanding adoption of our differentiated Alpha front-to-back capabilities and capturing growth across alternatives, digital assets and well servicing. We also expect continued support from net interest income, which remains closely tied to the client deposit growth and underlying strength of our servicing business. On the productivity side, given the scale of our global operations, Investment Services is expected to be the largest contributor to the expense saves in our technology and AI and the transformation program. By simplifying our operating model, scaling common platforms modernizing our technology stack and increasingly leveraging data and AI capabilities, we expect to deliver an upgraded client experience and improved service quality while lowering unit costs over time. In Investment Management, we see significant opportunities to drive growth through scale and expanded client access. ETFs, index investing, fixed income and other solutions remain core growth engines for the business. In addition, wealth is a key strategic focus as we expand our presence across advisory, intermediary and retirement channels, while partnerships with next-generation wealth platforms extend our distribution to new investors, and bring differentiated investment solutions to market. We also see substantial opportunities in alternatives and tokenization where we are broadening access and developing new ways for clients to incorporate private market and digital asset exposures into their portfolios. Taken together, these opportunities support our confidence in delivering sustained organic growth, operating leverage and approximately 200 basis points of enterprise margin expansion from investment management over the medium term. In markets, we see continued opportunities from both geographic expansion and product innovation. This includes scaling our financing, trading and execution capabilities in our faster-growing international markets. expanding our product offerings and deepening engagement with our core investment services clients. Beyond this, growing demand across alternatives, digital assets and wealth is creating new opportunities to expand our solution set. Supporting these growth drivers, enhance data capabilities, automation and operating efficiency initiatives are expected to enhance execution and helped to deliver approximately 100 basis points of enterprise margin expansion over the medium term. Underlying all of these opportunities is our One State Street approach which enables us to connect capabilities across investment services, investment management and markets to deliver more integrated solutions, deepen client relationships and increased wallet share. Turning now to Slide 17. Let me expand on the transformation initiatives that will accelerate execution, enhance service quality and create capacity for future growth. First is the migration of our operating model to a technology and AI-enabled product platform structure. Rather than just reengineering legacy processes, we are taking an end-to-end view of the enterprise and are planning to rewire how we operate, embedding AI and modern technology into our core business processes. Under this model, business, operations and technology resources are reorganized into integrated agile delivery teams with business leaders holding end-to-end ownership of the client delivery process and experience. The result is meaningful efficiency gains from simplification, automation and AI enablement. Beyond these efficiency benefits, faster time to market for new products enhanced service quality and improved client experience are expected to drive incremental revenue opportunities across the franchise. Supporting this operating model is our technology simplification and modernization agenda. By reducing legacy applications, expanding the use of modern cloud platforms and further strengthening our enterprise data foundation, we are lowering unit costs, improving resiliency and reducing operational risk. At the same time, a modernized data foundation unlocks new revenue potential by creating capacity for investment in growth and innovation. Finally, we're scaling AI adoption across the enterprise to improve execution, enhance productivity and accelerate software development. AI will drive meaningful gains in developer efficiency and code modernization freeing up capacity for higher value work. Beyond these productivity benefits, AI is enabling new client-facing capabilities and better data insights that will increase the earnings power of our franchises over time. Together, these efforts are expected to deliver approximately $1 billion of run rate transformation benefits by 2029 with approximately 75% of this driven by expense productivity and 25% from revenue. Turning to Slide 18. We outline our capital allocation framework and how we intend to deploy capital over the medium term to support our strategic objectives, generate attractive returns for shareholders and maintain the resilient balance sheet our clients expect. Our capital priorities remain unchanged, supporting a strong and growing common dividend, investing in the franchise to drive organic growth, and returning excess capital to shareholders through share repurchases. Consistent with these priorities, we continue to target a total payout ratio of approximately 80%. To support these objectives, our current medium-term outlook includes a CET1 ratio of approximately 11% and a Tier 1 leverage ratio of approximately 5.25% to 5.75%. Turning to our final slide. State Street is entering its next phase of growth from a position of strength. The momentum we have built in recent years has fundamentally repositioned State Street to deliver sustained growth continued margin expansion and stronger returns over the medium term. The scale and strength of our franchises, our distinctive portfolio of strategic growth initiatives and the accelerating impact of our transformation agenda give us real conviction in the path ahead and in our ability to execute against it. Collectively, these drivers support our new medium-term targets of 35% pretax margin and a return on tangible common equity in the mid-20s. With that, operator, please open the line for questions.

[Operator Instructions] Our first question will come from Alex Blostein with Goldman Sachs.

So I was hoping to start with the medium-term targets. Maybe starting with the revenue question first. So helpful in the way you framed it in terms of sort of qualitatively where you're looking to lean into. But I was hoping you can give perhaps just a little more granularity on the $250 million and kind of which businesses that's likely to come from. And I guess, more importantly, you guys have been improving organic growth to begin with over the last couple of years. So as you think about the firm-wide organic fee growth today, where does that stand? And I guess, when you layer in these incremental efficiencies or incremental initiatives, where do you see organic growth from white going on the fee side?

Yes. Bill, thanks for the question, Alex. This is John. I'll go ahead and give you some context with respect to overall how we're thinking about it. Over the medium term, the way I would think through it would be positive operating leverage is the main sort of North Star that we're committing to. So what we're saying here is, and as I mentioned in my remarks, we look at the baseline from which we're launching this in 2026 whether it's 1H or even our outlook for 2026 overall, we're around 32%. That's growing over the medium term to that 35%. And I'd say that, that would be consistent with positive operating leverage of 100 to 150 basis points, which is driven by organic growth across all 3 of those businesses that we're talking about. I would pair that with some commentary with respect to NII over the medium term. So we do see net interest income rising in that low to mid-single digits area driven by balance sheet growth in the low single-digit range and our net interest margin getting to the upper end of our $110 million to $115 range as you get out over the medium term. And so those are the underlying engine that drives this progression. And then when you flip over to the transformation program, and that 75, 25 split that $1 billion that we expect to deliver by 2029. As you asked, 25% of that is decked against revenue opportunities. And I think that's the starting point, given what we're trying to accomplish here is so broad-based and has huge impacts on client experience and time to market and cycle times. But the $250 million that we have in there is primarily related to the targeted strategic initiatives that you'll see that we're mentioning here that are on State Street driven. That would be in the alternative space. and in digital and in wealth and among those 3 probably alternatives is the biggest contributor, just given its maturity profile. We've gotten -- that initiative has been ongoing for a number of years, and we're accelerating into it. So that's how I would think about overall the context for the medium-term outlook and putting revenue into the mix there.

Got it. That's helpful. And just for a follow-up, maybe double-clicking on the $750 million of, I guess, cost savings you expect to see here. Again, it feels like there's inherent operating leverage in the business, regular way as you described it initially and then this sort of comes on top if you round that through, obviously, that leaves you with much higher pretax margin than the 35%. So if I think about the $750 million being a gross number, maybe help us frame how much of that will ultimately get reinvested back in the business. to think about what the net kind of efficiency on the net cost savings could be on the back of the program.

Yes. I mean it's fungible, right? But I would say that the transformation program has 2 overall objectives, maybe more than 2, but 2 overall financial objectives. It has the broader objective in the revenue space, which we've already covered. But when it comes to just the $750 million, it's doing double duty. First, it's allowing us to grow our strategic investment capacity over this medium term in order to drive the outcomes that we're talking about with respect to these One State Street initiatives as well as the broader powering our leading franchises. So that's the first part of it. And then the second part of it is helping us stay on track for the margin expansion. So I think as a percentage, I think it's relatively equal parts allocated to reinvestment and margin expansion is, I think, the best way to think about it. And we also mentioned that when you look at our businesses, just given the footprint of our investment services business, that's the majority of that of the productivity saves get generated by that -- where all that head count is over in the servicing side of the business. So that's the way to think about it across the businesses as well.

Your next question will come from Glenn Schorr with Evercore ISI.

I definitely want to ask a question on all things digital assets, stablecoin and tokenized deposits. But the lead into that, I just want to make sure I get the right perspective. And I think this is for you guys and for the industry is the initiatives and you have many in that space are included in that incremental $250 million, and it's not even the biggest piece. So the message I'm hearing is for you guys and the industry is we're investing a lot in the future infrastructure of the financial markets, but it's a long-term commitment because even if the all $250 million was from digital assets, that would be less than 2% of State Street's revenue. So focus on the big picture first. And either way, my next question is, I noticed there was 2 announcements during the quarter. One on the Visa, MasterCard, stablecoin network with over 100 businesses, and you weren't one of them and also okanized deposit network with a bunch of banks and that's more of a bank thing. So my question is what is taking place in terms of as we're modernizing all the payments and clearing and settlement systems? And are we paying too much attention because right now, it's not adding up too much money. So I apologize, I smushed those 2 together, but I want to get the right perspective on all things digital.

Glenn, maybe I'll start, and John will pick up on the specifics as it relates to the numbers. And -- as you think about the $750 million and the $250 million, again, that was in the context of the go-forward next phase of transformation that we just described. we've got initiatives underway. And if you think about just the -- on the cost side, if you think about the margin expansion, that we've enjoyed over the past several years. I mean that's been the result of our ongoing transformation program. What we're talking about here in the $750 million and the $250 million is the next phase, which is incremental. But we've got existing initiatives that also will be contributing. So I just want to make sure that people understand the mathematics here. Number one. Number two, in terms of your specific question, on digital. The way we think about this is we're primarily an infrastructure provider to our clients, enabling them to do to execute their digital strategies. So who are our clients? Our clients are global investors, right? So that's why we're focusing on the -- if you think about it, the traditional to digital back to traditional kind of rails because it will be a long time before the whole infrastructure stack is digital. And then secondly, we're focused on things that relate to those investors, asset managers or asset owners, hence, for example, the focus on the focus on tokenized money market funds who are our client base, will a large segment of them are large asset managers. So we're picking our spots and going to where we know our clients want to go is the way to think about it. John?

Yes, just a few comments to add to that. I mean I'd say that, as you know, we launched our digital asset platform recently. It's a secure, scalable platform. I think we're trying to create the capabilities to manage wallets and really manage the on-ramp and off-ramp between traditional finance and into the digital on chain world. A few comments about some things that we've also been able to do is we're -- in the Investment Services side of the business, we're focused on enabling client launches of tokenized money markets. And so that's early in the road map, and we're excited about that. And I think on the other side of the house with respect to Investment Management, we also announced a couple of digital asset ecosystem product launches as well. So you think about this across the One State Street lens, State Street Investment Management did launch a tokenized money market fund on chain, basically cash equivalent for the digital ecosystem creating new distribution, et cetera. And broadly, asset managers love this with respect to the distribution aspects as well as collateral mobility. And Investment Management also launched a stablecoin reserves money market fund as well targeted to stable in issuers. I think it's going to be table stakes for us in the space that we're in to have these capabilities. as we mentioned, alternatives is probably the most mature of the 3 that we're spotlighting here today. Digital was gaining momentum, but lots of activity, as I articulated here, in the here and now as well that we're making progress on.

I appreciate that. I mean it sounds like you make a lot of progress. It doesn't add up to huge numbers right now. But that actually, I take as a good thing because it means the other $15 billion, $16 billion of your revenues is that much safer from the digital invasion, but if you agree with that, I'm good and done.

Your next question will come from Mike Mayo with Wells Fargo.

Could you guys give us more confidence on -- or why you're confident that this new phase at State Street over the next 3 to 5 years is going to succeed? I guess I have -- in my plus column I recognize that you have 10 quarters in a row positive opt leverage, better returns, better pretax margin. And the organic growth aims to pick up. I'd love if you could verify that. It looks like the servicing fees have picked up organic 2% last year to 5% this year. Asset Management, 6% to double digits this year. So that would be the plus column. But I'd say the negative column is I've heard this before at Phase 3 for the last the 10 years and this certainly predates you, John, and it predates you Ron. But the whole cloud, the tech, the rewiring, as you said, John, was the story last decade and it failed to produce the results that were desired. So really, why is this time different? Why should investors think that this major kind of demarcation new phase of State Street should succeed.

Mike, it's Ron. I'll start with that. We begin with a very strong foundation. If you look at our track record of execution, we've got, as you point out, the 10 quarters of positive operating leverage. I mean that didn't come out of nowhere that came out of investment in the platform. But also investment in products and the revenue growth capabilities that we've now demonstrated over those 10 quarters. So what you're seeing in this foundation is consistent organic revenue growth and a very productivity-focused culture, right? John noted in the results that yes, our expenses have gone up, revenue related and reflecting the revenue-related cost plus investments in these capabilities, but our head count is actually going down. We didn't have that kind of foundation in the history that you're referring to. Secondly, I put a lot of -- we put a lot of credence in this team. The current management team is a strong one. Over 50% of that team is either new or new to its role in the last 3 years. They work very well together, and you're seeing it in terms of this strengthening each of the franchises, but also the real results coming out of the integrated One State Street approach. You're seeing out of this team improved operating efficiency literally across the board quarter after quarter, year after year. And our First half 2026 results kind of reinforced this trajectory, right? We had the prior 3 years that we pointed to, and you're seeing that now play out again in the first half year. So taking it all together, we look at these targets. And these are targets over a cycle. I mean, we're in a very constructive environment now. We're not assuming that, that's going to last forever. But when we look over the cycle, these are the targets that we're aiming for, they're ambitious, but we're going to hit them. We selected margin and ROTCE because they're within our control and they are things that are important to you as investors. So we bring it all together. We've got a lot of conviction. We've got a lot of confidence, and we intend to execute what we laid out there.

I guess in terms of the rewiring part, I mean, it all sounds good on paper, and it may or may not play out the way you expect it. Is there any metric that you or we on the outside can monitor to see that success, like revenues per employee or I don't know, number of employees just the idea of going to a more agile infrastructure, kind of what that means in financial terms.

Yes, Mike, it's John. I guess a couple of things. One is the -- starting with the overall number of the $750 million, it is disproportionately being driven by this operating model transformation, which is pretty tangible. I mean what we're talking about is basically migrating to a product platform approach where our business technology and ops teams are reorganized into cross-functional integrated teams that deliver specific business outcomes for clients. That's a physical organizational migration that's very tangible to see. And what we're going to be doing is taking out the unneeded interfaces that currently exist that slow down and created some inefficiencies between those groups today. That's pretty tangible, and that will flow through to headcount. I think what you saw over the last couple of years is that our head count is down. The gross head count is down by more than what the net is. And the reason for that is that we've been investing in driving strategic initiatives along the way. And that theme will continue. So I think you should keep an eye on head count and watch that area. We'll also, over time, look for a short list of metrics that will help support what we're talking about here in terms of product development, like release cycle times and client experience and service quality metrics, et cetera, which we expect to improve. And in the platform space, having -- migrating to more applications in the cloud and reducing the footprint of our data centers are also lend themselves to metrics that I think we can share and also migrating our overall investment spend because of the efficiency that we should get in software development life cycle and in the product life cycle overall, you should see the percentage of our growth, of our investment spend rise over time as well. So I think there's a handful of metrics that we can share in combination with the fact that we are actually going to reorganize the company along these lines, and that will be very tangible. It won't be -- and that will be something that we can demonstrate over this medium term.

Your next question will come from Ken Usdin with Autonomous Research.

Actually just don't mind to focus on the current outlook. John, just maybe give a little color just looking at kind of what you're expecting for the full year now I guess I would assume that NII kind of flattens out from here and fees probably revert a little bit given how strong FX was in the second quarter, I could imagine some of that would be there. But just kind of just still how you expect some of those to progress from here? And anything we should just be thinking about with regards to either seasonality or things that revert from the recent results.

Yes, sure. I mean I think maybe starting with the revenue, I mean, I think we expect continued organic growth in the servicing fee and management fee space. And I think that's an important anchor point continuing the momentum that you're seeing in the first half, that continues into the second half. We're not assuming, however, as much of a tailwind from markets -- market levels, I mean, as well as markets, I'll get back to markets in a second, but market levels. We're keeping it flat to the end of the second quarter. And so we'll see how that plays out. But most importantly, organic growth continues into 2H. But to your point, we're setting records in FX trading services here quarter after quarter, it seems. And we do have built in some moderation into the second half. And you can be of 2 minds there. I mean I think we've been -- we've seen client volumes be extremely resilient. We've seen opportunities internationally where spreads are wider and growth is a little stronger but continue to support our markets business. And so we're excited about that, but we're not counting on that in this -- continuing in this outlook for the revenue side of things in the markets business. I think it's going to be a strong second half for markets, but moderating a bit from the record in 2Q is what we're assuming in this outlook. When it comes to NII, that's about right. I mean, I think you're seeing some flattening out there. I mean I'd say earlier, we had a sense that deposits would be in the $250 billion to $260 billion range. We came in above that in the second quarter. Average was around $270 billion. And I think we're going to assume that, that is going to be the outlook for the whole year. So we're raising that in terms of balance sheet contribution coming from NII, and that's underpinning this increase in the outlook from 8% to 10% to up 14% to 15% year-over-year. And with the net interest margin kind of staying in that range of $110 billion to $115 billion. that we mentioned last quarter. So those are the thoughts from my standpoint on those -- on the revenue side. And on expenses, I think the point there is that we're going to see some moderation in the growth in part due to some lower cost on the third-party spend side in the numerator. And then there's also a year-over-year denominator impact from 2H '25 that takes our expenses up to 8% from the prior 5% to 6%, including revenue related. So just a few comments across each 1 of those line items.

Okay. And just one clarification, and I apologize if I missed it in the deck somewhere, but can you just make sure we understand the 3 to 5 years of just what years we're talking about there? And the question people are just asking about like possibility of achieving it inside when you can get to these targets inside that range?

Yes, sure. I'd add 2 points there. One is we -- on the $1 billion transformation program, that is explicitly tied to achieving that by 2029. So that's sort of earlier than the 3 to 5, I would say. So that's by 2029. So that's more in the 3-year range early end of it. With respect to the targets overall, so I think we like to talk about the medium-term meeting 3 to 5 but that 100 to 150 basis point positive operating leverage expectation would imply that we would get there in the early end of that medium-term time frame.

Your next question will come from David Smith with Truist.

The $1 billion of transformation is a nice goal. Are you anticipating any major upfront spend required to get there by the 2029 target? Or is it just embedded between your normal investment spend each year net of efficiencies?

Yes. I think on the recurring side of things, that's all embedded in the numbers that you heard. I think there will be some onetime costs that are predominantly severance related with respect to the head count implications. And so I'd probably frame that in the neighborhood of around $500 million or so would give you a sense for how that would equate to head count reductions, gross. And then on a net basis, maybe similar to what you saw over the recent past, we would expect head count to be down in the low single digits range on a net basis after reinvestment of that capacity into strategic initiatives and growing our franchises, so that's the way to think about it. And we think that's a highly attractive ROI on that severance cost. There's a little contract termination in there, too. but almost the substantial majority of that $500 million, I would say, is severance-related, which typically ends up with very solid ROIs and solid earn-backs as well.

Okay. And then in terms of the lines of business targets, just focusing on investment management, you're saying you're going to get about 200 basis points of enterprise-wide margin expansion from there. But it was less than 20% of revenues last year. So just thinking about the weighted contribution, it would take a pretty big improvement in margins, specifically in investment management to get 200 for the overall company. Can you just talk a little bit more about the key drivers there and your confidence in achieving them?

Yes. I'd say -- I think the answer is -- I think that's right. I mean the math there is that if you go back to 2029, investment management was around 33% margin. In second quarter investment management has already improved that to 38%. So -- and I think that's probably about halfway home from a mathematical standpoint in order to deliver that 200 basis points top of the house. So it seems large from '25 but about 50% of that's already delivered here in the second quarter. Now nothing is linear, and the market levels can have an impact on that over time. But we're just seeing incredible momentum in the investment management space. and just flexing the scale advantage that they have and the innovation in terms of the products that's being delivered. We've got a lot of confidence in this 200 basis point top of house contribution coming from Investment Management. And I think the specific areas that we're talking about is continuing to drive our leading franchise as it stands with ETFs, index and fixed income and just our global distribution expanding that is -- that's a big driver. And then their own transformation delivery as part of the overall transformation program is also a large contributor where cycle times and product release cycle times all shorten, and there's revenue uplift that's embedded in that 200 as well. So those are some of the ways I think about the credibility of that 200.

Your next question will come from Jim Mitchell with Seaport Global Securities.

Just maybe on the margins and expenses again. I guess if we think about the Tech and Ops transformation, do you expect any drag, I guess, in the very short term on pretax margins as you invest or is a lot of that stepped-up investment spending kind of in the run rate? Just trying to think through 100, 150 basis points of pretax margin improvement per year. Would you view that as somewhat linear or back ended.

Yes. It's not back ended. I would say that the base case is that we would expect to generate positive operating leverage in each year of the medium-term outlook. That's our goal, and that's what we're trying to accomplish to make progress along the way. So it's not back-end loaded, but what I'm giving you is an average. And there will be some variation in that inevitably based on both the pace of internal activity and execution as well as external macro factors. But I think 100 to 150 is a good planning range that takes it to the earlier end of that 3- to 5-year outlook. And there's not a early years large investment cycle that has been back-end unveiled over the medium term. The tech investments are planned and consistent with the $1 billion program along the way across the medium term without it being back-end loaded.

Right. Okay. That's helpful. And then on the numerator side, obviously, this year has been a great year, and you've gotten 500 basis points of operating leverage. But what -- you talked about expectations for the rest of the year. from assumptions. But how are you thinking about the assumptions over the medium term for the revenue backdrop? And if we have more years like this, can you get there even quicker? Does that flow to the bottom line, the upside?