State Street Aktie

Moving right along. Very pleased to have State Street. From the company, John Woods, Chief Financial Officer. John did this conference last year with a week or 2 into the job. This year, he's a year and 2 weeks into the job, so we get to grill him a bit more.

And John, maybe the best place to start, in July, you laid out new medium-term targets for State Street: 35% pretax margin, 20% ROTCE. As you think about the path to achieving those targets, what gives you confidence in the ability to get there? And what do you see as the 2 or 3 most important drivers of success over the next several years?

Yes. Thanks, Jason. Really great to be here. And just 1 year into the job, just an incredible platform that we can talk about, that we laid out our medium-term outlook in July.

I mean, I think I'd start off with the global franchises that are part of State Street and drive State Street at scale. So whether it's the #2 custodian in the world, #4 asset manager in the world, #1 FX provider to asset managers in the world as well out of our Markets business. So a pretty incredible collection there that really drives it. And it all starts with that at the foundation and the core.

I think the second one that I would highlight is some very distinctive strategic initiatives that we think will diversify and accelerate growth and returns over time. So we talked about our presence in the alternatives business, what we've got going for us in terms of investing in digital and infrastructure and products. And then more recently, a lot of investment being put into the wealth services space. So that's the second one that comes to mind, just really strong strategic portfolio on top of the core.

And then we did talk about transformation, which I think is something that allows us to invest in those strategic initiatives while still maintaining margins.

And I guess I'd hasten to also add, I mean, recent performance has been really strong. I mean we -- after basically new leadership over the past 2, 3, 4 years in each of our biggest businesses, you're just seeing some of that momentum really kicking in, in terms of the investments that they've made. And there were records set in the second quarter across all of our businesses in one way or another. And that momentum has been really good.

And if you just take a little step back just a few years ago, our pretax margin was in the mid-20s. And when you look at where we are now, it's basically low 30s. Just significant progress in a short period of time. And so I think you put all that together and I'm feeling very good about our ability to deliver on those medium-term goals that we laid out in July. So yes, those are the top ones that come to mind.

Maybe if we could just double-click on a few topics you mentioned. Wealth services, digital assets and alternatives, big strategic areas of focus for the firm. Just how are you positioning the business to capitalize on these initiatives? And where are you seeing the strongest potential to drive growth over the medium term?

Yes. And maybe I'll do that in reverse order. I think -- because in the near term, I would say alternatives is the one that really is delivering, right? So you've got 15% to 20% of our servicing fee revenues actually coming out of the alternatives business. And we're really investing to make that a platform business and improving capabilities along the way. So things like leading into a product where we would drive daily NAVs, as an example, in the alternative space, which is pretty typical in a traditional world, but not quite as typical in alternatives.

So we're continuing to invest there. We've had a lot of success. The growth profile is attractive. The return profile is attractive. And so I'd say over the near term, that's the one that really contributes.

The next one, if you think about digital products and infrastructure. From an infrastructure standpoint, we launched our digital asset platform earlier this year. And we're continuing to invest there from an infrastructure standpoint where we're heading into a multichain capability in digital. So by the end of the year, we'll be in a public permissioned space from a blockchain standpoint, and we'll have public permissionless to follow. But we'll be in a multichain infrastructure. And we sit at the center of our clients' workflows managing that kind of on-ramp, off-ramp between the traditional world and the digital world.

I think what you'll -- where you're going to see that contribute is really just being relevant to our asset manager clients around the world and continuing to see organic growth by making sure we can play that role over time.

The last one that you mentioned, wealth, is the one that is really starting to gain momentum and gain steam. It's not a huge driver of profitability today, but I'd say over the -- like alternatives is. But I'd say over the medium term, you can really keep an eye on wealth being a needle mover. We started off with our Apex investment late last year, and that was driving back-office capabilities.

We've recently announced a State Street integrated offering here in the U.S. And we've got a mandate from one of the largest RIAs in the U.S. to be an anchor client. And our front-to-back wealth services offering, we're extremely excited about that. We've got a pipeline building behind that as well.

So when you think about broadly the things that really drive that strategic initiatives portfolio, it's probably alternatives in the near term, digital throughout, and wealth picking up steam over the medium term.

Got it. You've also spoken about the power of the core franchises across Investment Services, Asset Management, Markets and the benefits of this One State Street. Just how does that show up in practice today? And where can connecting the businesses more tightly drive the greatest incremental value over the medium term?

Yes. I mean the way I think about that is if you think about our top 3 businesses, and I look at it as the intersection between those businesses and our top client segments. So you've got Investment Services, Investment Management and Markets. And then you think about the client segments that we want to serve, it's asset managers, traditional and alternatives, asset owners and wealth managers and intermediaries.

And so when you think about asset managers, that's our kind of collaboration, primarily between Investment Services and Markets. So where you see Investment Services with the front-to-back capabilities serving asset managers, but institutional-grade Markets capabilities from a liquidity and financing perspective, where we go to market together. And there isn't -- Investment Management provides distribution capabilities as well as supporting fund launches for other asset managers. And so that's kind of an exciting way to think about on a day-to-day basis how we serve the asset manager client base.

When I flip over to asset owners, same capabilities port over from Investment Services and Investment Management. But you think about from a One State Street standpoint where a bigger part of the story is the Investment Management capabilities, where whether it's ETFs, portfolio construction, you basically have indexing, multi-strategy, outsourced CIO. Lots of very rich portfolio of products that the Investment Management business provides to asset owners. But nevertheless, we also can bring, again, institutional-grade Markets capabilities for liquidity and financing to the table at the same time. So on a day-to-day basis, you see that playing out with asset managers and asset owners.

And I think the third one, and I referenced -- I alluded to this a little earlier, the third one being wealth managers and intermediaries. I would look at that as not only a customer segment, but also, as I mentioned, one of our top initiatives. And it's probably one of the clearest examples of One State Street really -- and certainly one of the more recent, more exciting ones, where each of the businesses has a big role to play. And where Investment Services, where, as I mentioned, we've launched a front-to-back capability with CRD Wealth supporting the front office, we have the State Street capabilities in the back-office where we have that resident within State Street proper, but also supported by Apex. So very exciting in terms of that Investment Services approach.

But increasingly, these wealth intermediaries appreciate the institutional-grade capabilities that we bring from a liquidity and financing perspective, that we can at the same time support them with, and then all of the Investment Management products in the wealth space from a distribution standpoint, and products. And I should hasten to add, I think approximately 30% of our Investment Management AUM outstanding is in -- comes from the wealth channel. So you look at that and it's really exciting from a One State Street standpoint.

Rounding things out, I mean, I'll circle back to alternatives where I already mentioned what we're doing from an Investment Services standpoint. But Investment Management as well, partnering with alternative asset managers to actually distribute private markets products and get greater access to that. And in the digital space, all the capabilities I already mentioned, but I would add to that Investment Management's tokenized money market fund launches that they recently did. And they also launched a stablecoin reserve money market fund that targets stablecoin issuers.

So I mean, just to wrap all that up, I mean, One State Street on a day-to-day basis is very exciting, but these recent initiatives are all examples of One State Street at work, whether it's alternatives, digital or wealth.

Very comprehensive.

Yes. I'm excited about it. Yes.

You talked about AI as an important part of the kind of the transformation agenda. Can you talk to where you are in terms of implementation, where you see the greatest opportunities to improve productivity, enhance client outcomes and just create capacity for future growth?

Yes. I mean I'd put it in a couple of buckets. I mean the first one that comes to mind would be the developer productivity from an AI standpoint. That was pretty straightforward intangible. We've referenced 30% to 40% productivity expected out of the developer community within State Street. And that comes from code generation, modernizing legacy code and as well as vulnerability assessments, which is increasingly an incredibly important capability to have in-house. And so that's the first leg of it.

I think the second leg, when I think about the rest of the employee base. We've invested in this in a significant way recently. And so much so that the AI-enabled workforce that we track, which is not just day-to-day access to things like Copilot, but more sophisticated tools, has grown significantly. Over the last -- in just the last couple of quarters, I think we classify over 80% of our employees as being AI-enabled. And that's driving the ability to convert that into, certainly, more efficient knowledge retrieval, data extraction, analysis, et cetera.

But it's playing out in products and client experiences as well. When you put in the -- for example. So from a product standpoint, I would say our Data Intelligence product PriceStats is now -- has AI-enriched data incorporated in it. It helps to anticipate inflation readings, increasingly important for our clients to think through. So that's AI-enabled from a product standpoint.

And from other client experiences, I mean, we're a huge cash transaction processor, as you know, and we're wringing out a significant amount of manual interfaces where, whether it's sanctions screening or reconciliations and auto matching, reducing manual interventions so it increases controls and speed of delivery for clients. So that's very exciting.

And maybe the last thing I'll close it out with is we did launch our agentic platform internally earlier this year. That, plus the end-to-end process redesign work that we're doing in the transformation space, that's underpinning the confidence in that transformation journey as well. So it's a -- our transformation journey is process-led, but it is AI-enabled.

Got it. When we look at the market backdrop, we've seen a mix of market volatility, changing rate expectations, dynamic equity markets. I guess as we sit here today, how is the operating environment compared to our expectations coming into the year? And what are you watching most closely as we head into year-end?

Yes. I mean, well, things changed a fair bit. When we were thinking about things at the end of '25, early '26, just equity markets were around 6,800, 6,900. Our assumptions today, if you fast forward, are more like 7,600, 7,700, is end of August, where you look out the window here. It's about where what our assumptions are for the rest of the year. So that's changed a lot. And I think outlooks from Street firms, which I think kind of get updated, might even imply 8,000, but our assumption is 7,600, 7,700 in the equity markets.

I got to jump to the rate markets again. So earlier in the year, I think we were thinking about cuts. And you fast forward to where we are today where there may be as many as 3 or 4 cuts -- I'm sorry, hikes, incorporated into the outlook for the Fed. And it's not just the Fed, the ECB is in a similar place. I think we had ECB on hold this year, and they've already hiked once, and I think there's 3 more hikes in the outlook even for the ECB.

So I think the idea that we would be continuing on the easing cycle has really pivoted to more of a higher for longer outlook, not just -- and not just on the short end. I mean, I think the -- we had the 10-year coming in probably 1,025 or so -- I'm sorry, 425 or so, at the end of '26, and it looks like that's over 5% today. So very different backdrop when it comes to the equity markets and rates.

But I would say that those things tend to be tailwinds for us. I mean higher equity markets, if you add in higher rates, we're asset sensitive, both within the U.S. and in Europe and outside the U.S., generally. And I'd also add that a lot going on that we're keeping an eye on for the rest of the year: volatility, midterms, keeping an eye on what's going on with geopolitics and all of that stuff. But higher volatility tends to be somewhat of a tailwind for us as well. So kind of a constructive outlook for the rest of the year.

You know the next question. In July, right, you raised your outlook for 2026 following strong performance in the first half of the year. We're getting close to the end of the third quarter against the backdrop you're discussing. Just any thoughts on how the business is tracking relative to your expectations?

Yes. I mean pretty good momentum there, I mean, things playing out very well. And I'll make a few comments about where we're seeing this come out. Just from a headline standpoint, if we think about fee revenues, I think we're going to see that come in basically a little better than where we had 2026 before. So maybe something along the lines of 13% to 14% range versus the original 12% to 13% from a fee standpoint.

NII, we had it originally at around 14% to 15%, I think we're going to see that coming in towards the upper end of that range. And so feeling very good on the revenue story. Expenses come in slightly higher in reaction to some of that revenue and other factors. And when you put all that together for the year, I think we -- in July, we mentioned that we would come in around 500 basis points of operating leverage. That probably plays out to be slightly higher based upon those forces from a 2026 standpoint.

Maybe just what we're seeing in the quarter, I could add to that. I mean in the quarter, I'd say that a good way to think about it is pretty stable quarter-over-quarter and somewhat across the board. So whether it's fees, NII or expenses, you could kind of look at 3Q versus 2Q, seeing stability there.

And a couple of themes, on the fee side of things, doing a little better in the servicing and management fee space, maybe as an offset to some moderation in the markets business. And those are a continuation of expectations that we had in July. And then as I mentioned, stability on the expense side of things. And I articulated that 2Q was 10 quarters in a row of positive operating leverage and 3Q is going to be the 11th. Very excited about that and feeling good about the outlook there.

A lot to unpack. Let's start on NII; you continue to outperform expectations. Maybe delve in a bit and just talk about deposits, what you're seeing there and just kind of what gives you confidence in the durability of the trends we've seen, and maybe just the most important drivers of NII performance this year and just how you're thinking about trending into next year.

Yes, I'd just maybe unpack that, starting with balance sheet, and interest-earning assets tend to grow highly correlated with deposit growth. And so we saw pretty strong deposit growth in the second quarter versus the first quarter and articulated an expectation of deposits being in the neighborhood of $270 billion for the year. I mean, I think that's still a pretty good number. That does imply growth in the second half compared to the first half. And we're seeing good trends in the deposit portfolio. That really allows us to think about interest-earning asset growth in '26 being a tailwind for NII. And so that's one -- that's really the main driver and contributor to the upper end of the range of getting closer to 15%.

Net interest margin is going to be range-bound, in the 110 to 115 basis point range. And so those are some of the, I think, forces you'll see play out that are supporting that upper end of 14% to 15% from an NII standpoint. And broadly, the expectation over time and over the medium term is for that growth to continue on the interest-earning asset side of things and for net interest margin to really migrate towards the higher end of that 110 to 115 range over the medium term.

Helpful. You mentioned Apex earlier, where you have a minority investment and partnership with. And I think it was this quarter, you announced an acquisition to expand our servicing business in Latin America. Just as you think about future opportunities, what makes an acquisition or partnership attractive to State Street? What role does M&A play? And maybe just talk about your appetite for bolt-ons and larger things.

Yes. I mean really, I'll comment on this too, I mean, but I will start that when we think about capital -- allocating capital, we start with the strategy road map. That's where it all begins. And the emphasis there is to allocate capital to organic deployment for driving that strategic road map over time. And I talked about the things that we're excited about whether it's alts, digital, wealth and also supporting our global network. So it begins there. But from time to time, when we see the opportunity to actually accelerate capabilities, we'll think about some transactions to help move us down that path in an attractive manner.

And so starting with Apex, we're really excited about the wealth services opportunity and serving the wealth intermediary -- wealth manager client segment. And so the ability to create a digitally-native front-to-back capability to support that customer segment was really exciting. And so the first step in that was creating that partnership with Apex. The second -- the next step in that was really what I mentioned earlier in terms of integrating that within State Street, so now that's an integrated State Street offering that we lead with, and signing up an anchor client there. So very excited about that.

And so it's all part of a combination of organic and some inorganic activity to actually move that strategic road map down the path.

And then yes, we are excited about the transaction we announced with Santander and CACEIS to acquire their joint venture in Latin America. Our global asset management clients have business operations around the world, including Latin America. And we weren't at scale down there, and this creates a scaled servicing capability that is attractive and accretive from a growth and return standpoint. And so from that standpoint, we feel really good about that puzzle piece as part of the global network and infrastructure.

But broadly, we start off with the focus on organic deployment of capital and having -- being very disciplined when it comes to smaller transactions like bolt-ons.

Got it. State Street has historically talked to 80% payout ratio, you've talked about it for this year as well, as well as looking out. Just given strong capital ratios, this improving regulatory backdrop, is 80% the right level for State Street? And just how do you think about prioritizing capital deployment across dividends, share buyback, bringing reinvestment in the business and some of the strategic opportunities you just talked about?

Yes. I think it's a good point. I mean roughly 80% is a good yardstick to -- that we plan against. And we mentioned that that would be -- that was the planning expectation, not only for 2026, but also over the medium term. I think what it does is that it starts off with the expectation that we're going to return a majority of the capital generated in any given year to our investors, so first and foremost.

The reason why we're leaving that capacity there, that other 20%, is just to reflect the fact that we have very attractive opportunities in a number of our businesses to deploy capital for the benefit of our client segments and our customers. So for example, in the Markets business, we have a leading FX capability that does absorb capital. But being the #1 FX provider to asset managers and continuing down that path does have some capital needs. That capital that gets deployed is accretive from a return standpoint and is really part of the overall ecosystem in terms of supporting asset managers.

The other side of the ledger, we have some attractive opportunities from a lending perspective. And so you see we will also support the asset management space, both traditional and alternative, in providing access to the balance sheet, connected with our servicing capabilities. That also -- that ecosystem is also very accretive. And so just having a growth mindset and staying on the path to continuing to grow the platform, we think that it's valuable to have some ability to use some of that capital strength in order to support customers.

And then lastly, from time to time, as you mentioned, we'll see the opportunity for some bolt-ons. And so that's why we tend to use that 80-20 as a good planning expectation in any given year, which could deviate depending upon the opportunities that may ebb and flow that I articulated.

You mentioned earlier that this third quarter is the 11th straight quarter of positive operating leverage. You're going to exceed 500 basis points of positive operating leverage for the year. Just as you kind of put together the kind of the 2027 budget and thinking out expenses, maybe just talk to how you balance kind of investing for the future, driving further profitability improvement? How are you thinking about operating leverage target for next year? And then, right, things are really good, just how do you kind of pivot if maybe next year the environment becomes less favorable?

Yes. We did -- so broadly, we have scenario-based planning. So if we see some base case expectations, I think we talked about in July in terms of making progress over time, we talked about the transformation program supporting our strategic initiatives as well as allowing us to continue to contribute to pretax margin over the medium term.

The scenario-based planning, whether it's a blue sky outcome where we might -- maybe lean in a bit, we also have gray sky scenarios that would allow us, nevertheless, continue to invest in the crown jewel strategic initiatives through downturns. Because we do think that's important that when and if you have a downturn, you may tap the brakes on certain marginal investing, but you really need to protect the core so that you have momentum coming out of those downturns and don't see yourself in an air pocket of strategic capabilities as you get -- as things become a little better and those downturns pass.

So we do a scenario-based planning. I think you'd see us leaning in on transformation-related capacity to invest in order to continue to have an attractive margin progression over time, delivering against that medium-term outlook that we articulated.

I guess you talked about the $1 billion transformation benefits on last quarter's earnings call. Is that the right number? What should we be watching to see if you're on target for that? Maybe expand upon the biggest pieces of it, and how did you come up with it?

Yes. I mean, I think the -- when you look at that over a 3 or 4-year period and break that down, that's a pretty solid mid to high single-digit creation and productivity based upon the expense base. And I think that's the -- we said we would get to that level by the end of 2029. So on a run rate basis, you start seeing that in year 4 of an outlook, and so pretty solid productivity expectation when you think about it top-down.

We did build it bottoms-up across 4 overall pillars. The first is an end-to-end process redesign of our business processes and our supporting operating model across the whole company. So we're migrating to our product platform approach, which is very cross-functionally driven and underpinned by an agile delivery mechanism. So that's the first pillar of it, and you're going to see reengineering and significant efficiencies and productivity coming out of that first pillar.

The second one is technology modernization, fewer applications, bigger footprint in the cloud. And then the third is data, fewer data lakes and much more efficient access to data throughout the platform. And the last one is more of the traditional kind of blocking and tackling from an efficiency perspective, third-party spend, managing through organizational design and those kinds of things.

So those are the 4 pillars that underpin the $1 billion. $750 million of that's on the productivity side coming out of expenses, and then you have the $250 million coming out of revenue in terms of product launches and that kind of thing as well. So feeling good about that calibration. And seeing that productivity begin to ramp over the medium term is what would give you the signal that we're on track to deliver by the end of 2029.

Got it. And earlier we were talking about digital assets. Maybe spend a little bit more on that. I think it's something that we're trying to, I guess, continue to grapple with as it's still in the early stages. Just as you look out, I guess, what are you hearing from clients? Where is demand? I know we're in the early innings. I guess how do you just see this evolving? And then what are the biggest opportunities for State Street?

Yes. I mean, I think as I mentioned, we think about being at the intersection of all of these workflows for our clients, and providing that seamless on-ramp and off-ramp between the traditional world and the digital world. Where we're seeing our clients get really excited is, in the early use cases, is really around collateral management and unlocking the economic value of collateral movement and flexibility. So tokenized money market funds, where money market funds are often not -- are not eligible collateral, this unlocks that on behalf of our clients, number one.

And I think secondly, the other big one that we think about is facilitating new distribution channels for our asset managers, where on-chain distribution of assets for a customer base that prefers to operate or have the flexibility to operate in the digital world and on blockchain is the second big one that we're following our clients, and being the infrastructure that allows them to do that seamlessly.

And as I mentioned, this is just going to be table stakes. So the asset management space is going to need to operate in all likelihood, for the foreseeable future, in a hybrid approach, from both traditional rails and on digital rails. And we're going to be there to support them in doing that. It's going to be quite some time before we see how that plays out in terms of digital versus traditional rails, but we think it's a hybrid approach for the foreseeable future. And we're investing in the infrastructure and product capability to power it.

And we've talked about at the onset, we started with kind of your medium targets, and I know they're kind of 3 to 5-year targets, but just what are the most important milestones we should watch over the next 12, 18 months as maybe leading indicators that you're on track to achieve that 35% pretax margin, mid-20s ROTCE?

Yes. I mean, I would say, I'd go back to the core franchise again and keep an eye on organic fee growth, is an important driver of where we were. And if you look at item I may reference, if you look at the second quarter and if you strip out market tailwinds and FX tailwinds from where things are going, and we certainly benefit from all that. But even if you exclude all of that, you look at that operating leverage, is -- and I talked in July about, over time, 100 to 150 basis points is what we're talking about in terms of over the medium term to deliver that 35% pretax margin. We delivered exactly that in the second quarter, stripping out all of the market stuff. And so keeping an eye on our organic fee growth is one of the important drivers ex Markets.

I think the other one is continuing to see the benefits of NII as an important part of that story. And as I mentioned, we expect NII to grow in the low single digits range over the medium term, driven by the expected growth that we'll see in deposits, et cetera. But I should correct that. So the NII we expect is low to mid-single digits. The balance sheet growth is low single digits. But keeping an eye on continuing to grow deposits over time as well as seeing our net interest margin starting to migrate towards the upper end of that range. That's the revenue story.

And on the expense side of things, just seeing us continuing to be able to advance our capabilities from a strategic initiatives portfolio perspective while still growing that productivity and getting to that $750 million of productivity that underpins that $1 billion. Those are the things that we are excited about that I think will remain -- will be emblematic of being able to provide that positive operating leverage even ex Markets, that will underpin getting to that medium-term outlook that we're excited about from July.

And in the waning minutes, you've been at State Street a year. Biggest positive surprise, biggest, I don't want to say negative surprise, but biggest not-positive surprise?

I mean I -- maybe positive surprise, I mean the global presence and the interconnected businesses that we have around the world and the quality of our customer base is just incredible. So 95 of the top 100 asset managers in the world are clients of State Street. 85 of the top 100 asset owners are clients of State Street around the world. It's just really impressive. And just a premier client base, an incredible global network.

From outside the building, and we all look at State Street, you can think about it in one way. And so after a year of being inside the building and seeing it operate, it's just an incredibly positive feeling to be part of this franchise. So that's the first one.

I'd say that the -- on the other side of the ledger, and I think that quickly becomes a positive, as these often do, I mean, the opportunity from a strategic initiatives perspective and from a transformation perspective is probably a little bigger than I thought it was going to be. And we grabbed the wheel on that and leaned in and put a transformation acceleration program together to basically pull that lever over the medium term. But yes, that was probably a little bit of a surprise in terms of how big that opportunity was going to be coming in from a year ago.

Great. On that note, please join me in thanking John for his time today.

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?

Yes. I mean I think, as I mentioned, the 100 to 150 basis points assumes. And we expect to deliver organic fee growth over this time frame. I also mentioned that NII would come in low to mid-single digits when we think about how that will contribute over the time frame. And so to the extent that the positive operating leverage exceeds the 100 to 150, we would we would achieve the 35% earlier. That's for sure.

I would hasten to add that we are going to be looking for a sustainable level at the 35% million and at these targets, where we're delivering it, not only in real time for sufficiently long multiple quarter period but also have an expectation that it will continue to stabilize and grow from there. And then that's the timing for when we would reassess whether those targets have been achieved and then consider whether they should be adjusted higher.

Your next question will come from Ebrahim Poonawala with Bank of America Securities Merrill Lynch.

First of all, John, thanks for all the details in the slide deck on the target. Nicely laid out. I had a question. I think it's an interesting point in time where you're going through -- when you talked about rewiring the business and kind of when we think about AI adoption within Financial Services. Just talk to us as you've approached the targets as you're thinking about adopting AI, how difficult is it to sort of implement that through workflows and rewire that, is it -- like, do you think over the next 12 to 24 months, you'd have a franchise or an enterprise that fully, I guess, I don't know, AI native or yes, if you don't mind talking through that?

And I guess tied to that, how much of AI-driven gains are in these targets as opposed to you could be an even more profitable bank if kind of AI delivers to its promise on productivity.

Yes, sure. I mean, I'll make a few comments about this. So I'd say I'd put the AI benefits in maybe 3 categories. The first 1 would be within our operating model, which is the lion's share of what we're really delivering here in terms of the $750 million and which depends upon the tech simplification and AI adoption. We are going to be embedding Agentic capabilities within our operating model redesign. So we are migrating to agile ways of working and within any given cross-functional team, if we would have done this, call it, 5 years ago, that would have been composed of all humans, of course, now it's going to be a hybrid of human, a genetic team that actually staff these integrated teams.

So I would describe the savings that will be coming from the operating model transformation as embedded with Agentic capabilities. And I'm not sure you can fully unpack how much is separately driven by the Agentic aspects versus there are a lot of other things going on where we're reengineering, taking out interfaces from business processes. At the same time, the rewiring is basically creating these human Agentic hybrid teams. And so it all happened together and had put that 1 category, which is Agentic is helping to power the operating model efficiencies that we're talking about. So I'd say that's the first one.

The second one is within the technology organization itself where it's much more able to be ring-fenced, if you will, when we look at software developer productivity. And it's very explicit and we're indicating -- that is our expectation that you'll see equipping software developers with these tools that we would expect to see a 30% to 40% increase in productivity. And that likely gets deployed in faster cycle times and more product launch and higher innovation, which drives revenue. So we're excited about that, and that's the second overall category.

I think the third one is really kind of a rising tide [indiscernible] all boats story where we're going to be and have delivered Agentic capabilities from a standardized standpoint on a copilot platform to all eligible employees. And it's basically allowing them to actively use these AI tools and create higher value work. So knowledge, retrieval data document extraction, content creation, all of those things and analytics and decision support, all of that is improving the productivity of our colleagues across the platform.

And those are the 3 ways that I think about it, and you're going to see the savings expressed and embedded in that $750 million with respect to expense saves, definitely, but you'll also see it driving the expectation of the $250 million on revenue and beyond over time.

Got it. So that was helpful. And just a separate question following up on Glen's on digital assets. I mean there seems to be a lot of hype around that. Not that the technology is not real, but just talk to us when you think about blockchain digital assets kind of playing a critical role in the plumbing of the market. Do you think of that as a 5- to 10-year build-out? Or do you think over the next year this is going to have a meaningful impact on how you think about revenue growth and including disruption risks to certain line items. Just yes, your thought process around that?

Ebrahim, it's Ron. It's a really good question. And I think what's playing out is like a lot of technologies. There's an awful lot of promise and the early delivery, I think underwhelms and is disappointing. And then the later delivery actually is greater than what everybody anticipated. And I suspect that's how this will play out. I mean if you think about some of this blockchain technology, it's not new at all. I mean it's been around for a while. Part of it is you're taking new technology and putting it into an ecosystem. And I'm not talking about just State Street ecosystem. You're talking about a financial ecosystem.

But the -- there's a lot of enablement that's occurred over the past couple of years, things like the Genius and whatever is going to come out of the Clarity Act. There's a regulatory movement that's starting to align around this. Again, given some of these things, the regulatory movement has to align across borders. But if you think about what it enables, just think about collateral alone and the ability to create a -- to transform money market funds into collateral eligible, there'll be so much pressure to do that.

If you think about in real assets, the growth in real assets and the ability to use blockchain to actually tokenize some of these things enable it to be broken up and put into smaller portfolios, wealth and retail portfolios. I think market pressures will accelerate this. So I believe that not surprisingly lower than what the hype might have suggested. But if you look at what's going on under the covers, there's real adoption going on. There's real stuff being built out. And I think you will see this promise over the medium to long term.

Your next question will come from Manan Gosalia with Morgan Stanley.

John, you've spoken about the balance sheet optimization and the NII durability is being central pillars of their medium-term outlook. Can you just remind us on what the near-term and medium-term impacts of the balance sheet optimization efforts are and what the impact is to NII?

Yes. I mean I would say it's all embedded in that outlook with respect to, I think, in mid-2025, our net interest margin was around 96 basis points. I think -- and we've been able to raise that predominantly through optimization activities, not exclusively, but a big part of it was optimization activities to remix the funding side of our balance sheet into higher deposits as a percentage of overall funding and lower short-term wholesale funding. And so that net interest margin has risen from around that 96% level to $110 to $115 range that we're talking about today. So if you do the math on that, that's around 15 to 20 basis points overall of net interest margin lift.

I think there's some environmental factors and business execution that has been driving that, which is great. And then there's a reasonably large piece of that was restructuring the balance sheet over the last several quarters to stabilize it at this $110 to $115 level. And then as I mentioned earlier, we're expecting to try to see continued tailwinds there on net interest margin. And so I would -- what's assumed in the medium-term outlook is that is that we'll migrate to the high end of that $110 to $115 to be around the $115 range as you -- as the medium term plays out.

Got it. And then maybe on the capital side, it seems like you raised the CET1 target a little bit from 10% to 11% to 11%. Can you speak to what's driving that? Is it just [indiscernible] or is it a desire to keep some sort of capital buffer right now while the environment is good. And is there any upside to that 80% payout ratio?

Yes. I mean I think 80% is a good planning level. That's what we've got included and assumed in our medium-term outlook. And I'll start with that and come back to the back to the ratio itself. We do have very attractive opportunities to put capital to work in support of our strategic clients, whether it's in our global credit finance business, supporting our Investment Services clients or in the markets business who are supporting investment services clients as well as asset owners and increasingly thinking about wealth managers over time.

So there's RWA there that we think about aligning with our strategic goals over the medium term and also being attractive marginal deployment, just a growth mindset there. So I think it balances reasonably well. Our opportunities in terms of putting balance sheet to work with our desire to continue to have an attractive return of capital for shareholders. So that's what's going on there.

I mean I think what you're seeing with respect to the CET1 ratio is a couple of things. One is we're leverage constrained. If we're increasingly able to continue to grow deposits, which is our expectation, not only here in -- we demonstrated that in the first half. We're committing to that maintaining those levels on an average basis in 2026, that creates more of a leverage constraint. And so we'll have to be managing the interplay between leverage capital and CET1. And so that's probably the thing to think about when you see that 11%.

Your next question will come from Brennan Hawken with BMO Capital Markets.

I had a couple on the ETF business. So recently, you launched a new product, QNDX, which is a rather interesting market had been dominated by the Qs and recently opened up for new competition. But what was particularly interesting to me is the pricing of the product you priced it at 10 basis points, which was a pretty narrow spread above NASDAQ. 8 basis point licensing charge and suggested to me that maybe this might be a new pricing strategy for Spyders, given your inherent advantage of having your own servicer and effectively being able to price more attractively than a lot of your competition. Is this what we're starting to see here? And does it lead to any concerns around potential pricing pressure on ETF servicing?

Yes, Brennan, I mean we -- unlike if you think about the history of us in ETFs. If you think about SPY in the Spyder franchise, which started out as an institutional franchise. And later on, we thought about, okay, what are we going to do for the wealth and the asset holder world, if you will, that's what led to the launch of SPYM to set alongside SPY. We didn't have that equivalent institutional product. So our view was when we went into this that we needed to round out our product line. We just didn't have it. It's a good strategy for the wealth and buy and hold investors.

So we thought about it positioning that way is really how we thought about and really nothing more than that. obviously, because we are the leading ETF servicer when we're both the servicer and the sponsor, we're in effect deriving revenues from 2 different places. So sure, that's a factor. But in terms of how we position the product, it really has to do with our starting point, which was not being in that market at all. And when NASDAQ in effect, opened it up to others. That's how we thought about the positioning.

Got it. That makes sense. And also, we've heard a noise from wealth management firms talking about rolling out revenue share programs for ETFs, do you have any sense for that potential impact? Have you been in dialogue with any of those wealth management firms? And what would you expect on that front going forward. I know the ETF business is a little more institutional oriented, but the wealth side is still relevant.

Yes. So I mean we're -- as I think you know the franchise is growing, and the fastest-growing part of that is the well side of it. So we clearly are in dialogue with all these distributors. We work with all of them. There's long-term partnerships here. with them. In many cases, not only are they our distributor, but we serve them in other ways and they serve us in other ways. So these are -- virtually all these distributors are also important partners. So we talk to them. We'll do things that make sense, and we won't do things that won't make sense.

Next question will come from Steven Chubak with Wolfe Research.

So I wanted to ask on the pricing outlook. Pricing pressures have been less acute in recent years. At the same time, there are more investors that are questioning pricing resiliency going forward, just given the significant windfall, you and your peers are expecting to realize from AI deployment and just a structurally lower cost to serve. Was hoping you could speak to what you're hearing from customers as you engage in more recent discussions on pricing? And what are some of the assumptions on pricing that are underpinning the 35% medium-term target how much of that benefit do you expect will be shared with customers over time?

Yes. I'll start on that. I mean I'm just reflecting on your question, and I mean, I spent a lot of time with clients. And I can't think of one -- we always talk about AI, and I can't think of one that's talked about and we're really looking forward to you lowering prices, right? They think of it more -- and the discussions are more around first State Street, how is it going to help you serve us. And we talk there about speed, so kind of cycle times and those kinds of things.

We then talk about how we can actually think about AI across our firms, particularly in those cases where we're not just the back office, but we're providing middle office services. So it's most -- most of the dialogue is around what does this enable us to do in terms of getting things faster to them or how we might work more intensively and in an automated way together.

Yes, I might just add on to that. I mean, I think what we've got -- we've got planned over the medium term is organic growth in the servicing business. And within that, there are multiple drivers and that incorporates conversations with clients with respect to pricing and all of that. And they all end up being positive. I mean we are going to lower cost to serve over the medium term there is net new business. There is client activity and turnover that we really benefit from. And I think all of that would be included in and inclusive of our organic growth on the top line. And then when you look at the contribution we expect from the servicing business of 300 basis points to the overall enterprise that drops to the bottom line as well from a pretax margin standpoint.

That's great color. And for my follow-up, I wanted to ask on the medium-term target, but maybe looking at it from some of the parts lens, if you will. You noted the 35% margin target is ambitious. If I look across each of the core segments, best-in-class peers are running with stand-alone margins, somewhere around 40% plus.

And just wanted to better understand how you and the Board settled on 35% just given some of the higher margin upside that might be implied when benchmarking best-in-class peers? And is there anything structural that's precluding you from getting somewhere closer to high 30s to maybe 40% type margin over time even beyond the medium term.

Yes. Firstly, I think it's important to put these targets into context. They're -- it's not a destination, it's a milestone, right? And if you think about the progress that we've made to date and the fact that we've -- we're talking about what we're going to do through a cycle, we feel like over the time frame that we've talked about, 3 to 4 to 5 years, that this is a reasonable number, and we'll reset them again. So number one.

Number two, that margin is composed. I'm not sure the number you're citing kind of which segment that you're alluding to there. But if you if you think about it, obviously, embedded in this or the 3 businesses, you've got a services kind of service-intensive business, like the investment services which will have a lower margin, but a higher opportunity for improvement, just given this next generation of transformation that we're putting in. You've then got the investment management in the markets business, which starts with high margins and will continue to improve. So there's a portfolio of businesses here.

Yes, I think I would just add on to that, just that we've we're looking at in 2029, we were at 29% pretax margin. And we are delivering 32% in the first half of 2026. That's 300 basis points. And what you're seeing here today, given the outlook for 32%, also implied by 2026, another 300 basis points of sustainable pretax margin where we want to have ambitious and achievable targets. And that's some of the thinking that went into this.

And you heard from Ron that all of these are milestones. And when and if we've been able to demonstrate sustainability not only from a demonstrated delivery of that level, but an expectation that would continue and rise over time, we would reconsider them. And I think that's a pretty natural cadence that you would expect from us as we're delivering these targets.

That's great color. Really appreciate all the detail in the remarks as well as your slides.

Your next question will come from Vivek Juneja with JPMorgan.

John, I wanted to clarify a couple of things. One from the last -- your last answer. You said pricing discussions have been positive. Does that mean you're actually having discussions for being able to raise pricing? Or what is that positive mean?

Yes. I'm not sure we said that. I'd have to go and reflect on that one, Vivek. But what I was -- what I said was that we have expectation of organic revenue growth in the servicing fee business over the medium term, that incorporates all impacts with respect to client activity, net new business and all pricing expectations are all built into that, and that incorporates organic growth and that drops to the bottom line because servicing contributes 300 basis points over the medium term. So I think that's what you should take away from that.

So what do you mean by pricing expectations? Are you expecting pricing to go up, stay static? And given that you've never had this kind of operating margin of this anywhere this level of return on tangible common equity, isn't it -- I understand that AI is in the early stages, we were trying to forgot how to use it. But once it gets set in and the returns are much higher, wouldn't your clients come back to you. And this is something that you all have talked about over the years, when the ROE came down that you went back to clients saying you weren't earning an adequate return, wouldn't the flip side happen when the return goes up a lot and your clients look at you and say, "Hey, why are you sharing that with us?

Vivek, I just think we're in a very different environment than we saw -- if you go back 5 plus years ago where there was a lot more price compression in the market. Think about the environment we were in. It was largely a mutual fund driven environment that was at some level, particularly in the retail space. It was a time when mutual funds were being rapidly consolidated platforms were basically kicking mutual funds off the platform trying to get down from the old supermarkets to a curated selection. That's not what we're in now, right? You've got this rapid adoption and proliferation of ETFs and applications in areas that nobody would have even contemplated 5 years ago, number one.

Number two, if you think about the firms themselves, particularly are the segment that we operate in, which tends to be the larger multi-discipline kind of asset managers and the most sophisticated asset owners, right? The kinds of asset classes that they're competing in and needs that they have that are driving a couple of things. One, more traditional servicing, but now it's alternatives and things like that. But two, it's working with them on their own operations and how do we deliver technology and services to them so they can actually adapt to not only these multiple kinds of assets, but the movement from institutional to wealth.

So obviously, these clients are sophisticated and they want to get value for what they're spending, but it's just a very different environment than the one you're referencing.

Your next question will come from Gerard Cassidy with RBC.

Throughout your conversation on the call that you keep on referring to through the cycle these milestones that you're planning and reaching. I'm assuming that's an economic market cycle. And if it is, is this an average that you think you can get to during -- through the cycle? Or can you frame out the highs and lows at all?

Yes. I mean I think maybe a couple of thoughts there, Gerard. I mean I'd say that just going back to 100 to 150 basis points of positive operating leverage is an average over the medium term. It does imply the earlier end of the medium term. But we're just saying that often these things don't happen on a linear straight line. And so they're just based on what may occur in terms of business opportunities as well as the macro environment could have an impact on exactly how this gets achieved over the medium term. But the average what we're talking about is that 100 to 150 basis points.

I think one of the larger contributors not just with respect to the business delivery from an organic growth standpoint, one of the -- maybe the way to frame it could be in the NII space, where that's a reasonably important contributor to this over time. And you could think about the rate environment, having an impact on net interest margin. And so framing that for you may be helpful and responsive to your inquiry. If we think about rates, we've got the base case here with respect to forward rates. If we end up, we do a little better if rates are higher.

And so -- and given that we're asset sensitive and maybe a little lower before management optimization or actions on a static basis, plus or minus 50 basis points on rates would have along the lines of a 3 to 5 basis point impact up or down with respect to net interest margin, and that can give you a sense for some of the variability from 1 factor, which is where rates would play out.

But other factors, as I already mentioned, in terms of the operating environment, et cetera, would also play into that in terms of the impact on fee revenues. But nevertheless, we're feeling very good about the organic growth profile over the medium term.

This concludes our Q&A session. I will now turn the call back over to Elizabeth Lynn for closing remarks.

Thank you all for joining us today. Please feel free to reach out to Investor Relations with any follow-up questions. Thank you again, and have a nice day.

Okay. Up next, we have State Street, and we're delighted to have with us today, John Woods, CFO of State Street. John, welcome back to the conference.

Great to be here.

All right. John, let's start with the operating environment and talk about how you see the overall environment today versus what you expected maybe heading into the year and maybe even as you got past 1Q earnings.

Yes, sure. It's been -- I mean it's been pretty constructive. I mean when we go back to what we were thinking about in April, we had the equity markets being basically flat to year-end in terms of how we were -- what our assumptions were in terms of driving our outlook for the year. And it's been a little bit of a wild ride, but we're still up, whatever, 6%, 7% year-to-date. So that equity tailwind is nice to have comparing and contrasting to where we were in April. Rates also a little bit of a U-turn from earlier in the year, at least, kind of we were talking about cuts and now hikes seem to be priced in, not just here but also in Europe where we have exposure.

And the whole volatility story or I guess, volatility of -- volatility, if you will, we had that large spike in the first quarter, and we had a view that, that was going to moderate throughout the rest of the year. And for most of this quarter, that's what's been going on and then Friday happened with the jobs report. And we saw volatility kick back up. And -- so yes, it's been a little bit of a -- playing out a little differently than we expected, but in a constructive way in the context of how our businesses are performing and operating.

So we should get into some of the balance sheet side of things and how you're managing that rate volatility. But before that, can you talk a little bit about 2Q, what you're seeing quarter-to-date and maybe update us on the full year guide as well?

Yes, I'll make a few comments about 2Q. So maybe just the headline, I think we're seeing revenues coming in year-over-year up around low teens percentage. So that's a little better than expected. Unpacking that a little bit, if I talk about servicing, I mentioned equity markets being a little bit more of a tailwind. But nevertheless, I think the story is organic growth. When I look at servicing fees, we have positive contributions coming from client activity and flows. We have positive contributions coming from net new business and net installs. So from that standpoint, we're having both the organic growth story play out in the second quarter for our largest revenue line item as well as a constructive backdrop from an equity market standpoint.

Pretty similar story in management fees when you think about our investment management business, very strong flows in the second quarter, meaningfully higher than 1Q. And that's really being driven predominantly in the ETF space from both equities and fixed income and cash. And it's -- and from a regional standpoint, it's primarily a North American story, whereas last quarter, it was Europe leading the way. And so we're seeing, again, in management fees, both organic growth, which is really attractive as well as the uplift that we typically get when markets levels are higher. And then speaking of markets, our markets business itself, even though we had volatility moderating into the second quarter, and that's what was playing out, quarter-to-date, even with average volatility, frankly, being lower than the end of the first quarter, our client volumes were very resilient. And so we're feeling good about the contributions coming from the markets business.

So those are the big 3 really and the reason why we're feeling good about revenue trends being a little better than expected in low teens year-over-year. I'll also add that I think what we're seeing is likely that translating into an operating leverage number that's 400 basis points or more for the quarter.

For the quarter. Got it. Got it. Great. And what does it mean for the full year guide? Any...

Yes. I mean we'll see. Well, I think what -- certainly, the trends in the second quarter coming in a little better than expected could imply some upside for the year. But we'll go ahead and digest these results and absorb where we are from a macro standpoint and give you further insight on that in July.

All right. So another reason to look forward to -- and I know we'll get into the other reasons in a second. Let's focus on the strategic priorities here. You laid out a number of areas of focus like alts, wealth services and digital assets. There's -- I know there's a lot to unpack there. There's a lot of recent developments there, a lot of investments that you've made. Can you talk about how you think the path to scale across alts servicing, wealth, digital assets and what your major priorities are there?

Yes. I mean I'd say those are -- we're excited about those 3. I'll hasten to add that the core franchise is pretty exciting, too, even without those 3, just the global scale that we've got across our core businesses is something we can also talk about. But jumping into the 3 here for a second. So in the alternative space, this is a big part of our business. It's -- in terms of our servicing business, it's a big part of our innovation in investment management, and it's a large client base for markets as well. So it's across all 3. But within Investment Services, it's now up to around 15% to 20% of our servicing fees.

And it typically grows faster than the traditional space. And so the growth and return profile is quite good. So we've been investing in that. The alternative space is probably the one that's most at scale given those numbers. And so we've got the Investment Services business driving that. But investment management as part of their innovative product launch mentality, they've been partnering with key alternatives asset managers like Apollo and Bridgewater to democratize access to private assets. And as I mentioned, the markets business is a liquidity and securities finance provider in the alternative space.

So that's a big part of what's driving our momentum. I mean I think the second one, which was wealth for us, also cuts across the businesses. When you think about what's going on with respect to wealth services, we're really excited about our partnership with Apex, which is a global digital-first wealth manager custody and clearing platform, and it's scalable. And so from a services standpoint, we have that anchoring our wealth back-office capabilities. But when you put that together with CRD Wealth, that's an investment management platform that is a holistic solution for wealth managers.

And rounding it out with investment management, they've got approximately 30% of our AUM is in the wealth space coming out of investment management. So that's -- we're wrapping that together from a wealth standpoint. And then maybe lastly, digital. It's early days in digital. As we've mentioned, we want to be there for our customers as they want to support the traditional finance and digital finance and the interoperability among all of that. And as part of that road map, we've launched our digital asset platform.

Our product road map leads with tokenized money funds. There's a strong business case and conviction around that being the right first place to go. There's a number of reasons for that. It creates liquid collateral out of current collateral that's sort of trapped and not in motion -- sets that in motion. It provides a yield for those that want to stay on chain and they like the safety of stablecoins, flipping to tokenized money funds, which has a yield is something that's attractive.

And then opening up asset manager distribution to digital investors. So we like that as the first part of the road map, and that will be followed up with tokenized ETFs and tokenized deposits down the line. So those are the big 3, and they touch a number of our businesses.

So maybe I'll ask the question on AI and the impact on deposit costs here because as you have like, say, tokenized money funds and you have tokenized deposits as well, and that allows people to move their money around a lot faster. How does that impact in your mind, how you think about deposit costs in the medium term?

Well, I mean, I think most of our clients are fiduciaries, and we have -- this may have an impact over time. I suspect that the holistic value proposition that we will provide to our customers could shift around to the extent that -- if the balance of value that we provide and that we extract changes because deposit levels are impacted by other services, I think that will show up in maybe fee pools potentially versus balance sheet pools. But nevertheless, we've migrated over the decades with various impacts to the deposit franchise of commercial banks and trust banks overall. And that can change over time. But I feel like the value proposition that we're providing in the digital space will nevertheless be really attractive and be part of a strong growth and return profile.

Got it. Okay. Let's talk about the strength of the franchise overall. You've talked about the power of the combined franchise across Investment Services, Investment Management and in markets and this idea of One State Street. How does that show up in practice today? Where do you see the biggest opportunities as you showcase that part of the business?

Yes. I mean I think I would go back to the 3 that we talked about. Each one of those is an example of One State Street and how we're driving that distinctive strategic portfolio into the future. So I won't go back over that, but investment services, investment management and markets, each of them has a role to play in those 3. But if I come back to the core, maybe as just a reminder, as our core value that we provide across different client segments, maybe starting with the asset manager space itself. We have investment services and markets business go to market together with a holistic solution for investment services plus markets financing and liquidity solutions to serve asset managers.

And not just traditional asset managers, which is a big part of our business, it's 80-plus percent of our business, but also alternative asset managers, which we talked about in the alternative space. So it's kind of an 80% to 85% in the traditional space, but the 15% to 20% in the alternative space, investment services and markets go as one State Street to deliver those services. If I flip to asset owners, maybe the pension funds of the world and insurance companies, sovereign wealth, that's more of an investment services plus investment management go-to-market, where that customer base will be in need of custody services, but they need investment management products as well. And that's an opportunity for those 2 businesses to go to market together.

And then we've talked about wealth managers, where the support where we put together the capabilities of Apex in the investment services space covering the back office and CRD in the front office and put that together in terms of serving wealth managers. And again, another example of our core One State Street offering across the big customer segments, asset managers, asset owners and wealth managers. So it's pretty powerful and the connectedness of the enterprise is something that is pretty attractive when you think about the opportunities going forward.

All right. So I know we have an exciting update in July. I think a lot of what you spoke about right now will be -- will go into that update. And when you think about that strategic update that you're giving, without giving too much away or let me rephrase that, giving away as much as you care to give away, can you provide some more color on what metrics you think are important? What should investors focus on as we think about that path forward?

Yes. I can make a few comments about this. I mean I think you'll just hear us repeat that we're very excited about the core franchise, and you'll see how that momentum plays out over the medium term. We are going to highlight, we think, exciting and distinctive portfolio of strategic initiatives as well and how that plays out through our businesses, our 3 big businesses. I think the third thing to highlight is that underpinning this and creating capacity for investment is our transformation program, which we're accelerating and communicating the impact of in July. But within that transformation program, you'll hear us talk about we're migrating to a new operating model, a product platform operating model, which is tech and AI-enabled.

And what does that mean? It means that we're taking an end-to-end process view of the entire company. and not just reengineering where you take steps out and interfaces, and I'm sure we'll do that, but we're going to rewire the company where we're infusing AI and technology into these business processes. So we're excited about that. And you put all that together, we think there's an earnings profile that's highly attractive. I think you'll hear us talk about pretax margin over the medium term, getting to your metrics question. We do look at return on tangible common equity as another metric that's important to talk about. So those are the big 2.

I think we'll also cover operating leverage and our commitment to positive operating leverage and how that will play out. We'll have a number of -- a description of how the businesses that I just walked through, Investment Services management and markets will -- what business goals will play out with respect to those businesses. And I think that's what you're likely to see and possibly a little more -- in July, and we're excited about being able to communicate it.

Very exciting. It will be here before we know it. Okay. Great. So you mentioned AI and you mentioned transformation. Any examples of, I guess, bigger use cases of AI and the highest value use cases that you're implementing right now?

Yes. I think today, the ones that are really up and running primarily revolve around code. So I mean, I think you're seeing us modernize our code from legacy languages to modern languages pretty quickly now with the use of AI. Code generation itself is becoming extremely efficient, as we all know. So that's the second big driver. Third is just risk managing and identifying vulnerabilities in code, which is now much more efficient using AI. So those are 3 big ones, all revolving around code. I would add, we've made the platform investments to give access to standardized agents across the whole company. So research and analysis agents are on all State Streeters desktop. And so that's important. And we're seeing augmentation and productivity that comes from that.

I think going forward, we are -- either have just are imminently launching our internal Agentic platform and factory, which will allow us to generate customized agents. So going from standardized agents to customized agents is more of a 2H '26 heading into '27 story. And then those customized agents won't exist in a vacuum. I'll take you back to the point we made about operating model. We're going to be embedding Agentic capabilities in an end-to-end process view. And so that's what we mean by AI enablement and rewiring processes. It's really embedding AI capabilities into that. And I think that's what you'll see kind of heading into the second half and into '27 going forward.

So there's an investment spend also associated with this. I'm sure you're getting productivity benefits already there and with more to come. As we think about 9 consecutive quarters of operating leverage at this stage, how are you thinking about the right balance between this investment spend as well as dropping some of that benefit to the bottom line?

Yes. I mean I think -- so if I think about productivity, there are multiple objectives. I think the first one that comes to mind, since you mentioned it, is to demonstrate progress from a profitability, returns and growth standpoint. So that's really great. It's important, and it is a high priority for us. I will say, though, that I guess second point would be that productivity creates a buffer and a mitigant in downturns, right? It gives you some flexibility -- downturns when, in fact, they do arrive. So that's helpful to the second one.

But the third one and maybe even more interesting is the capacity that productivity creates to invest in your strategic capabilities. And I think that's where the differentiation comes from. Productivity is necessary but insufficient in order to deliver. And so I think they come hand in hand. I think it's productivity plus strategic investment. And the differentiation shows up in customer experience, launching new products and new kind of business models broadly to continue that growth profile over time. So just wrapping it up, productivity helps you in the near term. But if you don't invest it right, then you're not going to own the medium and long term. And so I think that's how I think about it in terms of balancing near-term goals against medium- and long-term durability and excitement of the franchise.

So it seems like we're pretty early innings into this whole like productivity improvement game here.

Yes. I mean, well, we've been kind of delivering $500 million plus in the last couple of years. I think it's been over $2 billion over 4 years or 5 years. And so we've been at it, but it's -- there's some low-hanging fruit there and the that's been picked. And so I think what you're hearing from us is that we're going to climb that tree a little bit and go after the deeper productivity that you're hearing us talk about when we talk about operating model transformation to deliver durable capacity for strategic investment over multiple years. That's what you're hearing from us is we've always been committed to productivity, but we're looking to put a several year program in place to give us the confidence for several years of investments to support the strategic initiatives we talked about earlier.

Got it. Okay. Let's talk about NII and the balance sheet. One of your initial projects as CFO has been focused on the balance sheet, and we've seen a nice improvement over the last 3 quarters. Can you remind us of your strategy to optimize the balance sheet from both the funding mix and a loan perspective?

And just -- you mentioned NII. I think NII has got a little better than expected this quarter as well. I may not have mentioned that earlier. But -- and some of that is due to the work that we did in '25 on kind of some optimization actions that we took on both the asset and liability side. I think, as you mentioned, primarily short-term wholesale funding was something that was maybe becoming a smaller -- and in the loan book was another example on the asset side where we -- and this is an ongoing activity, but we're constantly looking at any capital and liquidity that can be recycled from lower strategic profile clients into higher strategic and risk return profile clients.

And so a lot of the actions that we talked about last year have been taken. And much of the benefit of that has flown through. This is ongoing. We'll continue to optimize the balance sheet, but much of the benefit that you could expect to see from balance sheet optimization has played through. And the net interest margin and the NII have responded to that quite nicely. And again, NII coming in a little better in 2Q than we expected.

And you brought up NII, I guess, anything to say on the deposit side? I know first quarter deposit growth was fairly strong. Anything driving the NII this quarter?

Yes. We said -- I think we gave a $250 million to $260 million range for the year. 2Q deposits coming in a little better than that. So a little bit north of that range.

Got it. All right. Perfect. Great. So let's talk about capital and liquidity a little bit here. I think as we -- as you've had more time to digest some of these NPRs that have come out, do you have anything incremental to share on the RWA impacts of these new rules?

No, I think we're pretty constructive on it. I mean I think we're going to end up with credit RWA benefits that more than offset the operational RWA that's going to have to be coming through. So there'll be a net positive benefit. And so again, pretty constructive on that rulemaking, and we'll see how that plays out in terms of getting finalized.

And as you think about the target payout ratio of 80%, is there any room to move higher in the near term given just the level of excess capital that you have?

Well, I mean, I think we've been operating in the -- around 11% or so, which is at the upper end of our policy range. And I think the way we think about it is -- I may have mentioned this in previous conversations is that there's a waterfall here where we commit to supporting an attractive and growing dividend. That's top of the list. The next level down would be supporting organic growth of our businesses as well as bolt-on partnerships and acquisitions that can accelerate our strategies faster than organic investment might.

And if that's attractive, we'll think about those kinds of things, and we did a couple of those transactions in 2025 as an example. And then what falls out of that is the buyback, right? And I think we've been able to demonstrate an attractive buyback over time. And here into the second quarter, I think we're going to be able to indicate that our buyback level is about the same as it was in the first quarter from a dollar standpoint.

Got it. All right. Perfect. And then there's other areas in the regulatory agenda. There could be changes in liquidity rules. There might be other changes coming down the pike. Is there anything else that you're focused on that might benefit State Street?

No. I mean I think we've got a pretty attractive G-SIB score at this point. And I think a lot of the rule-making seems to be headed in the right direction in terms of trying to calibrate and refresh what's going on in terms of growth in the banking -- in the G-SIB sector, some attention given to short-term wholesale funding, et cetera, but nothing significant that we're concerned about in that rule making.

Got it. Okay. I did want to come back to rates because one of the things you did mention is the changes not just in U.S. rates, but also in Europe. How are you thinking about the sensitivity of the balance sheet to both of those and how you're managing that?

Yes. I mean I think you would -- I think we can say that our U.S. balance sheet, which is maybe 75% or more of our overall balance sheet is neutral to asset sensitive to the Fed on the short end. And so even if there's a hike or 2, we -- at the margin, we will generate additional NII, but it's not significant. But nevertheless, that's our positioning. In Europe, we have more asset sensitivity. And I think the ECB is slated to have a couple of hikes this year, one in 3Q and in 4Q. We benefit something in the neighborhood of $5 million or so per hike per quarter in -- from our European balance sheet, which is, I don't know, 10% or 15% of our overall balance sheet, but we're more asset sensitive there and positioned to benefit if the ECB begins to hike.

Got it. Okay. Any changes in how you're thinking about managing it from here just given the amount of rate volatility?

Yes. I mean I think nothing significant in the near term. We've been well served when the Fed was expected to hike to hold the asset sensitivity. And so we didn't chase that in the U.S. And so that's played out nicely. Things are moving around a fair bit even as of Friday and what we saw in [ CPI ] this morning. So inflation pressures seem to be building from an energy perspective predominantly.

There are other forces, though, in terms of the consumer, consumer balance sheets are strong, but they're spending that down now. And so we'll be absorbing that and playing that through in our interest rate positioning. But we've been well served with our lack of action in terms of trying to chase a Fed cut, which is -- which evaporated. So I think we like for now our neutral to slightly asset-sensitive position in the U.S. and our clear asset-sensitive position in Europe.

All right. Perfect. Maybe to conclude here, what do you see as the most underappreciated part of the State Street story? And what do you think the market is missing here?

Yes. I mean I'd say back into the core aspects of this, when you think about One State Street and our exceptional client base, I think there are durable moats there and how we go to market for traditional asset managers with the #1 custodian for ETFs in the world and the #1 FX provider for asset managers in the world is really powerful. We have an extremely innovative investment management platform, #4 in the world, 30% in the wealth space, which is growing faster potentially than some other categories. I think that, that core aspect is sometimes forgotten. But increasingly, we're going to make sure that's not the case. And our markets business is -- it's a global business.

They're regionally diversified. They benefit from a number of forces around the world. This quarter, U.S. equities have helped our markets business, but APAC equities, in particular, in Korea and Taiwan, I think it's underappreciated our onshore presence in global markets that benefits us. Even when volatility was low this quarter, we've been doing quite well. And then, of course, I mentioned all of the 3 strategic initiatives that we're excited about. And to close it all out, I think the potential of our transformation to create capacity to invest in all of this and the earnings power that we're going to talk about in July. You wrap all that together, and I think that's something that investors will want to pay attention to.

All right. We'll look forward to July. John, thanks so much for joining us.

Yes, fantastic. Good to be with you.

Okay. Good afternoon, everybody. I'm Ken Usdin back here, the large-cap bank analyst at Autonomous. Excited for our next session with Ron O'Hanley, who is the Chairman and CEO of State Street Corporation. Ron has led the firm since 2019 after earlier roles as the President and COO and also as the CEO of State Street Global Advisors when he joined the firm.

State Street is among the largest asset servicers in the world and asset managers as well with $54.5 trillion of assets under custody and administration and $5.5 trillion (sic) [ $5.6 trillion ] of assets under management. As we get going, just a quick reminder, you can put forth questions in the Pigeonhole app. And Ron, thanks for joining us today. Appreciate it.

Glad to be here, Ken.

Great. So big picture to start, Ron, a lot of things going on in the world. You guys face all kinds of markets in different places and different products. Can you talk about what you're seeing in terms of risk allocation, risk appetite, allocation shifts, activity levels, et cetera? How is the [ operating ] environment changed? And what are the few -- couple of few swing factors that you think that can evolve as we look forward for the next 6 to 12 months?

Yes. Well, as I don't need to tell you and don't need to tell anybody else. I mean, it's been a remarkable year in terms of the geopolitical events that we've seen, many of them unexpected. And therefore, the uncertainty that, that's created. But underlying that has been, first and foremost, still very strong and continued economic activity, particularly in the U.S., but not just the U.S. And as a result of this, coupled with the whole kind of AI secular boom, you've seen really strong investment activity across the board.

Concerns about certain things like private credit. But really, overall, the environment has been constructive. You see it in equity indices. So for us, I mean, you know us well. We don't have a big credit exposure. So it's a constructive environment for us. But it's constructive in a couple of ways, not just because of equity levels, client activity. Clients are investing, institutional clients, retail clients are investing and that activity drives revenues for us. So it's been a very constructive environment.

Obviously, we operate in the environment we're in, but we prepare for something that's worse. And so we're being very vigilant, really watching the Middle East for a couple of reasons. I mean we've got a significant business there. But obviously, the more important thing is what actually happens with these rates? And what does it mean for the knock-on economic effect, particularly around inflation? So we're watching for all that. But in terms of how it's affecting us and our performance, I would say that it's been neutral to positive.

Yes. And thinking about State Street from a strategic perspective, it's been 9 straight quarters of positive operating leverage. Pre-tax margins have been improving over the last couple of years now. And as you're looking ahead and planning and giving us a strategic update in July, what do you see as the hallmarks of a successful next chapter for State Street?

Yes. I mean, as you know, we are the most focused of the G-SIB banks, and we really are organized to serve the investor. We either manage money for the investor or we service the investors' assets. So we think about our strategy on a go-forward basis really in kind of 3 parts. First is just powering the existing franchises. We've worked hard to build those franchises, and we see a lot of room for growth. So investment services as large as we are, there's still plenty of share to gain. There's plenty of markets that we see growing. So it's how do we continue to power that? What does that mean?

It's around service quality. It's around building out the client-facing activities and continuing to strengthen the value proposition. Second, in investment management, we're in the spaces that we want to be in. And particularly at the core is the ETF franchise. ETFs have grown to be the -- really the vehicle of choice and almost now the vehicle of choice worldwide. But it's not just that. We have leadership positions in the institutional space, leadership positions in the retirement space. So continuing to grow the product set there and power that franchise.

And then finally, markets. Markets, we do a few things, but we do them exceptionally well. It's to support the investment services business. So what do those institutional investors need? They need foreign exchange and they need securities finance, and they need kind of collateral movement and control, right? So -- and what we've done there is really haven't strayed from those businesses, but have built up subproducts within it and more importantly, distribution channels. That's number one.

Number two is what are the areas, we like to call them strategic frontiers. It's the edge of those existing franchises that we can push a little bit further. And there's 3 of those. One would be digital. And we can talk as more -- as much you'd like around digital. But you see what's going on in digital and the digitization of finance, the role that a securities servicer like us plays and that intersection between securities processing and kind of cash settlement is a really important place to play.

Secondly is around the continued rise in alternatives. We're a leading servicer there already. And that world is just getting more complex. The complexity is driven by -- a lot of it is the continued retailization of the channel. And while there's been some concerns raised about that lately, I think all that's going to result in is different vehicles, maybe different vehicles that make more sense and address some of the semi-liquidity issues there. But also what's driving the growth in that area is these firms were pretty simple when they got started, right?

They might be a long/short firm. They might be a private equity firm. They're not all multiproduct. They have big operational challenges to them. They have LPs, but each LP wants something different. So their complexity and back office has gotten greater, which is an opportunity for us. And then thirdly, wealth services. As the world has moved from vehicles like the mutual fund where you can have it just this way to really -- to SMAs and almost mass customization, that creates a servicing challenge for the investment managers and again, an opportunity for us. And the theme in both those 2 that I just described to you is this whole point of what we call One State Street, which isn't just a set of words. I began by talking about we have 1 client base, the investor. And if you think about those 3 things, they link together. And the more services that we can provide clients, one, it locks the relationship in. But two, it establishes us with the client as their essential partner.

And then finally, the next -- what will really power all this for us is the next stage of transformation. As you know, we've been on a journey since I've been CEO, and we've made a lot of inroads there. AI, particularly this generation of AI provides even more opportunity for us. So what will power this enable us to continue to gain more productivity, notwithstanding what we've done in the past, and enable us then to continue to reinvest in these franchises will be this next generation of AI transformation.

Excellent. And we'll deepen on a couple of those points as we go through it. And specifically on the transformation point and deepening on AI specifically. So when you think about the future earnings power of the company, what should investors think about how AI starts to become measurable, right, either in terms of outcomes for revenue linkage or primarily focused on productivity savings? How do you balance those 2 sides? And where do you think the biggest impacts will be?

Yes. It's a really good question. And maybe I'll start with our track record in transformation and the prior generation of AI, machine learning. If you think about over the last 5 years, we've saved and generated productivity savings of about $2 billion, most of which has been recurring. We have plowed much of that back into the business to be able to do what we're doing now, growing revenues, more products, et cetera. And that -- much of that came from the deployment of things like machine learning in places like the striking of a NAV and net asset value. Today, the machine does that a lot in developed market equities.

And if you think about it, machine learning is very basic relative to what we can get today in generative AI. So we have a very substantial effort underway, really 3 parts to that. One is the ubiquitous kind of AI everywhere. Everybody's got it on their desk. Second is what we call inside kind of our lighthouse projects. These are key. They started out as pilots. Now they're achieving some scale to them where they've got repeatability elsewhere. So an application that has a big impact in multiple areas. Sometimes it's a customer/client interface.

And sometimes it's around how do you think about operations and reconciliations. If you think about what we do, so much of it is around reconciliations. If you can do it once, you can, with the right data, apply it again. And that's now being fostered by, what we call, our AI foundry, right, where we're taking that from just -- not just the AI and the data management, but to then move it on to agents. So we've established what we call the AI foundry, which is to build these agents and then be able to use them on a repeatable basis.

And then finally, the third element of all this is each of the businesses and functions, we've charged them with a productivity goal, a multiyear productivity goal and said, in addition to everything else that we've just described, what you need to do is get to X number. And so work with the technology team in terms of what's going to be unique to you, whether it's in compliance, whether it's in risk, whether it's in finance and all the other areas. So for us -- you'll start to see -- well, you're seeing the prior generation now. You'll start to see the impact of this in -- throughout -- towards the second half of '26 and certainly throughout the next 3 years as we move forward.

Last part of your question is a really important one, which is, is it just around cost? And it's not. If you think about what this data enables us to do and the ability to get -- to mine that data and to quickly get to an insight, and think about the data that we sit on, we see it as a really a very significant opportunity for revenues, places like markets, for example, we can look at the behavior of our clients and see, gee, where is it that they're trading away? Were their custodian that where are they trading away? And we can see a lot of that because we've got all that data and be able to very quickly say, gee, there's this one client that for whatever reason, doesn't trade yen with us.

Well, so let's understand why that is. And maybe they just don't understand how good we are in the presence that we have there in Tokyo. So that's where we see those kinds of on the ground very quickly available to the frontline revenue people, and here's what we can do there.

Okay. And so now let's talk a little bit more about the individual businesses that you walked through in your prior answer just about asset servicing first, investment servicing. So you've spent a few years now really overhauling the sales process, transforming the business, pivoting towards that enterprise outsourcer model. So when you think about the franchise, can you talk about the strategic areas of focus, a few of which you hit on just before? And what are the upside areas over time you can see? You've got this goal to deliver $350 million to $400 million annual servicing fees. Like what do you need to do to kind of like move that bar even that much further with the products that you're coming up with and the transformation?

Yes. $350 million to $400 million is a big number. I mean, if you go back 5 years ago, it was $250 million, go back 7 years ago, it was under $150 million. So it's an ambitious goal, and what we're focused on now is achieving that. We were just under that last year or just over the year before, but we've got a lot of confidence. Now why do we have confidence in it?

Firstly, it all comes down to service quality. And we're talking about servicing fees here, investment services. In the end, if you don't have quality, you end up in a real bind. Even if the client doesn't want to leave you, it doesn't want to go through the switch, right, they're going to grind you on fees. They're going to grind you on price. So we've invested heavily in service quality and have been doing that since 2019. And that has actually paid off. It gives you the right to, one, retain the business, but so much of our business is more business from existing clients. And you become easy to do that with. So that's why we have a lot of confidence in this. Our service quality has never been higher. And so that will be one driver.

But second, you alluded to this. We just have to overhaul the sales force and how we think about even relationship management and to help our people understand that you -- yes, you're here to deliver superb service, but you're also here to grow that book of business. So we put the right kind of people in, put the right kind of incentives, put in repeatable processes. You'll hear that theme a lot from me that much of what we do almost everywhere we do is how can we build it right once and then repeat it elsewhere. And we do that a lot in the operations area, but we do that also in our client-facing areas, too. We build a team approach and say, okay, we've got that now in the U.S., how do we extend that to Europe?

And a lot of the conversation in the industry has moved towards tokenization, digital assets, the new frontier. How do you see this changing the landscape between the traditional custodians, market infrastructure players, new potential entrants as you start to roll out the digital side of your platform?

So it's a very exciting time. And I mean that in the truest sense because there is a long-term overhaul of financial infrastructure underway. And there'll be 10 years from now, there'll be much of it that we'll recognize. I mean, we'll still see the same kind of -- we'll see the same kinds of assets, but the form that they'll be in will be different. Much of that will be around tokens. And why are tokens important? For some assets like real estate, they make the asset much more marketable, much more tradable. It will help secondary markets. You can see the same, by the way, in private equity.

If you think today about why is there so much money available in secondaries, it's because there's just this complete lack of transparency in what you're buying, particularly if you're trying to buy something or sell something quickly. So okay, that was the NAV that was struck way back then a quarter ago, a lot has happened. I'm going to -- I'll give you a 20% haircut on that and we'll buy that. And oftentimes, that's what the market is. Tokenization will help that. You'll also see it change things like, for example, money market funds.

In the U.S. now, money market funds constitute about $8 trillion in cash. That's a lot of money. But if you think about it, a traditional money market fund can't be posted as collateral. Tokenization enables that. So it enables the kind of mobility that you haven't been able to see before. So the use cases are just more and more and more. The challenge is that it's like anything -- any other kind of long-term conversion. There's the traditional finance and there's a digital finance, and it will be a long tail from digital to -- from truly where it is now to truly digital. And so the initial kind of few years where we are now, it's that bridge from traditional finance to digital finance and back.

Second, for us, again, we sit at the interface between security settlement and cash settlement. And if you think about where much of the advances have already occurred, they've been on the cash side, whether it's stablecoins or otherwise. So to be able to marry what's a much, much newer kind of payment system to what's a much more established kind of securities processing system, that's the role that we play. So that's where we see it in these early days over the next 3 to 5 years. But what we don't see changing, and you're even seeing it now in the debate around the CLARITY Act, what we don't see is -- I think there's a recognition that segregated custody is actually a really important thing.

And why is that important? If you think about all the named financial crisis, call it Ponzi, call it Madoff, call it Sam Bankman-Fried, right? What was the distinguishing characteristic of each of those? There was no segregated custody. So we see that being embedded in all that, which will help -- certainly help preserve custody as we see it now, but also is really important for investors going forward.

Yes. And is that -- those established moats, connections, assets, is that what gives you the confidence that a traditional provider can maintain that connectivity, maintain the client base as opposed to a new -- novel competitor that comes up and about. That's the question that comes up a lot is like what's the advantage that you continue to retain?

Yes. So -- it's a good question because, yes, segregated custody will be important. But the extent to which the custodians stand still and don't understand that they need to be building these digital asset platforms that they need to be modernizing their infrastructure and they need to be doing it really quickly. I think the advantage, if anything, is that the world is not fully digital now. So you have to have both the digital platform and the traditional platform. So -- but it doesn't take away the investment requirement in terms of what we need to do in terms of being that at the forefront of digitization.

Right. Okay. So on the investment management side, your net new asset growth has been really strong. Outside of ETFs, what do you see as the main growth drivers for either by client sector, geography, product?

Yes. So I mean, in terms of client sectors, as you know, we are -- traditionally, we're an institutional provider, and we still have a very, very strong position serving institutions worldwide in these core, whether it's truly kind of index products or the core quantitative products. So that is one growth driver. Second is retirement. We're the fourth largest target date fund provider. That has become the vehicle of choice and the kind of the strategy of choice really around the world. And we have a lot of innovation there. So we were the first to put income protection into a target date fund, and that's now getting some traction.

There's -- certainly in the U.S., there's much more favorability in the Department of Labor around those kinds of things. And outside the U.S., that's recognized as, yes, that's pretty smart. Let's put some income protection in there and worry about decumulation as much as we worry about accumulation of assets. So that would be one. Secondly, we've got a global footprint. So we're in the markets that are growing. We've got not only the positions that we have in places like the U.S., Europe and developed markets in APAC, but we're also in places like the Middle East, places like Southeast Asia, where you're seeing lots of growth.

And then we're also in the big retirement markets. So we're a leading player now in Australia, which continues to grow and probably has the most established retirement system out there. So we see growth there. And there's a real product innovation machine that exists in State Street Investment Management. So the kinds of new products that we're seeing this -- well, I talked about income into a target date fund, some of the work that we've done with partners like Blackstone, like Apollo, like Bridgewater in terms of creating products, not just ETFs, but non-ETFs that actually bring the best of both those worlds together. So we see -- because of those spaces that we're in, even outside of ETFs, we see lots of growth potential at SSIM.

And on the ETF side, what once was thought was a bit of a race to 0, you've continued to expand the product set and grow the asset class a lot. What do you -- what is the most important parts about the strategic positioning of the ETF platform, including some of the work that you've done with the SPDRs product specifically?

Yes. So our franchise is unique in that it started out as an institutional franchise, SPY and then the big SPDR sector funds. And they are the vehicle of choice for institutions. I mean -- and the hallmark of that is if you think about notional value, right, first quarter, SPY alone, $3.2 trillion in notional value, right? That's 9x our nearest competitor in terms of what they saw. That's 17% of all traded ETF volume. That's 6% of all traded equity volume. So it is the vehicle of choice for institutions when they're trying to put positions on, take positions off, put options on, et cetera.

What we had to do over the last years -- last few years? And I'll acknowledge we got a slow start on this, but once we got started was around the wealth market. Today, about $1.7 trillion of our assets under management are somewhere in a wealth portfolio. SPYM, which is basically the low-cost SPDR portfolio, the largest growing ETF in the world in the first quarter in terms of asset gathering. So it's recognizing those barbells, creating products that are fit for purpose of each taking products that we have in some markets and extending them.

So if you think about gold, GLD, which is the leading gold ETF here in the U.S., we have successfully taken that to other gold markets like Japan and places like that. So there's product extensions.

And then finally, going back to geography. After a long time where people just said, well, ETFs are not going to be a thing in Europe because [ COP ] is not a tax advantage and there isn't a tax advantage. But nonetheless, it's become the attractive vehicle there, particularly as you're starting to see the rise in many developed markets of wealth channels outside the established channels. In the U.S., it was the wirehouses to RIAs. In Europe, it's banks going to the independents. It's already started in the U.K.

So -- and then when you get the fintech platforms out there, they love ETFs. So it's having fit-for-purpose kinds of products for them. So all of that we see driving a lot of growth. And then as you know, it's really successfully migrated over to fixed income. And again, after a lot of skepticism, I think there's a recognition now that it's at least as good as any other pooled vehicle and probably better because in the event of a crisis, what you can do in an ETF, which you can't do in a mutual fund, in the event of a crisis, you can actually just distribute assets and just say, we are not going to redeem, you're going to own that. No, we haven't faced one of those kinds of crisis. But in many respects, I think regulators have understood, yes, that's actually a pretty good escape patch as opposed to have this doom loop of selling off all the good assets and leaving a fund with all the bad assets.

So in between all of this or along the way, you've developed the Alpha solution set, connecting your software services business to the asset servicing business. And it's been fast growing. It's been low double digits. And as you evolve Alpha as that kind of all-in platform and think about it as an earnings driver, how should you position investors to understand how we should look at either the growth of the software business or just more so the growth overall of the entire solution set? How do we kind of see that through the numbers?

Yes. And I'm glad you worded it that way because that's exactly how we think about it. So this was enabled by our acquisition of Charles River back in 2018, 2019. And we -- why did we do that? First and foremost, because if you think about the space that we occupied already, we started out as a back-office player, built our middle office business. We wanted to basically complete that loop, if you will, go from pre-trade right through to the middle office through back-office custody to performance measurement and reporting out to the client. So it gave us that at the outset, established player, not a lot of competitors in that marketplace, formidable competitors, but not a lot of competitors.

So not a fragmented market, one that's actually -- one where you can actually get a strong position. We also did it for what you just described, which was we can now offer to clients who are increasingly seeking some less complexity in their own operation, a true front-to-back solution. And why is that important? Because so many of these institutions, particularly the large asset managers, but also the large asset owners were finding themselves in a lot of complexity in their own operations, right? They were doing some things inside. Oftentimes, they were in a high-cost location. Oftentimes, they didn't have the scale.

So this tool, when combined with our middle office and back office kinds of capabilities gave us the ability to offer, what we call, an interoperable, open architecture front-to-back solution. What does interoperable mean? These large asset managers, they're using a lot of things from us, but there's other things they want to use. So we built it from the ground up to be interoperable, whether it's data sources that you want to use. If you're using a different trading platform, if you're using Aladdin or Bloomberg, we can put that in there, too.

Open architecture, as new things come along, new particular data sources or a new kind of trading or risk evaluation kind of capability, we've got all that API technology in place so that we can plug it right in for you. So the way we think about the business is in the front-to-back solution, it cements our relationship with clients. It makes the client relationship a lot more sticky, and we tend to then attract more and more services from them. But it's also a stand-alone. I mean it starts -- Charles River started out as a stand-alone software player. It still is a stand-alone software business.

So -- and that's where you see the annual recurring revenue coming in, the movement from on-premises kinds of software to the Software as a Service, and that kind of conversion continues. And that's a nice recurring, somewhat diversified stream. It's not really subject to market effect kinds of things. It's priced as a software product. So we will continue to invest in that.

And to that point, just when you think about that stickier, can you talk just about like what stickier means in terms of -- does it just mean you hold on to the client longer, the contract longer? And then is it a more profitable relationship because you've gotten that whole front to back?

It is -- so stickier for a couple of reasons. First of all, we've just extended the contracts. I mean, back in the old days with custody kinds of contracts, you do 3, 4, sometimes 5, but probably the average of 4-year contracts. We won't do anything that's below 7. And typically, they're even longer than that. So that alone kind of gives you some stability in terms of even how you think about pricing it and how you -- the kind of contracts you're going to have. So that's one.

Two, particularly when the middle office is involved, I mean, basically, that's taking the back office of an asset manager or an asset owner and converting it over to what we do. So it's a full outsource. And it's not impossible to reverse that, but it's pretty difficult to reverse that. That's why these -- they're fairly long sales cycles, and we've learned a lot along the way. They're long sales cycles, but you also want to make sure that it's coming over in a way that we can scale it.

So part of the reason why it's a long sales cycle is, okay, we understand what you want. You want it exactly like you have it now, but at a lower price. Well, those don't go together, let's talk about that. So there's a fair amount of engineering in that sales cycle, but the net result is something that's very sticky in a very strong client relationship.

You mentioned earlier the growth of the markets business, FX trading and other parts and you also even used a little bit of the balance sheet in there as well. As the market franchise grows, what's the biggest financial importance of that? Is it just to add to what we just talked about, the stickiness and the overall profitability? Is it to just add to overall growth? Is it to improve returns? Does it fit all of those, none of those? How do you think about the placement of the markets business inside the franchise?

Well, first of all, we think about it in terms of returns. I mean why is an investor on State Street? It's not because of the way we're putting the balance sheet to work, right? That's not what you're coming to us for. So we think about it in terms of returns. Secondly, we think about it in terms of again, how does it complement the relationship we have with clients. So the vast majority of what we do in markets is to serve existing client relationships. And again, it goes back to, one, if we're serving them well in the services area, it's very easy for a client to say, that makes sense. Let's do our foreign exchange with you. Let's do our securities finance with you.

So we think about it primarily about returns, secondly, about rounding out the client value proposition. Also, though, it's a competitive business. So again, it's a big markets business, but narrow. We've talked about the areas that we're in foreign exchange, securities finance and things -- collateral movement and control. So what we think about is how do we continue to bring technology there in foreign exchange, we'll meet you exactly the way you want to trade.

If you still want to do it over the phone and sometimes big kinds of things, if there's a big move that somebody is making or rebalancing that somebody is making. That still is an over-the phone kind of thing, but most of it is all highly electronic. It's highly automated, and we've perfected all that technology. So we continue to make -- design and build it in a way so that it's easy for our clients to trade with us.

And coming back to the wealth services business that you mentioned before, last year you announced a partnership with Apex Fintech Solutions. Can you talk a little bit about what this will do to add to that growth you mentioned earlier in wealth? And what are the couple of milestones that will matter and that we'll be able to see over time in terms of that partnership working?

Yes. So maybe I can begin the answer to that question by giving you context as to why we did it, right? Because we -- as I talked about earlier, if you think about in the ETF business in SSIM, we are very much in the wealth business. So a lot of our ETFs and products ends up in wealth portfolios. Secondly, at Charles River, Charles River is both an institutional trading platform, but it's also a wealth platform, 20% of what it does, it actually sits on advisers' desks. So given that foothold that we have in wealth, as we think about how else are we going to grow and capitalize on this trend towards wealth services, right? We've said wealth custody makes some sense here for us.

Now a lot of the existing platforms are old. It's 20-, 30-, 40-year-old technology. What was attractive to us about Apex is this was built out of the blocks -- out of the box as digital. So the first milestone that we wanted to -- that you'll see from us is this integration of what we're doing already in wealth with Apex. What does that mean? Integrating the technology and the links, if you will, between Charles River and Apex to be able to have kind of a beginning to end type of solution.

Secondly, how do you think about the actual Apex platform as a distribution platform? The good news about a lot of the products that we offer, they're core building blocks within portfolios. And as long as they're priced properly and priced fairly to the client, you can have them as a default kind of thing. But we view this as part of a continued build-out in wealth. We talked earlier. I think this is really the true secular trend of our industry as wealth continues to grow around the world and clients expect and demand just more customization.

I'm Ron, and this is my situation, and this is exactly what I need. It's my tax situation. This is my family situation. This is all those kinds of things. I want to customize that servicing to be able to do that right, will require the kinds of technologies that we have at Charles River that we're able to access now through our 20% ownership of Apex and the agreements we have with them to be able to grow this wealth business.

Okay. And so talk about the balance sheet and capital. You've been pretty consistent paying out around 80% of earnings through a very consistent and growing dividend and then opportunistic on the buybacks. How do you think about the balancing act between returning capital to shareholders versus using the balance sheet to further support the growth of the revenue base and the company overall?

Yes. I mean we think about it probably as you'd like us to think about it. We think about it in terms of a waterfall. First and foremost is the dividend, which we truly do believe is a covenant and one that we're committing to grow. So the last couple of years, we've grown at about 10% a year. I think this year, it will be 11% what we recently announced. And so we begin with that.

Second, we begin with investing in the business. What are the opportunities to continue to invest in the business? And if you think about our franchise, it's narrow and deep. We can't afford to be anything but great in any one of those businesses. I mean we're not like a big universal bank where we can have 2 or 3 businesses parked at any given time where they're being fixed. These have to be operating at a very high level all the time and just be really dominant franchises. So it's how do we invest in the business.

And then third is from there is return to shareholders. M&A also figures in there, but that's a pretty high bar for us. So if you think about the waterfall, it's dividends, reinvesting in the business, if there's opportunistic M&A to do and then return to shareholders. And over the past couple of years, and by the way, maintaining the kind of capital ratio that we want to and we're conservative. We acknowledge that we're conservative in that regard. We target around 10% to 11% CET1. And we keep it at that level at least for now. And so that's how we think about what's the overall return strategy of 80%.

When you think about the investment in the business, whether it's balance sheet dollars or incremental expense dollars, how do you prioritize? How to -- which mouth to feed or which mouth to feed? And do you see that shape shift over time?

So I mean that's really what's driven a lot of the focus on cost and productivity over at least my time in this role because we recognize that we needed to continue to invest in -- to invest in the businesses. State Street, in prior times, it grown through big acquisitions, which at the time made sense, right? State Street had gone from almost no position, for example, in Europe did the Deutsche deal back in the mid-2000s, later 2009 or so IBT came up. These were big transformational deals and reasoning the balance sheet made sense.

Now it's about saying, let's create the pool of money off our productivity and just the returns in the business and invest off the income statement, which has been most of what we've done recently. We do tuck-in kinds of things, and you've seen those. I mean even we just talked about Apex, right? That was a 20% investment. And we're very strategic about those. We don't want to just collect a bunch of things. They have to have a purpose, a strategic purpose for us. Sometimes that strategic purpose is these are very, very small things. I just want to understand the technology and see if we can deploy it. But even then, we do it with the idea that more likely than that, we would deploy it. So that's how we think about it. And then returning capital to shareholders.

Yes. And you mentioned the high bar to do deals and reference some of the bigger ones that you did in the past. What does the high bar mean to you in terms of like need, desire, availability of things, whether it's small tuck-ins or bigger opportunities that come and go in front of you over time?

Yes. I mean, obviously, if it's a small deal, right, you're willing to take more risk with it, right? And you don't want to ever squander shareholder money. But if it's, gee, this is a digital technology that we think might make sense. So we have a minority investment that's grown quite significantly in [ ZILO ], which is a digital TA firm. And we're deploying that technology. We like it a lot. When you start to get into large M&A, what's the purpose of it? And if it doesn't really advance the strategy in some meaningful way, for example, give us a product set that we don't have now or give us a geographic kind of foothold or establish us that we don't have now. But again, that's a really high bar.

I mean the last time we did anything and looked at anything that's of significance would have been around Brown Brothers, right, where if the regulatory environment had been different, we would have been able to do that. But that made sense, right, because there was an ability to consolidate one of the last large-ish players in there, and that made sense. But if we look at an awful lot. So it's not that we don't have a pretty active team that works under John Woods. But as we like to say, we say no a heck of a lot more times than we say yes.

It also seems that some of the properties that might have come up for sale over 15 years ago that are owned by large banks have become kind of bigger parts of those enterprises as well, to your point that there might not be as much of those big ticket things around as much as they might have been in the past.

That's right. And it's to the point now. So you think about Europe, if you talked to us 10 years ago, maybe we would have said, sure, we'd love to do something else in Europe. We're an established player. We're the largest player in Luxembourg. We're the largest player in Ireland. We don't need to be buying anything there.

Yes. One more question on capital. Any initial thoughts from the recently reproposed Basel III and G-SIB surcharge rules and both how they look in finished form to you or if they look like this in finished form and what the potential impact is on State Street?

So as you know, the comment period is underway. We -- and we're pretty confident it's going to come out looking a lot like it is now. So what does it mean to us? I think RWA, we think it's neutral to slightly positive RWA for us. There's some nice elements to it that we think will be -- it certainly won't be negative in any way and should be positive for us.

And then secondly, on G-SIB, what we're seeing there is probably going to solidify our position right at the floor, right? And again, its things like the markets business have grown. We've kept an eye on that because we really don't want to come off that floor. But we see both the way they're going to be measuring it in some ways they're looking at things like, for example, wholesale funding. We think that's all going to be attractive and then keep us at that floor. So net-net, we view it as a positive.

And most importantly, this is a chapter. This is a book that needs to be finished and put on the shelf. It's been too long. And I have -- I'm very pleased with the way the Fed has taken the lead on this to get this done.

Okay. A couple of more strategic questions. One is that we talked on it before with private markets being a big growth area inside the servicing business. But if we step out a lens on the alternative space in general, being a big opportunity both for State Street as one of the biggest fee pools that's out there. How do you think that evolves over the course of time? Obviously, been a lot of movement inside different pockets of the alts world. So as you face it and as you try to go after the growth for you as a servicer, how do you expect that to just alter your opportunity set and how you approach it?

Yes. I think that the demand on the part of retail affluent and wealthy investors will only continue to grow for these kinds of alternatives. And that creates an opportunity for somebody like us because it has to be put in some form of a structure that's different from the conventional GP/LP kind of thing. And there's been a lot of noise lately around some of the existing products. I think the net result of that is not that they're going to go away.

I think you'll see new products and probably some that make more sense that actually make it very clear to the investors that this is actually closer to illiquid than liquid. Hopefully, I would love to see the term semi-liquid go away. But you're not going to see the need to have products there. That will create complexity that will drive demand for us.

Secondly, on the investment management side of this for us, the combination and the lines between alternatives and between private markets and public markets are blurring. And the most obvious place for that is credit. And I think if you're an institutional investor now, you really don't think too much about my private versus public. You think about what's my exposure to credit, how do I want to -- where do I want to be on credit, how do I think about duration, all that and fill it in with public and private, easy for institutions to do under the existing approach, harder for retail investors to do.

So we will continue to very carefully put out products that make sense with that. We did the work with Apollo. Last year, we did the work with Bridgewater and their all-weather fund and worked with them for a long time to say, okay, how do we turn this into something that actually works on a daily basis? And that's done very well. So we see lots of opportunity like that. If you go back to the discussion on digital -- digitization. As you see more and more tokenization and particularly as you see the continued rise of target date funds, you could foresee target date funds having a much richer mix of assets, particularly with tokenization in there. And what tokenization does, it also enables on the margin, more liquidity in the fund, the ability to trade assets in and out much more quicker.

So you could see a full -- and retirement investors are the truly long-term investors around the world, whether it's in the U.S. or outside the U.S. I mean, even if you think about the various financial crises we've seen, there's been very little going back to the GFC, very little invasion. It's talked about a lot in the press, but the numbers actually show that people don't go into their defined contribution balances. It's got to be a real family emergency to do that. They ought to get an illiquidity premium. And so we ought to be putting products together that enable them to get that. So that's one part of what will drive all this.

But the second part of it, which I alluded to earlier, is what's happening is the big firms are getting bigger. They're becoming multi-strategy. The operational stress is on them. And these firms did not become who they are because they were operationally excellent. They became who they are because they're very, very good at investing. And so it's still largely a highly in-sourced marketplace. So the ability to move that from an in-sourced market to an outsourced market to us, that's a trend that continues to grow, and we're seeing more of that.

And then finally, on all this is asset owners. And the large asset owners, particularly the big sovereign wealth funds, but even some of the large asset owners here in the U.S. increasingly act like asset managers for them to do what they want to do in privates are going to need our help in terms of being able to provide the infrastructure for all that. So again, one of those secular tailwinds. We have a strong position in it, putting a lot of investment in it, and we see a lot of growth in that for us.

Got it. And last question, which kind of maybe brings this all together and also points us towards the strategic update in July is that, you've really done a great job in the last year or 2 of delivering positive operating leverage and managing the lines better between revenue growth and expense control, funded in part by those productivity initiatives that you mentioned. How do you just feel that balance between expense discipline and growth when you kind of put this all together, everything we've talked about, facing the pools of growth out there, wanting to build for the future, keeping the core lights on, but also being ready for whatever comes ahead of us. Yes.

So we have a very large investment agenda. I mean we usually talk about this at the beginning of the year in terms of -- we talk about productivity. Here's our productivity target. We talk about that we're going to invest a lot of that in the business, why are we investing in the business so we can grow revenue. And that flywheel has started to work for us over the last couple of years, and we'll continue to do that. Now for the last few years, we've also had a constructive market environment. So we always think about what we call gray skies, right?

And so we've got a plan in place to the extent to which, in fact, markets turn from -- they don't even need to go from positive to neutral because we typically plan around neutral. But if they go from neutral to negative, right, then there's -- we've got a series of steps that we'll take. And there are certain investments that we won't make. We try and be smart about this. So we -- it's -- the further out investments are the ones that we could afford to delay for a period of time. You don't want to ever be so short term that you're cutting everything off, which is why we're so focused on why we continue every year to take our productivity target and ramp it up a little bit more.

In some ways, generative AI has come along just at the right time because I think I was getting concerned where we're going to be able to do it. But we see, given how operationally intensive we are, the ability to deploy that AI and actually get even more productivity that's different than we've done in the past. So that algorithm, if you will, we believe, puts us in a place where to the extent to which we are in a gray sky kind of situation, we're going to be okay. We'll be able to cut back on some of those investments and continue to deserve the returns that our investors want from us.

Perfect. Great. We're out of time. So please join me in thanking Ron O'Hanley, and thank you very much for joining us today.

Thanks, Ken. Thanks very much.

Good morning, and welcome to State Street Corporation's First 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 whole or in part at the expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be held on the State Street website. Now I'd like to hand the call over to Elizabeth Lynn.

Good morning, and thank you all for joining us. On our call today, our CEO, Ron O'Hanley, will speak first. Then John Woods, our CFO, will take you through our first quarter 2026 earnings presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.com. Afterwards, we'll be happy to take 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 agendum.

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 change. With that, let me turn it over to Ron.

Thank you, Liz. Good morning, everyone, and thank you for joining us. I'll begin with a few broader observations before John watch you through our financial results in more detail. Reflecting on the first quarter operating environment for a moment, several factors shaped investor sentiment in Q1 including the Iran War, divided views on the long-term impacts of artificial intelligence and rising concerns on credit quality in certain parts of the financial system. Against this geopolitical and macroeconomic backdrop, we remain firmly focused on serving as an essential long-term partner to our clients and helping to deliver better outcomes for the world's investors and the people they serve. We continue to execute effectively on our strategy supported by our distinctive capabilities, deep operational strengths and a conservatively positioned balance sheet. That strategic positioning allowed us to deliver strong growth, underpinned by continued financial and strategic progress during the first quarter.

Our results in the first quarter also underscore the inherent strength and diversification of our business model, which allows us to successfully navigate times of uncertainty and heightened market volatility as we saw in Q1 with both FX trading and NII contributing meaningfully to our year-over-year financial performance.

The scale, capabilities and leading market positions of our core businesses, working together as one State Street provide balance across varying market environments, reinforce the value of our platform for clients and accrete value for our shareholders.

Slide 2 of our investor presentation outlines our first quarter highlights excluding notable items, which John will address shortly. We had a strong start to 2026 with broad-based positive year-over-year revenue performance across the franchise. Reported earnings per share increased 22%, while excluding notable items, EPS grew a very strong 39% year-over-year, supported by record quarterly fee revenue, NII and total revenue. Importantly, substantial positive operating leverage in the first quarter drove another quarter of year-over-year pretax margin expansion.

Quarter after quarter, the proof points continue to demonstrate that our strategy is delivering consistent durable improvements in financial performance, with Q1 marking our ninth consecutive quarter of year-over-year positive operating leverage, excluding notable items. Stepping back from the quarter for a moment, I want to highlight some of the many growth opportunities we are realizing and see ahead at State Street. For disciplined business investments and focused execution against a clear set of strategic priorities, we believe we are well positioned to continue to accelerate growth and deliver substantial and sustainable returns for our shareholders. We are drawing on deep, broad-based technology-driven innovation and delivering digital platforms, compelling AI tools and agentics and client solutions. Together, these capabilities help our clients succeed in a constantly evolving market, while strategically pivoting State Street to faster-growing segments of the industry.

In digital, we are focused on building the market infrastructure clients need to bridge seamlessly between traditional and digital finance. Following the recent launch of our digital asset platform, we are executing against a clear and comprehensive product road map that includes tokenization of assets, funds and cash for institutional investors. These capabilities are designed to drive greater efficiency, enhance liquidity and and support new avenues of growth for markets, our clients and for State Street. We are well advanced with clients to support their launch of tokenized fund strategies this year. Furthermore, State Street is deeply engaged in a number of digital asset-related industry initiatives, including DTCC's tokenization efforts as well as [ penalties ] work to create an ecosystem of Central Bank connected blockchain-based payment systems. These initiatives are key to the development of digital markets and consistent with our track record as a critical market infrastructure provider and standard center. Across alternatives, including private markets and hedge funds, we continue to see compelling long-term growth potential as the segment matures, with clients leveraging State Street to bring innovative solutions to markets.

Our leadership positions across both investment servicing and investment management position us well to capture opportunities as we broaden access and simplify operations for clients and our clients' clients. In Wealth Services, we are investing in leveraging Charles River's capabilities alongside our strategic partnership with Apex Financial Solutions, to build a differentiated, fully digital and globally scalable wealth custody and clearing solution. This positions us to serve wealth advisers and self-directed wealth platforms and unlock a new avenue for growth that leverages our strength across investment servicing and investment management.

And finally, at State Street Investment Management, our strong track record of innovation, differentiated solutions and scaled franchises in areas such as ETFs, cash and retirement, to name just a few, create multiple avenues for growth. An illustration of our progress is the way we provide barbelled investment exposure at scale to serve distinct client needs. At one end, SPYM, our low-cost U.S. S&P 500 ETF is gaining strong traction in retail and wealth channels. It ranked as the #1 asset gathering ETF globally in the first quarter, with $27 billion of inflows in that fund alone. At the other end, SPY continues to anchor institutional usage as the market's liquidity benchmark with nearly $4 trillion of notional value traded in the quarter, representing roughly 17% of total U.S. listed ETF volume.

Together, this underscores strength, breadth and flexibility of our platform across client segments and our ability to successfully extend from our leading position in SPY to other high-growth ETF segments. Our scaled franchises within Investment Management also create a competitive advantage and will enable us to capitalize on several important global trends, including the shift from savings to investment to move globally towards funded retirement systems, the expansion of digital assets and the continued democratization of investing.

For example, in digital, we are preparing to launch the State Street Galaxy Onchain liquidity sweep fund, a tokenized private liquidity fund designed to support 24/7 on chain liquidity for institutional investors. Together, these strategic initiatives underscore the broad range of opportunities ahead as we focus on driving near- and long-term growth, enhancing client capabilities and strengthening our platform. At the same time, the next phase of our operating model transformation will strengthen our ability to deliver sustainable growth and long-term shareholder value. We are scaling AI-enabled capabilities embedding more agile ways of working across the organization and continuing to modernize our technology with a continued emphasis on operational excellence, consistent execution of our strategy and delivering for our clients.

We are strengthening and improving our core end-to-end capabilities and technology through the deployment of our agentic platform and AI foundry to scale and accelerate AI in high leverage areas while also advancing capabilities in areas such as State Street Alpha and Charles River Development. These actions position us to operate more effectively, partner more deeply with clients and help drive the next phase of industry evolution.

To conclude, we are pleased with our strong start to 2026, while recognizing that our potential is even greater. We see broad-based strength across the franchise, and our first quarter results reinforce that our strategy is translating into consistent and durable improvements in financial performance. At the same time, we continue to transform across the platform and accelerate the deployment of AI agents, which holds significant opportunity for State Street and our clients given the investment, operational and technology intensity of what we do. In July, we will provide a detailed update on our strategic growth and transformation initiatives and how these position us to drive stronger performance over the medium term.

We are encouraged by our progress, mindful of the environment and confident in our ability to continue delivering as we move through the year. With that, I'll turn it over to John to walk you through the first quarter in more detail.

Thank you, Ron, and good morning, everyone. We had an excellent start to 2026 with broad-based year-over-year growth across the franchise driving record quarterly revenues and over 600 basis points of positive operating leverage in the quarter, excluding notable items. These results reflect disciplined execution alongside ongoing investment across our portfolio of strategic growth areas. Now let me dive into the details of the quarter, excluding notable items, starting on Slide 3. In the first quarter, total revenue increased 16% year-over-year to a record $3.8 billion. Fee revenue of $3 billion increased 15% year-over-year driven by strong performance across investment management, investment services and markets. Net interest income of $835 million increased 17% year-over-year primarily reflecting continued net interest margin expansion. Expenses of $2.7 billion increased 9% year-over-year, driven by higher revenue strategic investments and the impact of currency translation, which was a headwind to expenses, but a benefit to revenues. Taken together, this performance drove a significant improvement in profitability, with 400 basis points of pretax margin expansion and a roughly 4 percentage point increase in ROTCE to 20%.

Before moving on, let me briefly touch on notable items recognized in the quarter. Notable items totaled $130 million pretax in the first quarter or $0.35 per share after tax, reflecting repositioning charges and the rescoping of the middle office client contract.

Turning to Slide 4. Servicing fees in the quarter increased 11% year-over-year to $1.4 billion, reflecting higher average market levels, the benefit of currency translation and continued organic growth supported by net client asset activity, flows and new business. AUC/A ended the quarter at a record $54.5 trillion, up 17% year-over-year, primarily reflecting higher period end market levels, positive client flows and net new business. First quarter servicing fee sales were $56 million, these were well distributed across regions and aligned with our strategic focus areas, particularly back office services and alternatives clients.

Looking ahead, we continue to target $350 million to $400 million of sales in 2026. The pipeline remains healthy with broad geographic and customer segment representation, including APAC, EMEA, emerging markets and alternatives. Additionally, we reported 1 new Alpha mandate win during the quarter highlighting continued client engagement with our integrated front-to-back platform.

Moving now to Slide 5. Management fees increased 23% year-over-year to $724 million in the first quarter, driven by higher average market levels and net inflows. Assets under management increased 20% year-over-year to $5.6 trillion, reflecting higher period end market levels and continued client inflows. Net inflows totaled $49 million for the quarter, led by strength across index strategies and solutions, including ETFs and fixed income as well as our cash franchise. Within ETFs, net inflows were $25 billion, driven by strong flows and market share gains in our U.S. low-cost suite. As Ron noted, SPYM, our low-cost S&P 500 ETF, was the largest asset gathering ETF globally during the quarter. We also continue to advance product innovation and strategic partnerships, launching 57 new products and solutions during the quarter that are creating new avenues for growth.

As a signpost of that progress, our State Street Bridgewater all-weather ETF surpassed $1 billion in assets under management during the quarter. We were also pleased to see our investment-grade public and private credit ETF developed in partnership with Apollo Global Management reached a new high watermark during 1Q with AUM of over $800 million.

Turning to Slide 6. Markets remains one of the key pillars of our One State Street strategy. It plays a key role in linking our investment services and investment management platforms strengthening the connectivity across the firm and enabling more cohesive client-led solutions. FX trading revenue increased 29% year-over-year to $435 million in the first quarter reflecting a strong 25% increase in client trading volumes, which reached a new record level as we supported clients amid a dynamic market environment. Securities finance revenue increased 2% year-over-year, supported by growth in client lending balances.

Moving on to Slide 7. Software Services revenue increased 7% year-over-year in the first quarter driven primarily by higher professional services and software and data revenues, reflecting continued SaaS go-lives and platform adoption across our client base. Software business momentum is also reflected in our annual recurring revenue, which increased 12% year-over-year and our revenue backlog, which increased 11%.

Turning now to Slide 8. First quarter net interest income of $835 million increased 17% year-over-year, primarily reflecting a 16 basis point expansion in net interest margin to 116 basis points and average interest-earning asset growth of 1%. The year-over-year increase in NIM reflected improvements in funding mix, continued benefits from investment portfolio repricing and runoff from terminated hedges partially offset by lower average market rates. Growth in interest-earning assets was driven primarily by higher client deposits, partially offset by a reduction in short-term wholesale funding.

Turning to Slide 9. Expenses were up 9% year-over-year in the first quarter, excluding notable items. Currency translation accounted for approximately 2 percentage points of the increase. Of the remaining 7 percentage points, approximately 5 percentage points reflected higher revenue-related costs, with the remaining balance of 2 percentage points, driven by continued strategic investments and run the bank expenses net of productivity savings.

Moving now to capital and liquidity on Slide 10. Our capital levels remain strong, enabling disciplined capital deployment aligned with our strategic priorities. At quarter end, our standardized CET1 ratio was 10.6%, down approximately 100 basis points from the prior quarter. The decrease primarily reflects higher risk-weighted assets associated with a normalization of RWA and our markets business from episodically low levels in the prior quarter, along with the impact of U.S. dollar appreciation in March, and to a lesser extent, equity market appreciation in the final day of the quarter.

Turning to capital return. In the first quarter, we repurchased $400 million in common shares and declared $233 million in common stock dividends, resulting in total capital return of $633 million, equivalent to a payout ratio of 90%. Before moving on, I'd call your attention to a new Slide 13 in the appendix on our MDFIs loan portfolio. This lending remains disciplined and client focused, primarily supporting Investment Services clients. In addition, this is a highly collateralized and diversified portfolio that has performed resiliently across cycles and continues to support durable client relationships.

Let's turn to our full year outlook, which as a reminder, excludes notable items. We continue to assume that global equity markets are flat this year on a point-to-point basis from the end of 2025 while remaining mindful of the potential for variability in the operating environment. Against this backdrop, we now expect fee revenue growth in the 7% to 9% range, an increase from our previous outlook of 4% to 6%, reflecting a stronger-than-expected 1Q, along with continued organic growth and solid momentum across the franchise.

Turning to net interest income. Following our strong first quarter performance, we now expect NII growth in the 8% to 10% range, representing an improvement from our previous outlook for low single-digit growth. We currently expect expenses to increase by 5% to 6%, up from our prior 3% to 4% outlook primarily reflecting higher revenue-related costs. Finally, we continue to expect an effective tax rate of approximately 22% for the full year and a total payout ratio of roughly 80%, subject to Board approval and other factors. And with that, operator, we can now open the call for questions.

[Operator Instructions]

Our first question will come from Glenn Schorr with Evercore.

First one is -- I'm happy about the -- obviously, the pickup in NII, and I think the NIM expansion during the quarter was great. I find it interesting that average interest-earning assets were only up 1%. So I'm just interested if you could talk to the whole tug-of-war dynamic of better NIM, but not a ton of earning asset growth? And does any of that change within your updated guidance?

Yes. So thanks for the question, Glenn. I would say that we're very pleased to see our net interest margin progress. And as mentioned, much of that is coming on the funding mix side of the balance sheet. And so as we see growth in the deposit levels, which surged in the first quarter. We are continuing the plans from the last couple of quarters of reducing our short-term wholesale funding. And so that's higher cost and we just find that to be an appropriate rotation to higher quality funding on the funding mix side. And so interest-earning assets will be less of the story. It wasn't -- it was -- 1Q was driven almost entirely by net interest margin. I think that's a similar story for our guide for 2026, that range that you articulated that we talked about earlier is almost entirely driven by net interest margin as well. And so interest-earning assets are really going to be something we keep an eye on, but not really what's going to drive the net interest income in '26.

Our next question will come from Alexander Blostein from Goldman Sachs.

I was hoping we could spend a minute on the goals you guys are trying to achieve from this next chapter of State Street transformation. I know you alluded to the fact that you'll provide a lot more detail in July. But since you kind of cracked that door open, I was hoping you can give us the kind of overarching goals you're trying to achieve. Is that faster revenue growth? Is it better profitability or both? I believe your last kind of official medium-term pretax margin target is somewhere in the low 30s. So is the goal to effectively get that into a higher range over time? Or any other way you can give us some high-level framework would be helpful.

Yes, I'll start off here. I mean, I think as you may have heard me comment on this in prior sessions, I mean, I think that we had a goal to get 30% pretax margin, which we've delivered on at the end of 2025. And again, here in early '26, you're seeing us meet that threshold and the guide that we delivered today actually would -- if you play that through, implies in the neighborhood of 31% pretax margin. So we think we're moving the platform forward from a profitability standpoint. I think the second big driver will be growth, right? So when -- what you'll probably hear from us in July is an updated view about what we think this platform can deliver over the medium term from a profitability standpoint.

And we feel like there are extremely attractive opportunities to grow profitability metrics pretax margin and other metrics. And we also believe that we have very unique opportunities to grow this platform overall from a revenue standpoint. So I think you'll see some commentary on both of those things. I think the building blocks of all of that will be the increasing business execution discipline that is emblematic of what you're seeing in organic growth across our fee line items.

So we'll talk about that in terms of what that can deliver for us. But I think the other two big categories I'd highlight is we also have a distinctive portfolio of strategic initiatives that would provide some unique outsized ability to drive benefits into the platform over the medium term. And then lastly, transformation. Within transformation, there are several pillars of that, that we'll talk through. we'll talk through our ongoing operating model transformation, kind of embedding agile ways of working across the entire enterprise and really solidifying a product platform approach to delivering our services to our clients. A second pillar will be the ongoing modernization of our technology infrastructure, which we're excited about. And then lastly, all things, AI, where we've continued to make investments and make progress and we'll wrap all of those building blocks together in what we believe they will contribute over the medium term in our commentary that you'll hear from us about in July.

That sounds great. Looking forward to that. For my follow-up, I wanted to ask you guys a question around ETFs, both in terms of the growth and expense perspective. Obviously, there's been an increased focus on distribution platform fees that may come online towards the end of the year, Schwab obviously the one discussing that. So any early thoughts on the implications that might have on both sort of ETF growth for State Street and the incremental expenses that you might be willing to incur on the back of that, if you were to say on the [indiscernible] platform.

Yes. So Alex, it's Ron. I mean we're very familiar with what some of the platforms are doing. Most of these platforms are close partners. In terms of our long-term strategy and our long-term performance, we're not concerned about this. I mean if you've been following what we've done in ETFs, we have continued to broaden that platform, moving from where we started as an institutional provider to not only maintaining that institutional leadership, but growing both in terms of client segments in the low-cost wealth channel, but also in channels outside the U.S. So you'll see pockets of the kinds of things that you're talking about, but we don't see it as any kind of a substantial risk or headwind to our overall ETF business.

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

So this quarter, you obviously showed the ability to put up meaningful operating leverage and also have a higher cost growth rate to even deliver that. I'm just wondering like were you able to pull forward some spending? Or was it mostly revenue related costs? And then as you look forward to the new 5% to 6% cost guidance, I'm just wondering how you're balancing the expected efficiencies that you're getting? And then how much FX translation you're still including in the full year guide after the hurt that it was in the first quarter?

Yes. Maybe just a couple of comments about that. I mean, I think what you saw in the first quarter, there was about 2% or so impact from a currency perspective. And so when you take that 9%, you're really starting with 7% ex currency. That 7% is predominantly revenue related. So 5 percentage points of that would be revenue related, which leaves you a net 2%. Within that 2%, we've got run the bank costs and our strategic investments. And those are in the neighborhood of, if you break that out, call it, 6% of spend and running the bank and really finding ways to invest in exciting initiatives that we're feeling good about. And we fund a lot of that through productivity. So that's the net 4% of productivity that we delivered in the first quarter. We're going to continue to monitor our productivity trajectory. And the same storyline holds with the 5% to 6%, the incremental growth that you're seeing, majority of that is revenue related and then there'll be other costs that we'll consider continuing to fund strategic investments and kind of partially offset by productivity. I think the the storyline for 1Q holds for the full year as well when you apply it to the 5% to 6% range.

Okay. And as a follow-up, just with the strong NII and then the strong FX trading, can you just help us understand, do you expect that to run rate? Or do you expect a natural just kind of coming off a little bit, given the types of volatility in the environment that we saw in the first quarter?

Yes, sure thing. I mean I think -- I mean, I'd say let me -- I'll start with FX. I mean, so we've had a strong quarter in FX trading. And I think 2 things have to come together to basically deliver on something like that. First, you have to have the franchise in place to be able to take advantage of these opportunities when they arise and be there for your clients. So first quarter was one of those times. And I'd say that the investments in client acquisition product extensions and geographic expansion in the markets business has served us well in 1Q. And you put that and you combine that with some elevated volatility, I would call it good volatility where liquidity is still good, but there's a lot of turnover given volatility. Those combined together to deliver our first quarter.

So very strategic and opportunistic and feel good about that. I would say that those conditions for the rest of the year, when you think about our fee guide of 7% to 9%. Those conditions, we think moderate gradually throughout the year, and that's built into the 7% to 9%. So we're not depending upon those highly favorable conditions in the first quarter being maintained for the rest of the year in order to deliver the 7% to 9%. So that's how I would just kind of articulate the FX trading side of things. When it comes to net interest income, we had an -- the original guide was up low single digits. So now it's in an 8% to 10% range. So we're seeing some very solid tailwinds there. We originally had a view that maybe our net interest margin would be somewhere in the 100 to 110 basis point range.

I think you could look for 2026 you could see a net interest margin in the 110 to 115 basis point range, which comes off slightly from the first quarter, where we're at 116. So that will give you a sense of the trajectory. And I think net interest margin is the main driver and the story of this with funding mix being one of the larger tailwinds as I mentioned a little earlier. But overall deposits will be up basically helping that funding mix.

So I think we said before, maybe $250 billion of deposits, is probably going to be in the range of $250 billion to $260 billion as we play out the rest of the year. And so -- but we'll look to maybe pay down some higher cost debt with that and continue to optimize the funding mix to drive the net interest margin. So that -- all of those building blocks are incorporated into the NII guide of 8% to 10%.

Ken, it's Ron. I just wanted to underscore a point that John made on FX, which is that we've been talking to you for years now about the investments we've made in terms of expanding client volumes and to really make sure that we were serving as much of our investment servicing clients as possible. We've done that through a variety of ways. Some of it has been expanding geographic capabilities. But most of it has actually been expanding the ways in which we can meet our clients technologically and how they can trade with us. And we did that at a time when there wasn't a lot of volatility in the market, preparing for the moment when volatility and normal volatility would return.

So for us, what we're seeing the benefits of those past and ongoing investments into really meeting our clients where they are in as many ways as they want to trade with us.

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

Maybe just a follow-up on the deposits up nicely with the big mix shift to IPs, which I think was a particular benefit quarter-over-quarter. So on the NII side. So can you kind of talk through what deposits maybe have looked like since April 1? How -- any further optimization around pricing can affect deposit growth from here and how you're thinking about the mix in your guide?

Sure. Yes. I think I mentioned the level of deposits, I'd anchor to that $250 billion to $260 billion range. When it comes to mix, we originally talked about around 10% of noninterest bearing. I think that's still a good anchor maybe over time. But I mean, I think in '26, it appears that we've got a higher net interest -- I'm sorry, noninterest-bearing opportunity. So maybe it's just a little bit higher than that 10% slightly. So that's -- those are the point I'd make with respect to that. When it comes to deposit drivers, I mean, we -- with our external drivers, internal drivers. The internal drivers that we control are continuing to grow our platform and just serving our clients and growing AUC/A, which was another record this quarter, and that's really where we're sourcing those deposits, number one. Number two, just given certain client segment growth, so the alternatives segment growth with the segment, which is growing faster than maybe the non-alternative segment is -- also happens to be pound for pound, brings more deposits with a more attractive mix generally to the platform.

So we're seeing some of that as the tailwind as the alternative strategic initiative continues to pay dividends. The external things to keep an eye on deposits tend to rise when money supply is growing. GDP is growing when rates are kind of stable on hold to falling and also given our business if volatility levels and risk off tends to rise, we tend to grow deposits.

So broadly, our NII line ends up being a little bit of an offset to other line items similar to what happens in the markets business, when and if you see periods of higher volatility like you saw in the first quarter.

Any thoughts on April 1 from here, what you've seen so far?

Yes. I mean I would say I'd probably put it in moderating from here. We had extremely positive conditions in the first quarter still very solid trends. I'd stick with the $250 billion to $260 billion, maybe slightly better than our 10% noninterest-bearing guide, as I mentioned earlier, April trends are good in the NII space and in the deposit space.

Okay. Great. And maybe just a follow-up on the Wealth Management business. Across regions, EMEA was the largest contributor to net flows in the first quarter, I think $29 billion that's obviously quite good progress. So what vehicles and asset classes, was it lumpy? And do you think that momentum in Europe can continue?

Yes. I mean I think if you want to talk about net asset flows in general, as we mentioned earlier, our -- from an asset class standpoint, its fixed income was a very strong quarter and led the way followed by multi-asset. And then you did hear how well our low-cost we did this quarter as well, more broadly and ETF in general. So those would be the ones but possibly fixed income, one of the bigger drivers.

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

One short-term question, one long-term question. The short term question, I think you said revenue backlogs are up 11%. If that's correct, can you size that a little bit more in terms of the level of the backlog versus history and where that's coming from? And then the long-term question, Ron, just back to AI, you guys seem clearly engaged in AI. You're looking to scale AI, but some people out there are like saying, this is -- they're going to remodel their entire business model around AI. You have a few banks saying that, some others actually giving -- only 1 bank gives quantifies expected AI benefits. You have some saying the business models will be destroyed due to AI scare trade? And then some other banks will say, hey, it's really kind of overrated, but will go along with it. So that's the long-term question. But first, the short-term question about the revenue backlog.

Yes. Thanks for the questions, Mike. That 11% was with respect to the software services line alone. And that is correct, uninstalled revenue up 11%. Multiyear revenue growth in this space has been around that level. So that continues that expectation of around 10%, low double digit growth that we expect over the medium term. And as we continue to invest in the business, we may have opportunities to do better than that, but the ARR grew 12% as well. So that's the background on that question. And then I'll turn it over to you. You had a follow-up to Ron related to AI.

Yes, Mike, I mean, we're very positive on AI. And a lot of that has to do with the nature of our business, which you understand well. It's investment, operational and technology intensive. So where are we on this? I would say it certainly is comprehensively embedded across the enterprise. We've got broad access and accelerating adoption virtually every employees, where it makes sense, has access to the tools and usage is continuing to scale rapidly. And a lot of repeat behavior indicating that the tools are becoming part of the distributed daily workflows.

Secondly, in terms of development and technology development systems development, we're fully enabled there and there we're already realizing productivity gains. And it's giving us the ability to actually do more faster and get to those projects that we would have liked to have gotten to but wouldn't have made the cut before this kind of productivity gain. So again, all of our developers have access to these AI assisted development tools, and they really -- we really are seeing an acceleration, both of new technology development, but also technology modernization.

Thirdly, it's what you do with it after that. And we have built a centralized AI hub, which has a very deep use case pipeline that's beginning to scale and will scale over the back half of 2026. This platform supports over 200 AI use cases now with 70 of those already live. And as they mature, we expect tangible business impact to begin emerging in the back half of '26 and then accelerating going forward, which then leads to the kind of fourth piece of all this, which is agentic service delivery. I talked a little bit about that in my prepared remarks.

Again, given the operational intensity of what we do, the opportunities are just manifest for us. We have agent-enabled service delivery that will become online in July. And we're, at the same time, put forth what we're calling the AI foundry to be able to do this and repeat this. The longer-term question that you're asking is do you think it destroys the business model, we don't see that. Now at the same time, we also see that these are widely available tools. There's nothing proprietary here. So it is how you actually deploy them. John talked about in his remarks, how you actually turn that not just into operational improvement but create real agility in the way the organization operates. And what does that mean right? It's -- many of these businesses have grown up kind of organized the way they are going back years and years. A lot of that won't make sense any longer. We're already seeing that change in our organization in terms of how we think about those things. So the real power of exploitation first is deploying the technology, but second is recognizing what it means for how you square off against clients and how you actually organize and organize the work internally. But for us, we see this as an opportunity, more opportunities than risk.

Three words. Sorry, go ahead.

You go ahead, Mike.

No, the three words, "annual business impact". Can you -- is it bigger than a [ bread ] box? You said starting late this year or next year, again, only 1 bank has given any numbers -- financial numbers around this. So maybe expectations are low for the answer, but could you dimension this in any way?

Yes. I mean I'll go ahead and articulate the framing around that, Mike. I think it's going to start scaling in the second half of '26, and we're going to dimension what the impact is going to be over the medium term. It will be very meaningful and it will be a very important pillar of how we're going to drive value and financial bottom line impact as well as expanding resources to continue to invest in our strategic road map. So it will do double duty, and we'll be very transparent about that medium-term expectation. And as we get into later in the year, when we start looking at run rate benefits as we're exiting '26 into '27, we'll come back around and articulate what that near-term benefit will be.

Okay. So if you -- we'll get this on the second quarter earnings call or -- and/or you'll have like a conference in Boston with lobsters like you did a few decades ago or something in between that.

Earnings call. I wasn't around for the lobsters, but sounds interesting, but no, it will be on the earnings call.

Our next question will come from Ebrahim Poonawala with Bank of America.

[indiscernible] to John, so if you're feeling bad about it. But -- maybe I wanted to follow up, like you spent some time in your prepared remarks just around tokenization, your digital asset platform. If you don't mind, talk to us -- should we think about all of this as mostly retaining the customer activity that you already have, but it's just moving from analog to digital to take sort of a comp? Or are there new revenue opportunities that you think that will surface as a result of tokenization and moving unchanged?

Yes. Ebrahim, I would say it's both. I mean, obviously, given the nature of our client base and our market share with the most sophisticated clients, you'd expect -- they expect from us and you'd expect us to be delivering the best that the market has to offer to them. But if you think about some of the use cases, they're a very real in terms of the tokenization of assets. That's in the end net new opportunity for us. And we talked and we've talked to you before in other venues about tokenized money market funds. I mean that's a real use case and it's beneficial to the market. It's beneficial to liquidity and will result in more revenues for us. The whole on-ramp, off-ramp bridge from "traditional" finance to digital finance is also a real opportunity. I mean what I'm -- the way to think about what's going on here, is there's lots of new railroads being manufactured and being laid.

There's not yet the interchange to those. And that's a very real thing. And when you think about everything that whether it's the stablecoin providers are doing or some of the other digital platforms. Again, the volumes are growing fast, but against -- off a very small base. And part of the reason for that is the on-ramps and off-ramps really are underdeveloped at this point. Being part of that on-ramp off-ramp and providing that infrastructure is a second source of new revenues, so we see it as both going forward.

Got it. And maybe just sticking with that on -- are there opportunities? Or should they -- like, is this all built in-house in terms of when you think about tapping into this? Or are they like very targeted digital asset platforms or capabilities as this infrastructure build-out that you would look at and where M&A would make sense? Or does it not quite exist, given just how new all of this is?

And Ebrahim, as you know, we always think about that. We always think about the make versus buy decision. And even on the make decision, it's M&A is one, but partnerships or another. So we've got this product that we've referred to that's -- with Galaxy. I mean that's a partnership with Galaxy. We'll continue to explore that. There are -- we're very tied into the to the emerging fintech platforms, not only here in the U.S. but in other hotspots of fintech development. There's hotspots and Europe, there's hotspots in India, we're very tied into those. So we'll continue to explore the M&A. But we also have a lot of confidence in our own organic capabilities and our ability to build this out, so it will be all of the above.

Our next question will come from Brennan Hawken with BMO Capital Markets.

John, you gave some really clear color on deposit trends and how those feed into the NII. I was curious about expectations around the euro and GBP deposits. Those beta, specifically, the forward curve there has on hawkish with 2 hikes the outlook. Are those hikes are included in your updated outlook and the betas on those currencies were low during the recent rate cuts. So therefore, should we expect -- can you tell us about your expectations for betas when those rates are moving up.

Yes, sure. So a couple of thoughts related to that. So in the guide, we have an assumption of one hike in -- and we've got the Bank of England and the Fed on hold. But we've got the ECB in for one hike. We acknowledge that currently, it appears that there could be more than one. Just from a sensitivity standpoint, it's not a huge driver on a quarterly basis. I think we've communicated previously around $5 million a quarter. So you can basically build that in from a sensitivity sensitivity standpoint. And the other question that you wanted to talk about?

Just whether you expect the betas to remain low as they were during the cut?

Yes. I mean I think I'd say that the betas in the -- and really, it's U.S. dollar and euro, but the betas for U.S. dollar pretty much is in the range of symmetrically in terms of the tightening cycle and the easing cycle. They've been relatively symmetric and then in terms of the betas for the euro, probably a similar expectation to be lower than the U.S. maybe in the 50% range versus the 75% to 80% that you'd see in the U.S. but relatively symmetrical on the up and down.

Got it. That makes a lot of sense. And then for my follow-up, Ron, you spoke to not expecting much from to your ECAF business from some of these changes that the work management firms are working on, which makes a lot of sense. I know it's not -- active ETFs aren't big for you, but there's a little confusion, I think, around space. And given your strong position in the ETF oligopoly, I'm curious your perspective. So it seems as though there's sort of a higher rate being discussed on the active ETF side, which makes sense. There's better expense ratios or higher fee rates in those products versus the passive. Is that sense what I'm hearing from my channel checks and wealth. Is that right? And does that speak to why you think that the impact will be pretty de minimis or manageable for your ETF business providers?

There's a lot in that question, Brennan. The active ETFs are absolutely growing, and we're seeing -- we're the beneficiary of that in our servicing business. And I think one of the reasons why they're growing in addition to the vehicle in many cases, simply being a better vehicle and also aligned with the way distribution has gone either within the traditional wirehouses where you want to have control over how the portfolios are put together or with the rise of the independents, but the kind of the buyer's fee comparison is less about the active ETF versus the passive ETF and much more around the active mutual fund versus the active ETF.

So I think that's also helped with the value proposition there. We see and because of our platform, we can realize opportunity in ETF growth literally around the world, right? So we talked a little bit about -- John talked a little bit about the growth that we've seen in Europe. That was -- we were early on there, both as a sponsor and as a servicer and it was slow growth at the beginning, but you're seeing a much bigger take-up. We actually think that the real growth is yet to come in Europe.

Why do I say that? Because the distribution in Europe is still largely bank based. Yet there's a lot of platforms and alternatives to banks that are going after them. They will employ and deploy ETFs as the tool. And again, we'll help us both on the sponsor side and the servicing side. You look even in places like the Middle East and the funds business in places like the UAE and Saudi, I just came back from Saudi earlier this week, my second trip to the Gulf this year, you're just seeing those countries skipping over the old mutual funds and use it and going right to ETFs and building modern platforms around ETFs. So all of this we see as real tailwind there. If you're a distributor, like a Schwab, obviously, you want to get paid for this, and they're going to do what they need to do to be appropriately compensated.

At the same time, every distribution platform is going to have to look at what are other distributors are doing. And there's emerging a lot of these tech-forward, tech-driven distribution platforms that are going to provide competition to them. So it's a vibrant sector. There's a lot of growth in it and we think we're just very well positioned both as a sponsor and servicer.

Our next question will come from David Smith with Truist Securities.

On the capital front, you've been running more at the high end of the 10% to 11% CET1 range for most of the last year, but you're in the middle of the range this quarter. Are you now more comfortable running into the range? Or is this just a transitory move down given the elevated balance sheet at the end of March. Then if you could give any early impressions on potential impact of the new RWA and G-SIB surcharge rules proposed last month and also clarify if the 80% payout ratio target, is that on a GAAP or adjusted earnings basis?

Sure. Yes. So I'll take those one at a time here. So -- the -- our operating range is 10% to 11%, and we've articulated recently that it is -- that we've been operating at the upper end of that range. That hasn't changed. You can see some variability on quarter ends where we report on any given day just given what could happen. And it just so happened that March 31 was an exceptionally active day, and there were some larger movements on that data that maybe drove this to the level of 10.6%.

If you were to look at the averages for the fourth quarter and the first quarter, average CET1 was in the upper end of 10% to 11%, and that's how we're continuing to operate. So nothing new to communicate there. I think the second one that you asked about was related to Basel III and -- yes. And I think -- I mean, so we're pretty constructive on the proposed approach. I think it's delivering on the expectation that there would be more targeted view of credit risk RWA. And I think that's played through. And it's our expectation that we'll see a benefit in the credit risk RWA side of things. That is expected to exceed the additional RWA that we'll have to provide on the risk operational risk [indiscernible] so we'll have to frame this and think about magnitude as we continue to study it and determine what the finalization of these rules will be, which will happen over time. But generally, reasonably constructive on the proposal, and it's going to be a benefit, it appears for us.

And then lastly, as it relates to the 80%, that's on a GAAP basis in terms of the payout.

Our next question will come from Manan Gosalia with Morgan Stanley.

So just on the private credit side. I appreciate all the incremental disclosure on the NDFI loans. It looks like the majority of those loans are all non-BDC loans, and you also mentioned some of the safeguards that you have on the BDC loans themselves. So maybe the question is, how are you thinking about growth in that NDFI portfolio going forward? And how do you assess the safety around that portfolio?

Yes. I mean when you think about all the other categories, this is, in essence, who we serve. These are our clients, non-depository financial institutions, broadly are an important part of how we support that customer segment. And these are investment services clients, by and large, and as part of the broad suite of services we provide them, we support them from a balance sheet standpoint.

So this is highly strategic lending for us when you see NDFIs and each of these categories are extremely well positioned from a risk return credit risk profile standpoint. We've never had losses in subscription finance or in the AAA CLO book. And that's really the large majority of the NDFI book is in that space, and we wanted to make it clear that just how high quality these categories are. We're down to $1.6 billion in the actual BDC lending.

I would kind of highlight that the points made on the slide with respect to that these are senior secured with substantial subordination on them, 80% subordination sitting behind the positions that we have in the BDC space that have diversified with ongoing structural protections. This is -- this will be a growth area for us. And you could see low to mid-single-digit growth and commensurate with our continued penetration of this customer segment, which is really attractive for us. And I think we're feeling very good about the profile here.

Great. And on the private market, private credit servicing business, you made several investments there over the past few years. Do any of the pressures that we're seeing here on the private credit side impact that business?

Yes. I mean there's some impacts. I mean I think that to the extent that you have elevated redemption requests, that can have a marginal impact. It's pretty limited, however. I mean, -- and frankly, the round trip is a net positive for us when you think about elevated redemption requests that may come in, in the private space, that could have a small impact on servicing fees, but it actually results in higher deposits. And so there's a balancing force here with respect to in the near term net-net, very stable in terms of revenues and fees and just don't see a huge impact here to here in the first quarter, which we think is more of a temporary flow-related issue rather than a broad systemic issue.

Yes, I think it's also important to remember that all this attention on these products and redemptions is really around a very, very small piece of the private credit market. It's around those that are put into funds and available on a semi-liquid basis to investors. The vast majority of private credit is not in those kinds of structures.

And there's nothing -- no reason to believe that private credit won't continue to grow. It's unlikely that you're going to see significant expansion of bank balance sheets in Europe or Asia. So yet the appetite for credit will continue to grow. You even think about bank intensive kinds of markets, again, like the -- if you look at those banks, highly profitable banks, but those -- they don't have a lot of places for bank balance sheets to grow. And if you think about the capital needs of that region that we're already there today or before March 1 and what those capital needs are going to be going forward.

There's -- that's just yet another pocket of -- that will need to be fulfilled by private credit in some form. I do think what you will see is a careful examination of these vehicles. And what actually goes in them, how do you manage expectations of retail and affluent investors appropriately. But again, that's a relatively small segment of the marketplace.

And maybe an extension to that, too, just to tie it back to that $1.6 billion that you're seeing on our slide, Ron's point about those that are in that sort of nonpublic semi-liquid space. It's less than half of that $1.6 billion. And the overall BDCs are 4% of loans, so less than half of those. So in around the 2% or less, are in the space that's getting a lot of the headlines and then it's well less than 1% of total assets just to kind of wrap it all back together with the point you heard from Ron.

Our next question will come from Vivek Juneja with JPMorgan.

A couple of questions. Firstly, you had a scoping charge of $41 million. This was the second one in the last 12 months. Is it -- can you give us some color? Is it the same client -- what -- is it the same type of issue? It doesn't seem like it, but I just want to not make assumptions. What's driving these and why have we seen twice in the last 12 months?

Yes. Vivek, it's Ron. It's -- these are idiosyncratic. It's not the same client, and it's not for the same reason. In this case, it was a -- it's an existing alpha client, and it will remain an Alpha client. It was 1 part of their in-source to outsource journey. So we serve them in our middle office business. They had intended, and we were working with them to help outsource more of that and we mutually agreed that this was not the time for them to continue that outsourcing journey. So it's within the middle office and it's an in-source versus outsource decision that the client has made.

And it's not the same kind of underlying drivers that drove the decisions in both of the client scoping changes?

No.

Okay. Different topic. Ron, you made a comment about the Schwab charging a fee for their distribution platform. I want to clarify your response. Will you absorb it? Or will you be able to -- will you pass it on? What's the plan with that?

Yes. We don't have a concrete plan yet because we haven't seen what the final is here. I mean, we'll figure out what we what we'll do once we see what it is. And once we know that, we'll come back to you.

Lastly, if you look in to me for one, this is John Woods, just a little detail. The charge-off jump you saw this quarter, any -- what type of loan? Any color on that?

Yes. This is -- this would be a COVID commercial loan. So just kind of coming out of some high-margin contracts that a name was able to execute back in, call it, the 2021 period when those rolled off, they went in, they had some pressure and went into nonaccrual. And we took the opportunity to exit the name. We had it substantially reserved for. So it's not really a big P&L impact but we decided to crystallize it and move on from the name in the first quarter, and that's what drove the charge-offs. So nothing that really extends into the other portfolios. And it didn't have anything to do with NDFI or anything else.

Our next question comes from Steven Chubak with Wolfe Research.

This is actually Sharon Leung filling in for Steven today. Just wanted to ask, I really appreciate the color on the drivers of the expense growth, including the 4% from net productivity phases. Just wanted to ask, given the head count was down 2% year-on-year, how much did that contribute to the overall efficiency savings? And then looking ahead, do you see the potential for further headcount optimization from here?

Yes. I mean head count will clearly be something that we'll think about. But I would say there are puts and takes there. We're growing businesses, and we're investing in businesses. And we may be -- and really what we're doing is thinking about how these gross productivity letters that we're engaging in by getting much more automation and by reengineering processes and by 0 basing those processes, we're finding ways to reduce reliance on as many kind of head count as we've had before, but we're using that net-net as ability to go higher in other areas. So round trip, there will be kind of an expectation of continuing contributions from headcount, but there are puts and takes as we're continuing to invest in other places. But -- so it's a meaningful portion of the productivity of 4%.

Our final question will come from Gerard Cassidy with RBC.

John, can you talk to us -- you've had obviously some real strong positive operating leverage, identified ninth consecutive quarter, excluding the notable items, of course. How much of the positive operating leverage. And I guess this plays into your pretax margin comments as well. How much of it is structural, meaning your scalable platform that you guys have built mix shift versus cyclical tailwinds like the FX volatility or rising market levels?

Yes. I'd say -- Gerard, it's a good question. I would tell you that across the board, we've had organic growth in the quarter, and that's been really something that you can -- you will be durable is multiyear investments and business execution and a sales culture that is starting to pay dividends. So we're seeing organic growth across all of our line items. As I mentioned earlier, all the investments that we've made in geographic expansion and product capabilities in the markets business, which from a distance, you might say, is purely environmental, it's really not. I mean it's also environmental, but it's not only environmental. There are long-term client relationships and platforms that we've built that our clients find very attractive and the connectivity between markets and our investment services clients and investment management clients are very strong. And therefore, I do think we have a durable opportunity to drive positive operating leverage that's attractive that will reflect itself in pretax margin improvements over time. Certainly, environmental factors can help that. But even without environmental factors, we believe we have a very attractive opportunity to grow pretax margin through positive operating leverage given all that organic commentary I just made.

Great. And then, Ron, obviously, you and I have been around for a fair bit in the custody banks scale has always been so important to success and with all the investing in AI today, can you share with us -- do you think it's even a greater challenge for smaller players to compete against companies like your own and the money center banks in New York or your big competitor down there. Just can you frame that out? Or is it we been the same as just maybe it's more of a dynamic because everybody talks about AI. But how important is it to really have scale to successfully compete in this business?

I think it's a really good question, Gerard. I think that the importance of scale certainly hasn't gone down. If you think just about the investments required around technology and cyber and those kinds of things just to stay where you are, right? Forget about growth, forget about new opportunities. the cost of doing that, which is either being imposed regulatorily on all the other players or increasingly by clients themselves who are saying, this is our expectation in terms of what we're going to expect in demand of you.

You then layer on to that, the real revolution that we're seeing both on the AI front and what it means, again, not just to bring the technology in, but to actually profit from it the scale, both around people, know-how, et cetera, is just really hard, I think, for a smaller player to do and then you -- if you believe that we're moving towards this true digitization of finance, that will take time. So it's not just about showing up with the fancy new platform but recognizing that there's this long-term transition between digital and digital that there are these on-ramps and off-ramps that need to be built. And if that's -- if you want to make money, that's what you need to do, again, puts more scale requirements.

So I don't dismiss the innovators, and we look at them and we follow them. And in some cases, we partner with them and an even smaller number of cases, we buy them. But in terms of do we see one of those developing into a true scaled player to compete in this little pocket that we compete in, we're not seeing that.

There are no further questions. I will now turn the call back over to Elizabeth Lynn for closing remarks.

Thank you all for joining us today. Please feel free to reach out to Investor Relations with any follow-up questions. Thank you again, and have a nice day.

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.

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 one [indiscernible] 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 where -- and even for you in terms of what's been different and what's been the same, that will be a prior role.

Yes, really good question. I mean I think the -- 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 those -- 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 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, I 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. The first one that I 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 as 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 is our operating model. And with a technology platform and the capabilities and accelerant that AI brings, I think what 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 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 a fourth category. It's just kind of the -- we -- 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 that's -- 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. So -- 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 is low.

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 you think about fee revenue growth or within Investment Services, you'll 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's -- 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, it's -- 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 services space. So lots to like about that. And I would be neglectful 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 the -- 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, is it -- 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 whether moving back and forth between fiat and stablecoin or -- 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 have -- if you can 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 to need collateral, 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. Our -- in talking to clients, it seems the demand is really in the stablecoin space. We will -- and that's where we're going. But tokenized deposits is on the product road map as well. And we'll -- 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, 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 in the 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% is with markets flat from the end of January is a pretty good place to be.

It is a good place to be.

Correct.

That's a nice little update. Thank you. And with the fee growth trending well, maybe I guess, let's just talk about the other component of revenue growth on the net interest income or 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 -- net interest income and 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 we 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 the virtual -- virtually all of them are, but to the extent that any of them aren't, we look at that as opportunities to pull 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 are -- 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/A growth, like [indiscernible]

It's a combination of things. I would say that you have 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 to 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 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 Walsh ] 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 the -- we lived through a period of -- 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 and 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 are 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 you 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 under -- there's a lot of moving parts underneath that. And so within that 3% to 4%, the round numbers 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 of 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 the -- connecting it back, it's essential to basically -- and it's connected to transformation as we're -- 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 that we've -- 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 [indiscernible] put words in your mouth, but I think you talked about providing a 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 here.

Yes. No, I think it's an important point. I mean I think -- so the last couple of years, we've been -- 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, 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 the 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...

Some more in terms of something that could be positive.

Yes. I mean I don't -- 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 there's -- 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 we have -- I think I 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 so our -- 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 with -- in 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 that -- 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.

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 support [indiscernible] 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 of small-ish are 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.

Good morning, and welcome to State Street Corporation's Fourth Quarter and full Year 2025 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 whole or in part without the expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on State Street's website.

Now I'd like to hand the call over to Elizabeth Lynn.

Good morning, and thank you all for joining us. On our call today, our CEO, Ron O’'Hanley, will speak first; then John Woods, our CFO, and will take you through our fourth quarter and full year 2025 earnings presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.com. Afterwards, we'll be happy to take 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 to these non-GAAP measures to the most directly comparable GAAP, or regulatory measure, are available in the appendix to our presentation.

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, including those referenced in our discussion today, as well as 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 view should change.

With that, let me hand it over to Ron.

Thank you, Liz. Good morning, everyone, and thank you for joining us. Our fourth quarter results represent a strong finish to another successful year for State Street. We entered 2026 with momentum and a proven strategy that continues to deliver strong results and meaningful value for our clients, shareholders and employees.

Our progress reflects the strategic actions and investments we have made in recent years, deepening and broadening our capabilities while elevating our client value proposition, which have strengthened our position as our clients' essential partner, enabling us to compete from a position of great strength. This solid foundation positioned us well to capitalize on a dynamic yet constructive market environment in 2025 and deliver another year of accelerating financial performance. Notably, 2025 marked our second consecutive year of positive operating leverage and pretax margin expansion, and our 4Q results represent the eighth straight quarter of positive operating leverage, excluding notable items.

Our strong financial performance underscores the effectiveness of our strategy. And in 2025, we built on that success with a number of key strategic milestones that I will detail shortly. These actions reflect our disciplined focus on reinvesting to drive near-term and long-term growth across our franchise, enhance client experience and capabilities, and further strengthen our platform while delivering strong shareholder returns. We are excited about the client opportunities ahead and the significant potential being unlocked by the next generation of our operating model transformation, particularly as we further leverage and embed AI-enabled capabilities throughout the franchise.

With that strategic context, let me turn to our fourth quarter and full year highlights on Slide 2 of our investor presentation. Starting with financial performance. Excluding notable items, which John will address shortly, we generated strong fourth quarter EPS growth of 14% year-over-year, supported by both record quarterly fee and total revenue. Healthy positive operating leverage in 4Q helped to drive pretax margin to 31%, excluding notable items.

Our full year results were similarly strong. Excluding notable items, earnings per share were $10.30, or up 19% year-over-year, supported by strong revenue growth and growing margins. For 2025, we delivered strong positive operating leverage, expanded pretax margin by more than 150 basis points, and achieved return on tangible common equity of 20%, excluding notable items.

As we look ahead, our attention is firmly focused on capturing the opportunities before us. Shifts in investor demand, advances in technology and an evolving regulatory landscape, or creating new opportunities for both us and our clients. In response, we meaningfully advanced a number of key strategic initiatives last year and are creating new distinctive capabilities that enhance client engagement, open doors to strategically attractive markets, and further streamline our operations and technology platform, all of which are designed to support continued strong financial performance.

Within Investment Services, which surpassed [ $50 trillion ] in AUC/A for the first time in 2025, we are encouraged by rising client satisfaction and the good momentum in Alpha client onboarding, including meaningful progress with large development partners. We are drawing on our heritage of technology-driven innovation and investment services by delivering next-generation tools. Digital platforms and client solutions aimed at helping our clients succeed in a constantly evolving market, while strategically pivoting State Street to faster-growing segments of the market.

Our strong industry position in private market servicing is a clear example with related servicing fees growing at a double-digit year-over-year pace in 2025. A further illustration is in the digital assets ecosystem. We finalized and recently launched our digital asset platform, which will enable tokenization of assets, funds and cash for institutional investors, unlocking new efficiencies, improving liquidity and creating opportunities for growth. As a result, we are strategically positioning State Street to be the bridge between traditional and digital finance, and the connection point among digital asset platforms.

Another example is in the wealth services market, which presents a highly attractive opportunity for expansion and long-term growth. In 2025, we strategically advanced our capabilities in this space through a partnership and minority investment in [ Apex ] fintech solutions. This action enables us to capitalize on new opportunities and significantly strengthen our market position, and we are confident that this partnership will deliver positive results this year. This combination of distinctive capabilities and high service quality, coupled with targeted strategic expansions, enables us to meet our clients where they are going while maintaining price discipline.

Within our Investment Management business, over the last several years, we have innovated at pace with a focus on expanding product and distribution capabilities. These actions are now delivering strong results. State Street Investment Management ended 2025 with record quarterly and full year management fee revenue. We were also delivering a consistent trend of solid asset growth as 2025 marked its third consecutive year of net new asset growth above 3%. This consistent organic growth helped drive period-end AUM to an all-time high of $5.7 trillion, just 2 quarters after surpassing the $5 trillion mark for the first time.

These results also reflect our ability to innovate in the strategic growth initiatives we executed in 2025. We launched a record 134 new products across our investment management business, expanding our capabilities and delivering greater value to clients. Within our ETF franchise, this included innovative alternatives offerings developed through partnerships with Apollo Global Management, Bridgewater Associates and Blackstone. We also introduced 11 sector [indiscernible] premium income ETFs and expanded our suite of actively managed target maturity ETFs, further strengthening our fixed income and retirement capabilities, both of which are core strategic priorities.

Throughout 2025, our Investment Management business also cultivated a series of strategic partnerships that strengthen our investment distribution and technology capabilities and position us for future growth. Early in the year, we invested in [ Ethic ], a technology leader that enables wealth advisers to build tailored client portfolios at scale. We also established a strategic relationship with [ Small Case ], India's largest model portfolios platform and partnered with [indiscernible] Investment Management to drive further growth in Europe. In addition, we made a strategic minority investment in [ Collar Capital ], one of the world's largest dedicated private market secondaries managers. And after quarter end, we also announced a strategic minority investment in [ Gro AMC ], the asset management arm of one of India's most innovative and fast-growing digital investment platforms.

Within our State Street Markets franchise, we have focused on strategically expanding and deepening client relationships in recent years, which is delivering positive results. We generated double-digit full year fee revenue growth across both FX trading services and securities finance in 2025, supported by higher client volumes. As a testament to the strength of our markets franchise and the value we deliver to clients, in 2025, we are proud to see State Street recognized with 8 category wins in [ Euromoney's ] FX awards, doubling our achievements for 2024.

Turning to our operational model. I'm pleased to report that we achieved our full year productivity savings target of $500 million in 2025, or 5.5% of our underlying cost base. Over the last 5 years, we have generated nearly $2 billion cumulatively in productivity and other savings, including significant recurring cost benefits. This achievement has enabled us to aggressively reinvest in our business which in turn is driving revenue growth, positive operating leverage and increasing returns to shareholders.

We are intensely focused on capturing the additional opportunities ahead of us with technology-led innovation and transformation among the most significant. For our next-gen transformation initiatives, underpinned by our growing AI-enabled capabilities and associated [indiscernible], we are building a stronger foundation and new platforms that aim to even further improve efficiency and empowers smarter decisions. We are positioning State Street to set new industry standards and fundamentally transform the way we and our clients work.

Turning to our solid financial position. Our strong balance sheet enabled us to return over $2.1 billion in capital to shareholders in 2025 for common share repurchases and dividends. To conclude, 2025 marked several strategic and performance milestones for State Street, reinforcing the effectiveness of our strategy as we enter 2026 with clear momentum. Our continued improvement is supported by a range of tangible proof points, including stronger financial performance, expanded innovation and product capabilities across our franchise, and ongoing technology-led transformation of our operating model and client experience. We are focused on the growth opportunities ahead through effective execution of our strategic priorities and leading with client service excellence. I am optimistic about 2026 and confident in what we will achieve next as a firm.

Advancing transformation to enhance how we operate and serve clients and further embedding digital and AI-enabled capabilities more deeply across the organization are the foundation. Our [ One State ] Street approach to unlock the full value of our franchise by connecting capabilities for clients has demonstrated results and has even greater potential, continuing to accelerate growth in private markets to strengthen our position as an industry-leading platform and operator, driving continued innovation in our investment management business, and executing against our growth opportunities in wealth services are enabling us to strengthen our core. Finally, we are advancing innovation in digital assets and digitizing capabilities in a space that is reshaping financial services. These are ambitious steps designed to position us and our shareholders for long-term success.

With that, let me turn the call over to John, who will take you through our results in more detail.

Thank you, Ron, and good morning, everyone. Picking up on Slide 3, I will review our fourth quarter and full year financial results, all on an ex notable basis.

Fourth quarter highlights included year-over-year fee revenue growth of 8%, higher net interest income and net interest margin, continued capital return and robust EPS growth of 14%. Our pretax margin in the quarter improved to approximately 31%, return on tangible common equity increased to 22%, and we generated operating leverage of over 100 basis points. For the full year, we delivered record total revenue of approximately $14 billion, up more than 7% from the prior year. Record fee revenue of $11 billion increased 9% year-over-year, reflecting broad-based growth across Investment Services, Investment Management and State Street Markets. Expenses of $9.8 billion increased 5%, primarily driven by an increase in strategic initiatives to enhance client-facing capabilities, investments in the ongoing transformation of our technology platform and higher operating costs, net of productivity savings.

We ended the year with record AUC/A and AUM, driven by higher market levels and continued strength in flows across Investment Servicing and Investment Management. Our capital and liquidity positions remain strong, giving us flexibility to support clients and invest in future growth. Taken together, we generated operating leverage of nearly 220 basis points and a pretax margin of approximately 29%, up from 28% in 2024. These results supported EPS growth of 19%, and an increase in return on tangible common equity from 19% in 2024 to 20% for the year, underscoring the strong momentum across our businesses and providing a solid foundation as we enter 2026. Finally, notable items totaled $206 million pretax in the fourth quarter, or $0.55 per share after tax, primarily reflecting repositioning charges associated with our ongoing productivity efforts, as well as an FDIC special assessment release included in other notable items.

Turning now to results for the fourth quarter, starting on Slide 4. Servicing fees increased 8% year-over-year, primarily reflecting higher average market levels, net new business and the impact of currency translation. Record AUC/A of $53.8 trillion increased 16% year-over-year, driven by higher period end market levels and positive client flows. In 2025, we made meaningful strides in our investment services business with servicing fee revenue wins of approximately $330 million, surpassing for the third consecutive year, while continuing to onboard new business at a healthy base.

As Ron mentioned, we are pleased with the strategic process we are driving across our Investment Services business and our focus on key growth areas, including private markets, wealth services and digital assets, which is positioning us for continued momentum. I would emphasize the private markets business, in particular, which continued to demonstrate strong growth of 12% in 2025 and now represents approximately 10% of servicing fees, up from 9% in 2024.

Moving to Slide 5. The fourth quarter represented the culmination of a record year for Investment Management revenue, delivering a strong finish to 2025 and reinforcing the strength of our platform. Management fees increased 15% year-over-year to a new quarterly record of $662 million, driven by higher average market levels and quarterly net inflows of $85 billion, supported by strong performance across our ETFs, cash and institutional segments. Assets under management increased 20% from the prior year to an all-time high of $5.7 trillion, reflecting higher period end market levels and continued client inflows. As indicated, innovation remains a cornerstone of our investment management strategy and is driving business momentum. In the fourth quarter alone, we launched 37 new products further expanding our suite of client solutions and positioning us for continued net new asset growth.

Turning to Slide 6. State Street markets posted a strong fourth quarter, achieving solid year-over-year growth in both FX trading services and securities finance. FX trading revenue increased 13% year-over-year supported by continued engagement with investment services clients. Despite a meaningful decline in currency volatility, our fourth quarter performance benefited from strong client franchise growth and healthy activity across all of our trading venues. Securities finance revenues increased 8% year-over-year, primarily driven by higher client lending balances.

Moving to Slide 7. Software and processing fees declined 15% year-over-year in the fourth quarter, primarily driven by lower on-premises renewals. This was partially offset by a 7% increase in software-enabled revenues, reflecting strong client engagement with CRD, and continued progress in transitioning clients to our cloud-based SaaS platform. For example, annual recurring revenue increased approximately 11% year-over-year, to about $420 million in the fourth quarter, and our front office revenue backlog increased approximately 16% year-over-year, reinforcing the differentiated value proposition offered to clients across both public and private markets.

Turning now to Slide 8. Fourth quarter net interest income of $802 million was up 7% year-over-year, reflecting a 3 basis point expansion of net interest margin to 1.10%, and an increase in average interest earning assets. Year-over-year NIM expansion was driven by improvements in both our interest earning asset and funding mix, partially offset by lower market rates. On the interest-earning asset side, continued securities portfolio repricing was complemented by the positive impact of runoff from terminated hedges on loan yields. Our funding mix benefited from a reduction in short-term wholesale funding associated with our balance sheet optimization efforts. Growth in interest-earning assets primarily reflected continued client-driven loan growth and higher investment securities balances all supported by healthy deposit growth.

On a sequential basis, NII increased 12%, driven by an improvement in NIM, partially offset by a decline in average interest-earning assets. Sequential NIM expansion reflected an improved interest-earning asset mix, driven by continued securities portfolio repricing and benefiting from the runoff from terminated hedges on loan yields. Our funding mix also improved quarter-over-quarter, reflecting lower short-term wholesale funding, as well as an improved deposit mix primarily due to seasonally higher noninterest-bearing deposits.

Turning to Slide 9. Expenses increased approximately 6% year-over-year in the fourth quarter, excluding notable items. Expense growth was primarily driven by an increase in strategic initiatives and technology investments, along with higher operational costs, net of productivity savings. Compensation-related costs increased 6% year-over-year, excluding notable items, reflecting higher salaries and incentive compensation, as well as currency translation, partially offset by head count reductions related to process improvements and the ongoing simplification of our operating model.

We continue to deliver productivity improvements in the fourth quarter, achieving approximately $500 million in productivity and other savings for full year 2025, and meeting the target established at the start of the year. These savings created capacity for incremental investments across key strategic growth priorities and for the investment in ongoing transformation activities.

Moving now to Slide 10. Our capital position remains strong and well above regulatory minimums, providing flexibility to support client activity and advance our strategic priorities. At quarter end, our standardized CET1 ratio was 11.7%, up approximately 40 basis points from the prior quarter, primarily reflecting a decline in risk-weighted assets, with the largest driver being market dynamics in our FX trading and agency lending businesses.

We returned $635 million of capital to common shareholders during the fourth quarter, including $400 million in common share repurchases, and $235 million in declared common stock dividends, resulting in a total payout ratio of over 90%. For the full year, we returned over $2.1 billion of capital to common shareholders for a total payout ratio of roughly 80%.

Turning to Slide 11, I'll cover our 2026 outlook which is on an [ ex notables ] basis. I'll start by outlining the key assumptions underlying our current full year outlook which assumes global equity markets to be flat point-to-point in 2026, equating to the daily average being up roughly 11% year-over-year. Our 2026 interest rate outlook assumes two cuts by the Fed, one cut by the Bank of England and no cuts by the ECB, all of which broadly align with the forward curves. We currently expect fee revenue to be up 4% to 6%, driven by continued momentum in servicing and management fees, reflecting higher average market levels and organic growth, and supported by continued solid client engagement in our markets business.

Regarding NII, based on our current assumptions, we expect NII to be up low single digits for the full year, off a record 2025 print, with an expected improvement in net interest margin relative to 2025. We currently expect expenses to be up approximately 3% to 4%, driven primarily by investments in strategic growth initiatives and ongoing transformation activities, as productivity and other savings are expected to largely offset the growth in recurring operating costs in 2026.

We are also targeting a level of productivity and other savings that is comparable to 2025. Importantly, we currently expect to deliver positive operating leverage in excess of 100 basis points in 2026, which success the continued improvement in full year pretax margin to roughly 30% this year. We expect an effective tax rate of approximately 22% for the full year. Lastly, we expect our 2026 total payout ratio will be roughly 80%, subject to Board approval and other factors consistent with 2025.

And with that, operator, we can now open the call for questions.

[Operator Instructions] Our first question will come from Glenn Schorr with Evercore.

I think I see like almost 20 basis points of core operating leverage in 2025. And you look at the 100-plus expected for '26. I just want to unpack a little bit of -- on the one hand, you see good markets and improved NII, and you'd love it to be bigger operating leverage and bring more to the bottom line. At the other hand, we want you to invest for growth and future gains.

So I wanted to just at the high level, hear how you think about that, and you could even weave in, and I won't ask a follow-up because this is a second one. We then why doesn't AI at some point, supercharge that ability to delivering better operating leverage and even better in good times?

Yes, sure, and thanks for the question, Glenn. I mean, I think -- let me unpack that a little bit, and there's a fair bit of management discretion and judgment about how we want to invest, that's really baked into that operating leverage outlook for '26 that you're seeing.

So -- but first, let me start off with the revenue picture. I think when you look at the guide and the fee revenue, we indicated an assumption of a flat market outlook for '26. I think the way we see that is the balance point there being a little above the midpoint, if, in fact, markets are flat. So first and foremost, I think you could see that if you isolate the impact of market levels, you could see our revenues coming in a little above the midpoint of the fee revenue range. I wanted to get that out in first and foremost.

Secondly, I think what we are doing is baking in significant productivity savings to both what we were able and recognizing in '25 as around $500 million, and that number is going to grow a bit as you get into 2026. What that's allowing us to do is to, for the most part, largely offset our ongoing run-the-bank type costs to support our existing platforms. And much of the remaining growth that you see of that 3% to 4% in expenses is really being decked against those multiyear investments in strategic initiatives that we're very excited about. And so we think that's a good balance point to, on the one hand, continue to drive overall margins higher.

So you saw our progression in '25, where we got to around 29% margin year -- for the year. Our guide in '26 implies continued progress where we're getting to full year margins of around 30%. And we actually delivered that in the second half of '25. So we have a good jumping off point as we go into '26. But then there's the judgment that we should be investing in the multiyear opportunities that we're seeing in the Servicing business and in the Management fee business, whether that's in private markets. wealth, digital and a number of the other investments that you're hearing about in Investment Management. And then separately, we're going to be ramping our investments in our multiyear technology-led transformation.

And to your point on AI, that has been contributing for us in the past. That's going to be a much bigger part of the story as you get into 2026 and years beyond. So it's really a judgment call on balancing, continuing to drive key metrics higher, while investing in multiyear attractive initiatives across our businesses.

Yes, Glenn, it's Ron. I just wanted to underscore a couple of things that John said. First of all, the guide does imply markets flat to year-end 2025. And we did that deliberately. I mean our own house view, Investment Management is suggesting markets will grow for a variety of reasons, but we wanted to do this to make it easier for each of you. You've got your own market view in here. And I think you know how markets affect our business. We can remind you all of that, if that helps. So that's number one.

Number two, we are investing at a very high level. We invested at a high level in 2025, and we're investing at an even higher level in 2026 of the $500 million in productivity, which largely addresses what I would broadly described as BAU expenses, will help offset a lot of that. And the point of that is that this is the moment we believe we should be investing in capabilities of technology, et cetera. But as John noted, I mean, there's some discretion in that. And if the market and conditions were to turn out to be very different this year, we've got some ability to modulate that.

And then on AI, we're well underway in this AI transformation. We do have some savings embedded in that. That will occur at an accelerating rate as we hit the second half of '26 and into '27.

Our next question will come from Betsy Graseck with Morgan Stanley.

I did have a question on the digital transformation here. But first off, what are clients actually looking to do with you in digital assets? Could you help us understand, is this just crypto? Or is it beyond that?

Actually, relatively little of it is in crypto is, if you mean by crypto kind of bitcoin and other crypto currencies, right? It really is about the digitalization of of transactions. So a fair amount of it is around how do you digitize and transform things like cash, money market bonds into tokens, number one.

Number two, working with a lot of the digital rail providers to help them, one, in some cases, they need a partner like this, whether it's or reserve cash or things like that. But more importantly, to be able to make the bridge between traditional finance and digital finance. And I may have used this analogy before here, so forgive me if I have. But where we are in this space is like kind of mid 1800's railroads. There's a lot of rails being laid. Not all of them are the same gauge. Everybody wants to charge everybody else to cross over from one set of rails to the other. And it's the role of somebody like us to actually enable that movement between and amongst these different rails.

But if you think about our business, in the asset management business, we've got a big money market business. So you will be seeing from us to tokenize money market funds, which have lots of benefits that we can talk about, if you'd like. But in the services business we, as you know, are the largest servicer of asset managers, and they all want to do similar things plus in terms of digitalizing collateral, tokenizing money market funds, et cetera. So it's to be able to enable those institutions to make this transition from traditional finance into digital financing to do it in a cost-effective way.

Sure. What's the benefit of tokenized money market funds?

[indiscernible] collateralize. I mean that's the -- I mean, they now can function as collateral. That's [indiscernible] And I mean there's lots of others. The speed of settlement, things like that. But -- I mean the most important would be that.

And clients are interested in this in part for the increased -- the perceived increased efficiency of asset funds movement and new asset classes? Is that fair?

Yes, that's part of it. And the other part of it is, I think -- we all have a view as to how this is going to turn out, but nobody can predict it with accuracy. So for example, to the extent to which stable coins become some kind of regular way of settling securities transactions. You need these kinds of capabilities to enable that kind of cash if you will, that digital cash, to be able to settle a traditional securities transaction.

And should we expect the financial impact of the digital asset work that you're doing in the services that you will be providing, should we be expecting that to appear in the P&L in the near term, medium term, long term? Is it replacing current activity, or in addition to current activity? How do you -- how should we think about the financial impact for you?

Yes. So that's hard to predict. I think in the short term, it's not necessarily replacing activity on the margin, I suppose it is. But we're in this space where what we call traditional finance and digital finance, the latter coming up, but the former dominates volumes and will continue to dominate volumes. So part of this is preparing for a future that, I think, it's reasonable to expect it will come it's uncertain as to when and how quickly.

Yes. Putting an emphasis on that last point. It's not really going to be visible on '26, it's more of a medium-term matter. But all of the investments we're making now will position us so that we are in relevant and part of that growth story over the medium term.

Our next question will come from Ken Usdin with Autonomous.

John, on the NII side, a really strong exit and obviously, kind of already run rating above what the kind of guide implies on a quarterly basis from here. So I'm just wondering, can you detail like what things do you think might have kind of overearned on the NII side in the fourth quarter that might not continue going forward?

Yes, sure. I mean, yes, we're feeling good about some of the early progress here as we start to think about managing for a stable and consistent NII with growing net interest margin, which is what our objectives are. So I feel very good about the strong print in the fourth quarter.

That said, there was some, I would call it, some seasonal factors with respect to deposit mix that tend to moderate a bit. And so I think the primary contributor to that was our noninterest-bearing balances on the deposit portfolio. We had really nice growth in that portfolio in the fourth quarter that probably comes off a little bit as you head into '26. And that's the reason for why you couldn't -- or shouldn't run rate [indiscernible]

That said, I mean, nevertheless, we printed net interest margin of 110 basis points. We're printing 100 basis points for the year. And we're calling for net interest margin rising as you get into '26. And I'd say it's probably -- net interest margin probably comes in a little low. A little lower than the run rate from 4Q, but it comes in higher than what you saw last year. So somewhere -- the balance point is probably somewhere in the middle of that. And I think that underpins an expectation of net interest margin growth on a multiyear basis so you go over the medium term.

Okay. Got it. And just a follow-up on -- you mentioned -- and we saw in the third quarter [indiscernible] that terminated swaps burden should lessen. Can you kind of give us the third to fourth delta on that if you have it in dollars? And then how does that -- how do you expect that to traject as you get into next year?

Yes. In the fourth quarter, I'd say terminated hedges are going to be a continued tailwind. There's some lumpiness, though, quarter-to-quarter, but I'd say, I'd put it in the range of a couple of basis points a quarter round numbers with some lumpiness. But overall, that's going to be something that contributes -- it contributed about 2 basis points in the fourth quarter, and it will continue to have a positive impact as you get into 2026.

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

John, maybe just following up on Ken's question a little bit, maybe a broader question. It seems like if I think about your NII guide and your NIM, and the NIM discussion, it seems like maybe the implied balance sheet is pretty flat. I know you're looking to do a lot of optimization with the balance sheet. Is that a fair assumption?

And maybe just walk us through some of the opportunities to optimize and how you're thinking about the balance sheet growth in '26?

Yes. I mean, I think that's fair. I mean I think when you think about '26 in that low single-digit guide, growing net interest margin I'd say, without much growth, maybe even a touch below where we ended -- where we came out in '25 is what -- what's implied by '26. And I think the point of that is that we're looking to think about balance sheet optimization across all the components of the balance sheet. And some of the early things we saw were in the short-term wholesale funding book, where there's some higher cost funding that weren't really driving a lot of value in the investment portfolio. And so you'll see early days us running some of that off. And so that may show total interest-earning assets and total funding declining, but it's noncustomer-facing and it's dilutive to net interest margin, and in some cases dilutive to NII.

So you get a win-win there when you run off some of those more wholesale associated portfolios that aren't necessary for other risk management related matters. And it wasn't. We have significant liquidity, and so we're feeling good about all of that. But that's an area that I think continues to contribute a bit into '26. Other areas of optimization when we're looking at the loans portfolio, we're seeing some opportunity to pull back on some of the thinner relationship activities and really [indiscernible] we have so much opportunity in our in our client base to have a broad relationship from a custody perspective and supplement that with lending opportunities. And we're really reserving our capital and liquidity for very attractive deep relationship lending.

So we're doing a little bit of rotation there. Same in the investment portfolio where we -- there's an ongoing repricing that's happening from a securities portfolio standpoint that happens naturally. But from time to time, we find opportunities to accelerate and see opportunities across currencies to add value in the investment portfolio. So all of those things are what we mean when we say balance sheet optimization as part of what you do over time, but we're doing a little bit of catch-up in terms of some opportunities we saw in late 2025.

And then finally, just ensuring that capital is being allocated to its highest and best use and optimizing across risk base and leverage metrics pulls it all together in driving a nice and attractive increase in net interest margin in 2026.

Okay. That's all helpful. But how do you think about the mix and growth in deposits? What's your kind of base assumption embedded in there?

Yes. I think it's -- I'd say deposits base assumption is around $250 billion. So basically stable overall for 2026 with around 10% of that in noninterest-bearing. So maybe off a little bit from the fourth quarter, but that would imply around $25 billion for noninterest-bearing [ for ] 2026.

Our next question will come from Alex Blostein with Goldman Sachs.

Just maybe building on some of the guidance dynamics. I kind of want to go back to the overall fee guide, if you don't mind. I guess if you just look at the quarter, you're annualizing pretty close to what you're implying for fee guide in 2026. And I totally get the market dynamic right, you're assuming flat markets, or no market tailwind, so that all makes sense. But it just feels like there's no organic growth really baked in your 2026 numbers, unless there was something really additive, I guess, to the run rate in Q4, which [indiscernible]

I was just kind of hoping you could unpack what your expectations are for organic growth in the fee businesses? And if there are any offsets that we should be thinking about that kind of doesn't create a bigger uplift in the fee structure here, even excluding markets?

Yes. I mean I would say just right out of the gate, two things. One is that the sort of the balance point if markets are flat, are -- as I mentioned a little earlier on the call, bring us a little above the midpoint of that [indiscernible] first thing to get out there. And then if -- and Ron was mentioning sensitivities. If markets are up 5%, that brings us to the upper end of that range. So I just wanted to make sure that was clear in terms of how the math works.

Then the other point I would make is that for both the quarter and the full year, we generated organic growth in our businesses, in our 2 largest businesses which drive a lot of this in servicing fees. And in management fees, we had very attractive organic growth, something in the neighborhood of 2% for servicing fees at around 3% or 4%, I think, for management fees. And so that's very attractive. A lot of momentum heading into 2026. We do have organic growth built in to those businesses in 2026, and we expect to deliver that.

I think the other things you have to pull together and our other two revenue businesses that I haven't mentioned is in the markets business itself. We also have growth there, and that tends to ebb and flow a little bit with how currency and equity volatility plays out. But so you've got to think about that.

And then lastly, our strategic transition in the software business from an on-prem approach to a SaaS approach, which is -- can have some headwinds when you transition from that lumpier, but all upfront model to one that's recurring and stable over time, but we think that pays dividends by making that transition and the underlying fundamentals are quite strong with high single-digit improvement and organic growth in the software business notwithstanding that transition. So putting it all together, absolutely expect and plan to deliver on organic growth in 2026.

Got it. That's helpful. And just one more on the balance sheet, just kind of building on the discussion around average earning assets and the optimization there. So it sounds like the average earning assets could remain flattish to your point earlier, and I was hoping you could relate that to the buyback. So when I think about 2025, total payout, I think it was a little below your target. I think you guys were doing it something in the low [ 70s ] versus the [ 80s ].

I know leverage, I think, has to be a little bit more binding for you guys for now. So with perhaps a more kind of range bound balance sheet should we expect a larger buyback, or a larger payout for 2026? Or how do you guys think about that?

A couple of points there. I mean -- I think we were right around 80% for '25, maybe just slightly below. That was due to a late in the quarter kind of windfall from the FDIC, where we ended up with additional P&L in the denominator. But our actual buybacks from a dollar standpoint were pinpoint on what we expected to deliver for the year. So feeling good there and that rolls over into '26.

But we think about this at the beginning of the year that around 80% is about right. When you think about our capital priorities, we start off with protecting and growing dividend over time given our strong earnings growth. And I think we have a track record of growing earnings and having an attractive growth in the dividend over time. So that's first and foremost.

The other areas are organic opportunities in deploying RWA, and we sort of reserve at the outset some capacity for growing the lending businesses with our custody clients. And we have opportunities to do that. And it's our expectation that we would grow RWA, and grow the loan book in '26 with deep customer relationships. We have a markets business that has -- supports Investment Services, Investment Management clients as well that actually has opportunities to deploy RWA, and there's an expectation of growth there that we're putting to work. And then supporting all of that are investment opportunities and bolt-on M&A that helps us accelerate our strategy that we've demonstrated at the end of '25 with several very attractive acquisitions, including [ Apex ]. And so we think that's the right balance to basically have a strong buyback at the end of the day because that's at the end of this, once you've allocated the capital in that direction, you still end up with a strong buyback but investing for the long term with your clients.

And then lastly, in terms of capital ratios themselves, although technically, from a regulatory standpoint, we're leverage constrained, just how we operate in terms of internal capital targets, et cetera. We tend to operate more on the CET1 as our lead metric that we optimize against. And so that 80% and all those capital priorities I articulated are all expressed in the context of a CET1 ratio.

Our next question will come from Brennan Hawken with BMO Capital Markets.

I'd love to follow up on the software and processing fees in the Alpha. I know you flagged the on-prem and John, you just spoke to shifting from on-prem to SaaS. But it looked like even beyond on-prem, like pretty much every line in software and processing were also down year-over-year aside from SaaS and -- so maybe you could help us understand why the other lines are down?

And how long of a process is it going to be transitioning from on-prem to SaaS when you hit that tipping point where we can start to see the growth dynamics shift back into your favor, and get the revenue more in line with some of the underlying metrics that continue to look like they're kind of constructive here on the slide?

Yes, a couple of things. I mean I think the biggest driver year-over-year is, in fact, the SaaS line, and that's up 7%. I think you'll have some minor variability in some of the other line items. One of them is professional services down slightly, down a little bit in terms of dollars, and we already referenced the on-prem. So the on-prem is -- I think the message really is on-prem is down. That's by far the biggest driver of the decline year-over-year and nevertheless offset by SaaS.

We also have on the page lending and other related fees, which will jump around a little bit, but these are single-digit million dollars, so not really anything strategically different going on there. And I think this transition will typically happen over the length of the contracts. So it will take a year or 2 for those contracts to turn over and for us to migrate into an outlook of -- that starts to see the -- not only the recurring revenue that's growing around 11%, but the actual revenues that are booked in the P&L that are growing at high single digit to converge. And that will typically takes a year or 2 for you to see that happening.

Yes. Brennan, it's Ron. What I would add to that, you use an interesting term, which is tipping point. And I would argue that we're at that tipping point. And part of how you know that is that there's fewer and fewer of these big on-prem renewals. As attractive as they are, you get all this revenue upfront, it's inconsistent with the business strategy. It's inconsistent with where the market is going. And we have encouraged our clients, and incented our clients, to actually move away from on-prem. It's better for them, right, because it saves these periodic gigantic kinds of software change-outs. It's better for us in that we make one change and it gets spread across lots of clients, and it happens, kind of, in the cloud as opposed to us, kind of, going in with wrenches and screw drivers and on-premises with them.

So I would say we're at that tipping point. And so you started to see it in 2025, you're seeing it in our guide in 2026 and that we have few, if any, significant on-prem renewals in the guide.

Got it. Okay. Okay. And then, John, when we're talking about the NII guide, which I think surprised a few folks, particularly given the strength of the fourth quarter, but you spoke to the seasonal loan growth. It seems as though there might have been some puts and takes in maybe mix from your comments before. Could you maybe flesh that out a little bit?

And what should we be thinking about for loan growth? Because that's been a pretty solid part of the story here in recent years. Are you guys expecting that to slow overall? And then you're just seeing going to see mix shift within? Or is that going to continue to be pretty robust as we move forward?

Yes. Good questions. I'd say all of the above. I think we're going to end up with continued loan growth. That loan growth is slowing a bit in the context of overall. But in terms of the opportunities across, call it, subscription finance, fund finance and CLOs, which are the big 3 that are the products that we tend to deliver into our client base. We're seeing very solid growth expectations across all 3 of those.

And there are some thinner relationship stuff that's sitting in the commercial loan line that we're allowing to run off, and in some cases, accelerating with some sales here and there. And that is being efficient with respect to capital and liquidity as we're servicing this underlying very strong growth. And just being -- rotating some of that capital for its highest and best use with deep customer relationships. So I'd say loan growth into '26 is still part of our story, maybe a little but below what you might have seen in '25.

Our next question comes from Gerard Cassidy with RBC.

Can you guys share with us, when you go back to your guidance in January of '25 with the fourth quarter '24 numbers, fee revenue growth forecast for 3% to 5%. NII was flat plus or minus 1% maybe, and expenses up 2% to 3%. Clearly, your fee revenues this year were much better than guidance, and it's hard to forecast. So I'm not questioning the forecast.

But what I'd be interested in when you look back at the forecast versus actual, was it due to just better markets? Or did you do better with your customers? You penetrated them more? Or you won more business than you thought? What led to that nice beat when you look back on the forecast?

Let me start on that, Gerard, because if you remember, last year, there was a fair amount of economic concern -- kind of concerns about the economy post the election. Some concerns about what was going to happen with tariffs, what would that mean for markets, et cetera. So in retrospect, it was a conservative guide. So obviously, we had a unanticipated market tailwind that helped us there, number one.

Number two, [ sweeps ]. While we had some significant execution built into our plan, we executed better than we -- than we even had planned. So you saw good onboardings. You saw we had some pretty important development partners in the Alpha area that we needed to get them onboarded. We've got those onboarded. And then lastly, you had really significant growth in markets. And as we've talked about, we've invested heavily when there was no volatility in the market in the market areas to kind of expand our position with clients, and that really paid off in 2025 because as more volatility came in, you saw what happened kind of post April 1 and Liberation Day, we really benefited from all that, and that was nowhere near in our forecast.

Which gets us really back to this year, and I'll turn it over to John in a second. But that's really why we wanted to focus, Gerard, on what's the kind of embedded organic growth capability in the firm. Instead of putting a market assumption and that may or may not be consistent with your own, we put no market assumption in. We're just end markets at where they were at the end of 2025 to show here's what it is organically, and depending on what you believe on markets, there's some upside to that. Or if you believe that markets are going to go down, there's some potential downside to it.

Very good. And then as a follow-up, we're all anticipating the Basel III [ end game ] proposal will hopefully be released in the first quarter or soon. Can you guys share with us what are you looking for to -- that would be a real benefit for State Street from that proposal?

Yes. Maybe the most important benefit will be that we stop talking about it. But...

I agree.

But leaving that aside, obviously, the [ GSIB ] proposal is very important. And what actually happens with capital as it relates to GSIB as a result of Basel III and everything else that [indiscernible] is doing. We think that collectively will be favorable to the [indiscernible], and we should benefit proportionately there. So will we benefit as much as some of the other balance sheet intensive business competitors? Probably not. But nonetheless, there's nothing but goodness that's going to come out of this.

Secondly, and it's not a Basel III point, but [indiscernible] that's come upon with this administration and the changes that have been made. Now for us, the Federal Reserve is the most important [indiscernible] and again, I don't think as being a huge rollback in regulation. But I think it's the application of regulation and supervision being much more risk-based, much more -- and much more predictable, therefore. And that has just enormous benefits in terms of being able to, one, it just takes some administrative burden on all of us, but it gives us some predictability in terms of how we operate.

Our next question will come from David Smith with Truist.

So you put up about 20% ROTCE. It sounds like you're confident that the ongoing business model transformation still have some legs there. You're pointing to some operating leverage for next year, albeit seemingly with some need for capital retention. I'm just wondering how much potential does State Street have to improve returns further over the next couple of years based on where you see the company's organic growth potential and for continued efficiency improvements?

Let me begin on that, David. It's Ron, and John can pick up. We see a lot of potential. The -- there's -- starting with the revenue lines. We have demonstrated that we can consistently grow these fee lines at an accelerating rate. There was a lot that needed to be done to make that happen.

First and foremost, in the core servicing business, it was really getting at service quality. And all of our metrics indicate that, that continues. We continue to be rated very highly there and rated very highly relative to others in the marketplace. Secondly, we've invested in capabilities that are enabling us to do more with these clients and to offer them more services. And then third, and it's last but not least, we've invested heavily in the sales and relationship management for us to deliver on this promise of being our clients' essential partner. So we're very confident in the revenue line across those 3 core businesses.

On top of the core businesses, we've invested, as you know, in some key areas. We've talked a lot about software, and that's in a nice spot. Secondly is in wealth services. That's still nascent, but we're already seeing some revenue pickup there. And between what we have at Charles River in terms of Charles River Wealth, plus the investment that we've made in [ Apex ], that gives us a highly modernized platform that's much more up-to-date than anybody else's, and really positions us for this ongoing shift away from kind of pure institutional asset management to [ the retail ] intermediary and direct to the to the client on a services basis. So we feel pretty strong about the revenue line John has talked about. We're primarily a fee-for-service provider, but the NII is important, and there's a -- the balance sheet optimization is underway there. John has talked about that.

In terms of expenses, we continue to be very confident there. We delivered $500 million in productivity last year. We've got the same kind of number planned for this year. And we're reinvesting a lot of that back into, what we call, next-gen transformation. We've had transformation underway now for years. And I'm as optimistic about what's in front of us as I am proud of what we've accomplished in terms of the promise of AI. Now everybody is talking about it. We have worked really hard on it. [ Agentics ] are being deployed. And if you think about our business and how operationally intensive it is, it actually lends itself to this kind of stuff. Whether it's in areas like reconciliations, whether it's areas of NAV production and what happens afterwards when the NAV is produced and has to be distributed out. So there's just immense opportunities here.

The way we're going about it is let's get it right in 2 or 3 high-value areas and then repeat it in analogous areas. So we see this pattern that we've established over the last couple of years is being able to continue and we're looking forward to that.

Yes, just to add a couple of points there is really, as Ron indicated. the fee businesses, I think when you put it all together, we have an opportunity to grow profitability over time and grow the platform over time. Where it comes from is solidifying the organic growth pivot that began a couple of years ago, and we're demonstrating that in our largest revenue line items, solidifying and growing NII over time is an objective. And when you think about, what Ron indicated, with respect to how operationally intensive we are, basically converting all of that into a much more manual tech-led transformation is all -- has already -- is underway. And there's a huge opportunity in front of us to take those resources and from a flywheel standpoint, plowing that back into all the innovative opportunities we have on the strategic initiatives portfolio to continue to be relevant with all of the mega trends that we're seeing that are impacting our business. Whether it's digital, wealth, private and opportunities that we see in the United States, but also outside the United States.

So those are the thoughts related to that. We have scale positions pivoting to growth, and really attractive risk/reward profile from that standpoint when you put it all together.

Putting it all together, does that mean that you should be able to do like a mid-20s ROTCE over the medium term? Or do you think that's too ambitious?

Yes. I mean, I think from a medium-term standpoint, I think we've made considerable progress migrating the business to where we are now, which is -- we're a pretax margin at 30% in the second half of 2025, and our guide implies that or even a little better for '26.

I think the objective here is to solidify that, create that consistency again, emphasize all that innovation and organic growth across our businesses that we've talked about. And, I mean, I think, a lot of the priorities you heard from us are multiyear in nature. But I'd say the natural evolution in our journey is that it would be valuable to illustrate what we think we can accomplish across a number of dimensions, both from a return standpoint, whether that's pretax margins, or return on tangible common equity, as you indicated, or growth when it comes to EPS and revenues. So I think that's something that we're working on and putting these building blocks together and we should be able to share that over time, maybe sometime later this year.

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

My short question is, if you put State Street's strategy on a cocktail napkin, would it say that would impress investors? And my longer version of this question is, my sense is that investors are very frustrated. Today, the stock is down 5% or 6%. This decade, you've far underperformed the S&P 500, despite having stock market benefits. And since the start of even last decade, you talked about investing in tech to progress. And as you know, when I attended the annual meeting way back then, the Board actually said it fell short.

So I feel like under the short, medium and long term, it's not really playing out the way State Street had wanted to do. I think the implicit premise in what you're saying today is that you aren't exactly where you want to be, but the last 2 years, you've seen more momentum. You talked about growth security servicing. You talked about the pretax margin going from 28% to 29%, maybe 30% this year. So let me accept the implicit premise that you have this new momentum in the last 2 years. Then the issue, I think, comes down to confidence by investors and management and the strategy.

I mean, here you have a fee-based capital market company that's trading at one of its lowest valuations, especially versus peers. So that just takes me back to the cocktail napkin question. What can you say that will give investors greater confidence not about the past quarter, or the next quarter, or even this year, but that over the next 5 years, that this is a company that they should invest in and that they're missing something?

So Mike, let me start on that. I think just listening to you carefully, I don't mean to rephrase your question, but I think you're asking why own State Street at this moment. And [indiscernible] 5 reasons for it.

First is there continues to be very attractive fundamentals in the space in which we operate. The shift from savings to investment continues worldwide. The shift from state-provided pensions to funded retirement system continues everywhere, even in places that you least expected. There's literally a pension revolution going on in the Middle East that we are well positioned to participate in. But democratization of investing is driving growth in vehicles like ETFs, and its increasing complexity for the players, these big private firms, that simply are not positioned to do this work themselves. As I mentioned earlier, the move to digital assets and digitalization is requiring new infrastructure, plus connecting points between traditional and digital platforms, and we are well positioned to participate in that. So that's number one.

Number two. We've got distinctive capabilities in high-growth IPE areas. So we've got a leading position in the 3 core businesses. We're the leading provider in private. We have the Alpha end-to-end platform, including an at-scale commercial software player. In the ETF space, we basically are the leading player in all aspects of it. Whether it's sponsoring ETFs, or servicing ETFs, and ETFs now have truly become the vehicle of choice globally. We've got a very key position and a trusted position in this digital revolution. We're [ staking ] out this new distinctive position in well services and its distinctive because it's a modern platform, and it's digital. And finally, we've got this proven and long-standing ability to partner, which is really important, whether it's partnering with firms like Blackstone or Apollo, to bring them into a space that they want to be. Or to work with clients long term and be their outsourcing partner.

Number three. We've got what I believe, and you more or less implied it there. We've got this clear pattern of effective execution and performance. Consistent fee growth over the last several years in services, asset management markets. We've got balance sheet optimization well underway, as John talked about, in NIM. We've got consistent productivity improvement, $500 million last year, $500 million this year, $2 billion over the last 5 years with more to come. And then as you note, 2 years of fee growth, positive operating leverage and expanding margin and our guide reflects a commitment to more of that in 2026.

Fourth, I would point to the team. It's a mix of State Street spectrants, plus truly super talent from the outside that I would argue, now makes up the best team in our space. Most importantly, it's backed up by a very deep bench, and it's a team that's determined to win an incentive to do so.

And then lastly, your negative is my positive. We're an attractive capital-light income statement. We're growing better than our peers in the attractive PE revenue areas like servicing fees, like management fees like software and that should drive multiple expansion. So whether or not that fits on a cocktail napkin, that's how I would articulate it.

Maybe that fits on 5 cocktail napkins. Just as follow-up. So let me just accept everything you just said, and the market's not convinced, right? I think that market knows a lot of this, and you've reminded the market a lot about that. But under what scenario would you consider a combination with another bank? Under what scenario would you consider selling off asset management? Under what scenario would you consider buying another bank? Under what scenario would you consider a more significant strategic move, especially given this environment of deregulation?

And I hear you don't need it. You have -- you're confident with the internal growth. But this seems like the time to think about those big types of questions. Where do you come out on that?

Mike, I mean, we always think about M&A as we think about capital deployment and even more importantly, strategically where we are and where do we want to go. I mean, we do remain confident in our abilities, and I think that we're showing this ability to deploy those capabilities and generate accelerating returns.

There's always the question around scale and how we think about that. I mean, that's really what motivated what we tried to do with [ BBH ]. It was unfortunate that, but that was in a different regulatory environment. And so without implying that there's anything underway, explicit or implicitly. I'm not saying that, and we are confident in our organic strategy. But to the extent to which something made sense and it was a good use of shareholder capital as opposed to returning it to capital, or reinvesting in our business, of course, we'd look at that.

And just a short follow-up, but -- go ahead. Go ahead, John.

Mike, it's just one point on that. I mean I think I agree with -- of course, everything as Ron was just saying. I mean I think -- when I think about the scale position and the growth pivot and how well positioned we are to win with the megatrends that Ron articulated, whether it's digital, privates and wealth. You put that together with the transformation and other opportunities that are all in front of us that will put a frame around maybe sometime later this year. All that upside we think should accrue to the benefit of the existing shareholder base. And when there's a large transaction, you have to think about whether you want to share what's right in front of us organically with any other shareholder base. And I think this shareholder base that hung in with us deserves to basically see that upside, and I think we see that coming.

So that's certainly something that I think about when you asked your question, and there's a lot of excitement here around what we can deliver organically. And let's basically convince the investor base that we can be consistent in solidifying our gains and growing down the line. And I think the stock will take care of itself under that scenario.

And just I didn't mischaracterize, maybe I'm talking to the wrong investors, but investors I talk to seem to be frustrated. Would you get that sense of frustration, you're trying to show them they're wrong? Or do you sense that investors are pleased with the progress?

I think we have a lot of support for the vision that we're painting which is, yes, you've made a pivot to growth over the last 2 or 3 years. Let's see that solidified and let's see that accelerate. And I think we have a lot of support for that vision. And we've demonstrated -- and we've allowed that to -- we've shown an ability to drop that to the bottom line with improving margin and returns. And I think you've got to basically have that track record continue to be the case over time, and that's our expectation. So I think we are hearing support from that standpoint.

Well, that concludes the question-and-answer session. I'll now turn the call back over to Elizabeth Lynn for closing remarks.

Thank you all for joining us today. And please feel free to reach out to Investor Relations for any additional questions. Thank you, and have a good day.

Great. Good morning. Thank you for joining us. For our next session, I'd like to welcome John Woods, State Street's recently appointed CFO. State Street is one of the largest global asset servicing and asset management firms with around $52 trillion in assets under custody and administration and $5.5 trillion in assets under management. Over the course of 2025, State Street saw a nice boost in servicing fee growth with positive sales momentum, largely stable NII and continued focus on delivering positive operating leverage and robust pace of share repurchases. So all clearly welcome trends. Hopefully, more of that to come into '26.

So thank you for joining us. Your first time here as State Street CFO, probably not the first time to the conference. But glad to have you here. Thank you for joining us.

Great to be here.

So John, I wanted to start with a question maybe on 2026 priorities. Obviously, financial markets saw a lot of volatility over the course of the year. State Street is still on track to deliver very healthy financial performance this year across the fee revenue stream, but also pretty stable NII. And to my point earlier, positive operating leverage, healthy return of capital. Looking out into '26, what are the top strategic priorities and key areas of growth for you and the team?

Yes. I mean I think I agree on '25. I think the strength of the franchise is coming through. Just in my first couple of months, maybe 3, 4 priorities I would highlight. One is financial delivery. And that's exceptionally important to continue to deliver on our commitments and what we expect to be able to do from a financial standpoint. So that's top of the list. I think I agree on; 25. I think the strength of the franchise is coming through.

I think the second one, which is related, as I would highlight maybe balance sheet and looking for opportunities to optimize the balance sheet put it to work for customers and deepening relationships, but also making sure it's very efficient and looking for ways to grow NIM and over time and grow NII over time is an objective. So that's the second item -- I mean I think the third one is very important these days when we want to put -- when we want to invest in our strategic initiatives, but it's managing expenses and productivity.

So I think we've done a great job of that in the past. It will continue to be really important. I think we have significant opportunities to continue to generate productivity over time. And that's important in terms of, as I mentioned, kind of supporting the strategic road map. And maybe I will add a fourth, that's the fourth major priority is partnering with the business leaders in Ron to drive our portfolio of strategic initiatives over time, which I believe is very distinctive. And so more to come on all those priorities as we talk about how that plays out for '26. But those are -- I'd say those are the top 4.

Yes. Those are all the good ones. Yes. So look, maybe starting with the last one you mentioned around just partnering with Ron and other people within the team to really drive growth. So why don't we start there? So let's talk about the servicing fees. It's your largest business, investment servicing. So a really nice ramp in 2025 in fee growth. Some of it is obviously the market that's been quite helpful for the last, call it, 12 to 18 months. But importantly, the sales momentum within kind of organization of that $350 million to $400 million in new fees remains on track. So talk to us a little bit about key areas of strength within that? And how are you thinking about sustainability of this type of organic growth into next year?

Yes. I think that we're feeling good about this. I mean I think we had an objective of $350 million to $400 million in sales. I think that sales can be lumpy quarter-to-quarter, as you know, and you'll see how things close out in the coming weeks, I think that probably ends up coming in closer to $350 million, but I think the context there is really important.

I think there's been a pivot several years ago where sales were lower than we wanted them to be. And I think for the last 3 years, we've had sales north of $300 million in '25. 2025 will be no exception. So that's really emblematic of all the work that's been put in by Joerg and the team in changing the operating model in terms of go-to-market and the sales force approach. And so we're seeing NPS scores rise and the sustained kind of sales momentum is -- continues. So feeling very good about that.

I think another way to look at it is how the backlog is evolving. And I think the mix of the backlog is now more concentrated in back office and frankly, private markets. And from the back-office standpoint, the quality of that is it's faster to install, it's our bread and butter, and it's important to us. And so that's been good. And then, of course, in the private market space, that's a higher growth segment that Joerg is focused on. that is also a big part of the backlog and a big part of our growth going forward will be underpinned by the private market space.

Yes. That's interesting. So when you look out into 2026 kind of this range still sounds reasonable, but the mix shift towards the areas you just kind of highlighted?

Yes.

Got it. All right. Well, let's talk about private markets. Obviously, it's a long-term growth area within financial services. It's been one for quite some time. more recently with significant growth in semi-liquid products, in particular, for the wealth channel. How do you think about the competitive dynamics for service providers like State Street evolving within that ecosystem? And can you maybe just remind us your footprint here, and what that looks like and some of the key competitive differentiation factors within the semi-liquid and just private market space broadly?

Yes. I mean it's a big part of what we're doing in the investment services side of the house. I mean we have a global platform that supports the private market space it -- with a range of products across all the range of products, whether it's private equity, private credit, real estate, infrastructure funds, you name it. So it's a broad offering I'd say that this is a relatively fragmented space. So I think we've got a right to win here. Our capabilities are significant in the context of whether it's tax obligations or regulatory requirements all on a global platform. We think that's unique, and that gives us a competitive advantage. And we've been demonstrating strong growth into 2025, and we expect that to be driving double-digit growth into 2026.

Great. Great Double-digit growth in that part of the market in terms of fees, right? Okay. Makes sense. I wanted to spend a couple of minutes on wealth servicing. It's something that I think the market doesn't really spend a whole lot of time on when they think about State Street, but you did make a couple of interesting announcements here over the course of the year. Back in July, you announced strategic partnership with UC and I guess more recently, there was announcement of strategic investment and partnership with Apex Fintech Solutions as well. So can you just expand a little bit on the opportunity you see for State Street within the wealth market? And how do you differentiate your offering there against some of the players as well?

Yes. I mean, I think well, this is a pretty exciting growth opportunity for us. I mean if you think about the revenue pool, it's growing significantly with the demographic shift from the baby boomers and the transfer of wealth that -- the great wealth transfer that I think is underway and will be ongoing for quite some time. And we feel like we're well positioned to capture a big part of that revenue pool based upon the investments that we're making in wealth. I would start off with -- in the front office basically in terms of CRD wealth and our capabilities there, which are unique.

And when we combine that with -- you mentioned our Apex partnership that -- we think that positions us very well to go from front office to back office support for wealth managers in the custody and clearing space. It's -- I think I think going back to the front office, I mean, I think portfolio construction and wealth trading support all the way through into the back -- all the way through into the core custody and clearing space. It's a unique offering. This partnership with Apex is maybe one of its kind in terms of their global platform with a truly cloud-native digital wealth, custodian support is, we think, very unique. And so positions us exceptionally well in the wealth space. So that's in the kind of the front to back range of things. I think the UC investments is also very interesting.

They're a very important strategic partner to us. And I'd say their expertise and our capabilities in the wealth space plus our new partnership with Apex and the unique technology platform that they create. I think we're going to look for opportunities to innovate along those lines with UC investments. And so Putting it all together, we're very well positioned in wealth. It's going to be a big part of our investments as we head into '26 and part of an outsized growth that we expect to generate in that space.

Is there a way to frame how big that business is for you guys today? Just to kind of help contextualize, hey, if they grows a lot, how much of a needle mover that is for the servicing fee business as a whole?

Yes, it's early days. I mean, we'll have some more to talk about this as we get into 2026. But it is -- it will be outsized growth and have a bigger impact over time.

Got it. Okay. Let's talk about digital. It's been a big area of focus for -- over the last really 2 days at this conference. I think there's not been many fireside chat like this that didn't touch on digital assets or crypto tokenization in one form or another. So let's talk about your views on that ecosystem, the role you see State Street playing there. I know you guys are aiming to launch a digital asset platform, I guess, in the coming months. So maybe just discuss what your offering there will look like. And again, relative to competitors, BK has been out there for a little while already, how do you expect that to be differentiated?

Yes. I mean I'd start off with the fact that we're already in the space, in the fund accounting and administration offering that we have to support digital custodians, and we have that for many -- several years now. So that's an important part of the foundation of our capabilities in the digital space. As you mentioned, we're launching a digital asset platform, I would say, in the coming weeks. -- not months. So we're -- that's imminent. So we're excited about that. And what that, I think that will allow us to do is to build products off of that foundation. And I think the first product that you could see come out of that in 2026 would be a tokenized money market fund. So that's really our near-term emphasis is to get that platform launched in the coming weeks and start building products and delivering that into the marketplace. I think down the line, I mean, this is going to be transformative. I mean it's already transforming many parts of financial services, and we want to be in a leadership position here in digital. I mean, another area we're exploring would be whether it makes sense for us to directly custody stablecoin or crypto.

It's -- with the evolution of the regulatory environment, it's something we're thinking about. It's not a definite at this point. But certainly, the regulatory environment has become more conducive and we'll be evaluating from a risk and compliance standpoint, whether that will be something that will make sense for us. But I would put that in the road map for evaluation down the line. But in here and now, very excited about the tokenization-related products that will get launched in 2026.

Away from just the tokenized money market fund that you mentioned, one of the things we're starting to hear is opportunity for even some of the traditional managers to tokenize some of the traditional assets, right? So whether it's tokenizing equities, tokenizing ETFs, maybe tokenizing some of the private markets, right, where there's clearly a lot more need for efficiencies. How could that impact your guys' revenue model? And just what kind of the capabilities you guys either need to build or you already have that could support that?

Yes. I mean I think that the -- although the first product will be tokenized money market funds, I mean, I think assets are part of the follow-on opportunities off the same platform, off the same digital asset platform. So I think we're well positioned there and I agree that, that's something that we would engage in as well.

Got it. So it's leverageable across...

It is.

Okay. All right. Let's turn our focus to investment management for a couple of minutes. Obviously, another really important area of growth for you guys. You really sort of try to speed up evolution on the product development side there over the last couple of years. And you could see that in fixed income. You could see it in the wealth channel as well as several partnerships you announced with alternative asset managers recently. So looking out maybe 1 to 2 years, what do you see as the largest growth contributors to that business? And what type of organic base fee growth are you ultimately aiming to achieve in the investment management side of the house?

Yes. There's a lot to unpack there with investment management. There's a lot going on. [ Yie-Hsin ] has a very full agenda and it's an exciting one. So I think just going through a number of the organic things that are on the list. First, I mean, starting off with ETFs, we're a top ETF manager top 3. So we have an exceptional position in the ETF space. Global asset flows still favor ETFs. So I'd throw that out there as a foundational matter that that's still important. We're still investing in that space. Now I'll come back to maybe later on some of the stuff that we've been innovating even broadly, but also in the private markets area when I get to that at the end here.

But before I get to privates, I mean, I think the second one is geography. We have significant opportunity outside the United States. We have 28 locations around the world, including the recent addition of Riyadh last year. And we have, I think, some outsized growth outside the United States that we expect to see in the future. I think the other areas that I highlight. I mean, we talked about wealth being a big opportunity in investment services. It's also an opportunity in investment management.

And in terms of how we think about the distribution to wealth managers, it's a place where we're increasingly focusing our efforts to ensure that our product set is getting shelf space with wealth managers and capture better growth there as well. So that's an important focus for Yie-Hsin. The next one that comes up, maybe the last one before I get to private or other things, is fixed income where we've seen significant growth in the fixed income space.

So from a product standpoint, that's something that we're optimistic about. And then the broader, I guess, category of privates, there's a lot going on there. I mean, we launched a couple of ETFs partnering with Apollo and Bridgewater earlier this year. We've also launched a target date fund supporting direct contribution plans also with Apollo. And then you mentioned Coller, which was one of the largest secondaries managers in the world, and we have an investment and a partnership with Coller to capture the growing focus in the secondary space from a private market standpoint.

A whole big large agenda there for investment management, but we're exceptionally well positioned. And it's part of what I say on top front that one of my top initiatives or top priorities is to partner with our business leaders to drive their strategic agenda, and there's a very full one on the investment management side.

Just double-clicking into that, I do want to spend another minute on the [ alts ]. But really overlaying your footprint in the defined contribution market, the targeted channel, in particular, as part of that. You guys have obviously one of the largest passive and index franchises out there. You have the access and the product with a targeted lineup. And obviously, a lot of private market participants really want access to that given the way the world is likely to evolve. I know you have a partnership with Apollo, but how do you think about sort of monetizing your footprint and capabilities on the liquid side of things with the alts more broadly? Are there more partnerships that you were able to participate in? Are there things that you might consider buying to sort of further enhance that -- those capabilities?

I think we have the organic opportunities. And I think we use bolt-ons like we did with Coller to accelerate capabilities in certain places. So I think all of those levers are -- will be brought to bear, but there is a huge opportunity to combine our experience with privates and our position in the retirement space with defined contribution plans in particular. So I think you're hitting on an area of focus that will play out in the future. that we think is attractive to be positioned for.

Got it. Okay. All right. All super interesting. Look, we're halfway through, so maybe we'll turn our attention to some of the financial items as well. We're kind of getting closer to quarter end here. So hoping you can give us an update on what Q4 is shaping up to be. Obviously, it's been a bit of a bumpy road with market volatility. Things were a little worse coming out. Now it feels a little bit better. So your latest expectation is around fees NII expenses and anything else you're willing to share with us as far as Q4?

Yes, sure. I mean I think things have been playing out well in '25. I mean, I think in the face of this volatility, I mean, I think the franchise is performing well, I would say, broadly, revenue is coming in a little better than expected. We had an 8.5% to 9% range on fees. I think you'll likely see that coming in more at the upper end of that range for the full year. I would say also -- and a lot of that is attributable to -- speaking of the investment management business, a lot of that would be attributable to the management fees.

We're seeing maybe flows a little better than expected and market levels have been a little higher as well. So that's really the main driver of that. But very solid and strong fee revenue performance that we expect to deliver for '25. I would say it's also true for NII. I think we're seeing a little better NII play out here in the fourth quarter and I'd call that when I think about the full year NII, we now see that coming in flat to up slightly.

And I think the drivers there are primarily -- we've got the ongoing benefits that I maybe talked about back in October, but what we're seeing in the fourth quarter is maybe some seasonal funding mix coming in better than we had expected. And so that's driving better net interest margin and NII to allow us to get to that flat to slightly up outlook for NII.

Turning to expenses. Just given the revenue picture, we see -- we now see expenses coming in approaching 5%. And I would say that the other item I wanted to highlight -- I think for the quarter, just given all of the productivity efforts that we're engaging in and some operating model adjustments that we're going to try to make from a productivity standpoint, we're going to have some notable items in the quarter and attributable to that. And so that will probably come in the range of approximately $275 million for the quarter.

And when you wrap all that up, I think it ends up looking like a very strong 2025 with positive operating leverage from a full year standpoint. And I think that also implies the seventh or eighth quarter in a row of positive operating leverage. And I think that's the theme for 2025, but also heading into 2026. And if I can make a comment or 2 about '26, I mean I think it's our expectation to continue the objective of delivering positive operating leverage.

I mean I would add that from an expense standpoint, the growth in expenses probably comes in lower than it did in '25. But with respect to all other matters related to '26, we'll probably hold off and cover that in more detail in January.

Great. Okay. Super helpful. Maybe we can just go back and double-click into a couple of items. The $275 million of notables for the fourth quarter, just talk to us a little bit of what that's related to and if that's kind of further headcount and repositioning, et cetera. And is that sort of what's driving slightly better outlook for expense growth in '26 versus '25?

Yes. It's -- I mean, I think it's all -- well, let me -- it's the first part of it, and I'll come back to the second part. But the first part of it is, yes, I mean it's operating model adjustments, severance real estate, those kind of things. And I think it's part of the story, but it's not the only part of the story. I mean I think productivity in '25 is going to come in around $500 million, pretty similar to where we were in '24. I think as we're heading into '26, we have a large strategic portfolio that we want to organically invest in. We want to continue the momentum on driving productivity so that we can continue to invest in these growth-oriented initiatives. And we calibrate our expenses to the revenue picture. And so we'll have more to talk about that and more color around that, of course, in January.

But there's a lot of factors that play into that. And our investment opportunities, our level of productivity that we're driving, the fact that we are seeing some opportunity to revise the operating model here at the end of December so that will provide a tailwind. But we're going to want to try to invest in all of these strategic initiatives as well, while calibrating to revenue and keeping our positive operating leverage objectives intact. So more to come in January, but that's kind of the contours of how I think about it.

Got it. Okay. If I were to go back to some of the original points you made as kind of like key objectives for you in your CFO role, but really broadly as an organization. You talked about both kind of the balance sheet construct and NII. And while acknowledging that you guys are probably not ready to share full out 2026 guidance on NII just yet, I do you hope we can maybe talk about just some of the building blocks and kind of how you're thinking and framing a slightly different approach to balance sheet and NII or maybe some of the area of incremental efficiencies that you can get out of the balance sheet. So first, I guess, when you talk about optimizing the balance sheet in terms of the asset mix or what you guys are doing for your clients, can you expand on that a little bit? What does that mean?

Yes. I mean I think the focus there is in the loan portfolio and ensuring that we're using that capital and deploying that capital into deep customer relationships and solidifying those relationships. And in places where the relationships may be thinner, we can allow that kind of stuff to run off and be redeployed. And I think that's a pretty typical commercial banking approach to where you're going to be relevant and you're going to have deep customer relationships, you're going to solidify that with providing access to balance sheet. So we'll take a look at that. And I think that also risk-adjusted returns just to add that change over time in different portfolios. It's an exceptionally high-quality loan book, but there is still variable risk-adjusted returns across the portfolio, and we're digging deeper into the subsets of that book to make sure that we're getting paid for the risk that we take.

And so I think you'll see that book continue to churn as we increase the level of focus on strong returns driving deep customer relationships in the loan book. So that's the area I would look at. I think in the investment portfolio itself, looking for opportunities to kind of turn over the fixed asset repricing is going to be a tailwind going forward. And that happens naturally. But if we can find opportunities to accelerate that here and there, we do that as part of good hygiene in terms of managing the investment portfolio on the asset side. And that basically covers the interest-bearing asset side of the ledger. And I think the other side is equally important, which is funding mix.

And so just taking a harder look at the mix of deposits and what's in low to moderate cost versus more market rate stuff in the deposit portfolio and then just wholesale funding in general. And the mix of wholesale funding as part of our entire funding stack and determining what the right level is on that. So you put all that together, I think we have -- we started working on that right out of the gate when I arrived, and that the company had been doing things along the way, but we intensified that a bit. And we're seeing a little bit of benefit of that in the fourth quarter where we'll see NII up and net interest margin up in the fourth quarter versus the third. And we'll see how that plays out as you look forward into 2026. I think we've got some tailwinds. We've got runoff of terminated hedges. That was a drag for a while. We've got the turnover, as I mentioned, of fixed assets being repriced, some optimization stuff. All those things are on the good side of the ledger.

The other things we're monitoring from a rate standpoint, we're asset sensitive, and we're in a rate-cutting world, right? Check your watch to -- right, we'll hear about what happens in the U.S. today. And whether we get another couple into 2026, and that will have an impact. But I think you put it all together and I'm feeling good that off of the 3Q base, we see opportunities to grow net interest margin and NII. And again, more to come in January. But those are the things we're thinking about in the NII space and balance sheet.

Got it. Okay. No, super helpful. These are all really good building blocks to think about. Okay. We didn't really talk a whole lot about capital returns, so maybe we can hit on them as well, both for the fourth quarter and just broadly kind of how you're thinking about that into next year?

Yes. I mean -- so in '25, I think you could -- you've heard us talk about approximately or roughly 80%. I think you can count on that for us to be at around a roughly 80% capital return in 2025. Our capital priorities really haven't changed. I mean you can kind of think of it in a waterfall. I mean at the top of it is supporting a strong and attractive dividend. I think the second item you'd have on that list is supporting organic growth. putting capital to work on behalf of customers, both with respect to the balance sheet as well as in terms of investments from an operating expense standpoint.

The third one, which is closely related to the first is bolt-on investments that we may make to accelerate our product capabilities that you saw us do in the fourth quarter with Apex on the investment -- on the well services side of things and Coller in secondaries. And so that's highly strategic, very connected to our ongoing organic investments over time. And then the last one is buybacks, right? And so if -- and we've been able to satisfy some expectations there this year. And -- so the waterfall really hasn't changed. I think the priorities really haven't changed, and we'll play that out again into 2026 in terms of capital return.

Got you. Got you. Maybe we can zone in on that third one, some of the bolt-on investments. And State Street has been kind of out of the M&A market for a little bit of time, and this is not large M&A by no stretch. But as you think about opportunities for either larger transactions, something that could really enhance your footprint or add scale in areas of interest or more of these kind of smaller bolt-on things to just kind of accelerate growth. How much more active are you likely to be there over the next couple of years relative to what we've seen in the past?

Yes. I think you put us in the category of using our capital for bolt-ons and smaller acquisitions that accelerate our product road map and our service capability road map is really what our focus is. I think there's an exceptionally high bar to do any larger M&A, and that's just not really on our radar.

Yes. Got you. Well, look, to wrap things up, I want to ask you a question back to your biggest business, which is the investment servicing business, and you and I talked about this offline as well, but the market obviously has had a view that State Street is facing a more challenging end market. A lot of it is traditional asset managers, and they have been shrinking over time. That has translated into more muted servicing fee growth for you guys over the years. We started to see that really ramp nicely. So super encouraging. But as you think about the sort of multiyear fee growth algorithm for the servicing side of the business and your early thoughts of kind of what would that look like across different buckets?

Yes. I mean I would call it. I mean, I think you saw in the third quarter when we talked about -- we've had core growth outside of the impact of market levels and outside of what you might see from an FX standpoint. So I think you've seen core growth in the investment servicing business. And just going back to the changes that Joerg has made from a sales go-to-market strategy has really pivoted to driving sales north of $300 million, as I mentioned, for the last 3 years, broadly but then more specifically, investing in higher growth categories like private markets. And so our capabilities there are distinctive. We think we have a right to win in the private market space in investment services.

And I think the solidification of our unique capabilities, front to back in investment services is -- we're the second largest in the world in that space in his business and that scale advantage is pretty attractive. But I think that, combined with the higher growth investments that we're making in privates and wealth will really be -- will combine to drive that growth outlook that you see going forward.

Great. Well, we look forward to that. Thank you so much for the time. Pleasure to see you. Welcome and look forward to more of these.

Yes, I appreciate it. Thanks.

Good morning, and welcome to State Street Corporation's Third Quarter 2025 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 broadcast or distribution in whole or in part without the expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street website.

Now I would like to hand the call over to Elizabeth Lynn.

Thank you, operator. Good morning, and thank you all for joining us. On our call today, our CEO, Ron O'Hanley, will speak first; then John Woods, our CFO, will take you through our third quarter 2025 earnings presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.com. Afterwards, we'll be happy to take 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 1 or more items from GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our presentation. 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 view should change.

With that, let me turn it over to Ron.

Thank you, Liz. Good morning, everyone, and thank you for joining us. I'm pleased to welcome John Woods to his first earnings call with State Street. John brings deep and additive expertise to our leadership team, and we're excited about the perspective he adds.

Turning to our results. I'll begin with our third quarter highlights before turning it over to John, who will walk you through our financial results in greater detail. Slide 2 of our investor presentation highlights the strength of our third quarter results with quarterly earnings per share of $2.78 increasing 23% year-over-year. Our strong financial performance reflects disciplined execution against our strategic priorities and our ability to effectively capitalize on the constructive market environment in the quarter.

We continue to demonstrate good business momentum and consistent delivery of improved financial performance. For example, 3Q marked our seventh consecutive quarter of positive total operating leverage, excluding notable items as we delivered total revenue growth of 9%, a pretax margin of 31% and return on tangible common equity of 21%. These metrics highlight our ability to drive profitable growth by executing our growth strategy and continuing the transformation of our operating model. Investor demand, new technology and a changing regulatory environment are creating new opportunities for us and our clients.

Alongside our robust third quarter financial performance, we remain focused on advancing product innovation and enhancing our capabilities to better serve our clients and accelerate growth in key strategic areas. For example, as I'll outline shortly, we launched a series of strategic initiatives and new product capabilities in the third quarter, all designed to position State Street for sustained long-term growth.

In Investment Services, we delivered strong year-over-year servicing fee growth and ended the quarter with a record $51.7 trillion in AUCA. We recorded 1 new alpha mandate another alpha client went live in 3 quarter -- in 3Q. State Street has long been a leader in technology-driven innovation Today, our investment services team is building on that legacy by developing the tools and client capabilities that will empower our clients to succeed in an evolving market. For example, in the digital assets ecosystem, State Street already provides fund administration and accounting services for digital assets today.

As we look ahead, we are strategically positioning State Street to be the bridge between traditional and digital finance as well as the connection point between digital asset platforms. To that end, we are excited about the forthcoming launch of our digital asset platform which will enable tokenization of assets, funds and cash for institutional investors. As the wealth market expands globally, we have noted the importance of building upon our front-office wealth trading and portfolio construction capabilities at Charles River to further access this growing revenue pool.

We achieved a key milestone of our well services strategy in 3Q with the announcement of a strategic partnership and minority investment in Apex fintech solutions. Through this partnership, State Street will leverage Apex's digital custody and clearing platform to expand our well services offerings in support of the high-growth wealth management industry. The partnership will deliver a differentiated, fully digital, globally scalable custody and clearing solution and experience for wealth advisers and self-directed wealth platforms as well as their clients around the world.

As a result, this partnership will significantly strengthen State Street's investment servicing capabilities and build on our existing foundation to deliver the industry's first truly global digital wealth custody solution. The third quarter also marked an important milestone for State Street Investment Management, which reported record quarterly management fee revenue as period-end AUM climbed to a record $5.4 trillion just 1 quarter after surpassing the $5 trillion mark for the first time.

We continue to innovate at pace, further strengthening our investment management capabilities to drive growth across several strategic focus areas. For example, we launched 11 select fighter premium income ETFs, enabling investors to tap into sector-specific opportunities with enhanced income potential. Elsewhere, by broadening our suite of actively managed target maturity ETFs, we further strengthened our capabilities in fixed income solutions, which remains a key strategic priority.

Importantly, the third quarter provided several compelling examples of how our partnerships with some of the world's leading investment firms are expanding and strengthening our client capabilities, positioning us for future growth. For example, in continued partnership with Apollo, we made further progress in expanding access to private markets with the launch of PRSD, an actively managed short-term bond ETF and which combines exposure to investment-grade public and private credit. We also launched the Euro-denominated AAA CLO UCIT ETF in partnership with Blackstone, building on our successful track record together which includes actively managed high income and senior loan ETFs.

Finally, in Europe, we entered a strategic partnership with an Lanshempan Investment Management that will drive further innovation across our respective investment offerings in this key strategic region. State Street markets continued to see the results of his efforts to deepen client relationships delivering strong year-over-year revenue growth in both securities finance and FX trading services.

As a testament to the strength of our markets franchise and the value we deliver to clients, we're proud that State Street was recognized with 8 category wins in Euromoney Magazine's 2025 FX awards, doubling our achievements from 2024. These industry recognitions are strong endorsements of our continuous effort to deliver best-in-class trading and financing solutions, technology platforms and research to our clients globally.

Turning to our balance sheet. Our solid financial position has enabled us to return nearly $1.5 billion in capital to shareholders year-to-date through common share repurchases and dividends, including $637 million in the third quarter. As previously announced, we were pleased to increase State Street's quarterly per share common stock dividend by 11% to $0.84 in 3Q. We remain committed to returning capital to our shareholders.

Before I conclude my prepared remarks, I'd like to take a moment to extend my gratitude to Mark Keating for his outstanding leadership during his tenure as Interim Chief Financial Officer. Mark stepped into the role during a pivotal time and provided invaluable stability and leadership as we navigate the transition period. Mark will continue to play an important role in shaping our long-term financial strategy and driving enterprise-wide initiatives working closely with John.

To conclude, the third quarter marked several strategic and performance milestones for State Street, reinforcing the effectiveness of our strategy. We delivered our seventh consecutive quarter of positive total operating leverage, excluding notable items, a clear indicator of sustained momentum. Our continued improving financial performance is supported by a range of tangible proof points that highlight how we are expanding product capabilities and driving innovation across the firm. These efforts continue to position us for future growth and long-term value creation for our shareholders.

With that, let me hand the call over to John, who will take you through the quarter in more detail.

Thank you, Ron, and good morning, everyone. Turning to Slide 3. As Ron mentioned, we delivered strong third quarter financial results that reflect healthy business momentum and consistent execution, driving EPS growth of 23% year-over-year to $2.78. Total revenue increased 9% year-over-year to approximately $3.5 billion and included fee revenue growth of nearly 12%, excluding notable items. Fee revenue growth was broad-based, supported by active client engagement and met a constructive market environment.

Servicing fees were up 7%, management fees increased 16% and FX trading services and securities finance revenues were collectively up 17%, excluding notable items year-over-year. Expenses increased approximately 5% year-over-year to $2.4 billion as we continue to prudently manage our expense base while also funding key strategic initiatives and technology investments to support future growth. Taken together, our strong third quarter performance delivered substantial fee and total operating leverage of over 600 basis points and over 300 basis points, respectively, year-over-year and excluding notable items. Our pretax margin expanded approximately 270 basis points to 31%, while our return on tangible common equity was approximately 160 basis points higher at 21% compared to the year ago period. Turning now to Slide 4.

Servicing fees increased 7% year-over-year, primarily driven by higher average market levels, net new business and the impact of currency translation. AUC reached a new record of $51.7 trillion, increasing 10% year-over-year, driven by higher period end market levels and strong client flows. We achieved nearly $50 million in servicing fee revenue wins in the quarter, bringing our year-to-date total to approximately $250 million.

We remain intensely focused on driving servicing fee revenue growth particularly in core back-office solutions and private markets, which together account for the vast majority of both our third quarter and year-to-date wins. Our pipeline remains healthy and well diversified and we are on track to meet our full year target of $350 million to $400 million. This momentum is reflected in our third quarter servicing fee revenue backlog of approximately $400 million, up roughly 40% from the prior year.

Installing our backlog remains a top priority as we focus on delivering consistent organic servicing fee growth in the quarters ahead. Additionally, we reported on new alpha mandate win with another client going live in the quarter. As Ron noted, we recently finalized a strategic partnership and minority investment in Apex fintech solutions. This partnership will expand our wealth services offering through Apex's digital custody and clearing platform and supports the long-term growth of our investment servicing business. Turning to Slide 5.

We Management fees increased 16% year-over-year to a quarterly record of $612 million, primarily driven by higher average market levels and net inflows. Assets under management increased 15% year-over-year to a record $5.4 trillion, supported by higher period end market levels and client inflows. Net inflows totaled $26 billion for the quarter, reflecting solid momentum across ETFs, cash and institutional index fixed income.

In ETFs, our U.S. low-cost suite continued to gain market share, achieving record flows in the quarter. Our gold ETF suite further strengthened its market leadership, reaching a record AUM of approximately $145 billion. This strong performance reflects both robust inflows and supported by our expanded distribution globally as well as elevated spot prices. As Ron mentioned, innovation remains a cornerstone of our investment management growth strategy.

In the third quarter, we launched 39 new products including an expansion of our select sector suite and new alternatives exposures. These initiatives broaden the capabilities available to clients and support organic net new asset growth. We are encouraged by the robust performance of our investment management business in the third quarter, which delivered a pretax margin of approximately 36%, up nearly 600 basis points from the prior year quarter. Turning to Slide 6.

State Street Markets delivered strong third quarter results with solid year-over-year growth in both FX trading services and securities finance. Our markets franchise is strategically positioned to support both our investment services and investment management businesses, delivering integrated value across the entire franchise. FX trading revenue increased 16% year-over-year, excluding prior period notable items. While FX volatility was relatively muted, client volumes increased 11% year-over-year with strong growth across all of our trading venues. Securities finance revenues increased 19% year-over-year driven by robust balance growth across both agency lending and prime services. In Agency Lending, third quarter performance benefited from increased assets on loan and specials activity while in Prime Services, our targeted client engagement supported solid revenue growth for the quarter. Moving to Slide 7.

Software and processing fees increased 9% year-over-year. Front office software and data revenue increased 14% year-over-year, driven by higher on-premises renewals growth in professional services and continued expansion of software-enabled revenue as we converted and implemented more clients onto our cloud-based SaaS platform. In turn, annual recurring revenue increased by approximately 13% year-over-year to approximately $400 million in the third quarter. Our front office revenue backlog remains healthy, increasing 45% year-over-year and reinforcing our confidence in the future growth of this business. Moving to Slide 8.

Net interest income of $715 million was down 1% year-over-year. This performance reflects an 11 basis point decline in the net interest margin to 96 basis points, primarily driven by lower average short-end rates and deposit mix shift, partially offset by the reinvestment of securities portfolio cash flows at higher yields and higher interest-earning assets supported by higher deposit balances. On a sequential basis, net interest income declined 2%, primarily due to a reduction in the interest earning assets resulting from lower deposit balances compared to elevated second quarter levels as well as lower average short-end rates. These factors were partially mitigated by the reinvestment of securities portfolio cash flows at higher yields, along with continued client-driven loan growth which contributed to an improvement in interest-earning asset mix supporting a stable net interest margin on a linked-quarter basis. Turning to Slide 9.

Expenses increased approximately 5% year-over-year, primarily driven by continued investments in technology and strategic initiatives, higher revenue-related costs and the impact of currency translation partially offset by continued productivity savings. Compensation-related costs were well contained, increasing 2% year-over-year in the third quarter. This increase was primarily driven by higher salaries and benefits and the impact of currency translation partially mitigated by a reduction in head count, including from ongoing operating model transformation and process improvements.

Information Systems and communications expense increased 12% year-over-year, primarily due to ongoing investments in platform modernization and resiliency, AI tools, enhanced data delivery and improved user experience as well as higher client implementation activity and volumes. In parallel, we continue to advance our productivity and optimization initiatives, generating approximately $125 million in year-over-year savings during the quarter. These efforts have delivered approximately $370 million of savings year-to-date, keeping us firmly on track to achieve our full year savings target of $500 million. Our ongoing productivity and other savings initiatives have enabled us to deliver both fee and total operating leverage while also creating capacity to invest strategically in growth areas such as well services, alpha, private markets, AI and process automation. Moving to Slide 10.

Our standardized CET1 ratio was 11.3% at quarter end, up approximately 60 basis points quarter-over-quarter reflecting capital generated from earnings and a decline in risk-weighted assets coming off of the elevated FX volatility of the prior quarter. We returned $637 million of capital to common shareholders during the third quarter, consisting of $400 million in common share repurchases and $237 million in declared common stock dividends for a total payout ratio of 79%. As Ron noted, in the third quarter, we were pleased to increase our per share quarterly common dividend by 11% to $0.84.

To wrap up, let's turn to our outlook, which, as a reminder, excludes notable items. Building on our strong year-to-date performance and a constructive market environment, we now expect 2025 total fee revenue growth in the 8.5% to 9% range, an improvement to our prior outlook of at or slightly above the 5% to 7% range. We expect full year NII to be down slightly relative to last year's record performance.

Turning to expenses. With our improved outlook for fee revenue, full year expense growth is now expected to be roughly 4.5%, up from our prior outlook of the upper end of the 3% to 4% range, reflecting ongoing investments in technology and strategic initiatives along with higher revenue-related costs. Importantly, we continue to generate significant positive fee and total operating leverage this year. And given where we are in the year, our full year outlook implies that for the fourth quarter, fee revenue will be flat to down slightly quarter-over-quarter, reflecting a normalization in other fee revenue from an elevated 3Q while suggesting a sequential increase in NII.

And on expenses, our updated full year outlook suggests that expenses will be up slightly in 4Q compared to the prior quarter. Finally, we continue to target a total payout ratio of approximately 80% for 2025, subject to market conditions and other factors while also deploying capital to support our clients drive organic growth and fund strategic investments. In conclusion, our third quarter results reflect the strength of our execution and the resilience of our strategy. driving consistent business momentum and delivering meaningful fee and total operating leverage. On a personal note, I'm excited to be partnering with Ron and the rest of the State Street management team and I'm very optimistic about the opportunity ahead of us at State Street as we aim to build upon the strong results we've achieved year-to-date. And with that, operator, we can now open the call for questions.

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

John. Welcome to the call. I wanted to maybe get your thoughts as you kind of get your feet wet with the new business here for State Street. How are you thinking about both the balance sheet management and sort of operating dynamics in the company. Any additional steps you're looking to pursue as far as just kind of your early observations across the business go either on the again, capital management, expense management, NII? Any other thoughts would be helpful just to get your first impressions.

Yes. Thanks for the question, and good to be on the call. I mean, I think maybe I mentioned this previously at a conference that I think about the priorities broadly. It starts with just partnering with the management team to drive execution and profitability. And in my -- I guess, I'm completing my month 2 here, I'm exceptionally impressed with the level of innovation and momentum that we have here at State Street. And so that's the foundation that I thought I was joining and all systems go on that front. So excited there. I will say that where are some of the areas that I'll be partnering with Ron and the management team on, I will spend time in the balance sheet space. I think there are optimization opportunities on the balance sheet that I've been digging into in my early days here. So that's -- that will be nice to see as that plays out in the coming quarters.

But the other couple of items I'd also hasten to add is there's an exceptional opportunity in the productivity space that this management team has been hard at for quite some time, but there is a lot ahead of us that we can accomplish together that's got a lot of tailwinds associated with the heading into 2026. And that gives us opportunity to continue to invest and drive tech-related innovation over time. And I'll be plugging in on that front. And then lastly, all of the strategic initiatives that we have in front of us, both within the United States and around the world with respect to geographic expansion and product development. those are broadly the areas of optimization and focus that I think I'm going to be looking at.

And then just bringing it back to the maybe the specific point you raised with respect to balance sheet based upon all of that, maybe just to add, you look at some of the balance sheet trends more in the micro here at the end of the third quarter heading into the fourth quarter, there are really solid trends coming out of all of that some strong deposit flows. You saw our net interest margin was flat quarter-over-quarter as you may have seen in the overall guide for the year. sort of seeing net interest income and net interest margin, both headed up as we head into the fourth quarter with some solid tailwinds there. So that's encouraging. And I think there's more opportunities on the balance sheet to keep that momentum heading into '26.

Great. That's helpful. And then just as a follow-up related to NII, your point just now around NII improving in the fourth quarter relative to the third quarter, is it a function of just the balances being higher and know they tend to pick up seasonally? Or is there something more specific that you guys are already starting to work through to drive NII higher from here?

Yes, it's a good question. We did see the balance sheet come down in the third quarter. I think the outlook into the fourth quarter is for the balance sheet size to be about stable. So I wouldn't call that the reason why we see NII and net interest margin rising into the fourth quarter, but it is important to stabilize that and the all-important deposit levels, which were down this quarter, overall, but frankly, mix was improved into the third quarter. Noninterest-bearing deposits held in, and we expect that to continue into 4Q and we see deposits stabilizing with a number of tailwinds there that will ensure that stable deposits is something that we can count on in 4Q. I'd say the real drivers are more about some other nonrate-related tailwinds.

So I would -- we've got the recurring turnover of the investment portfolio where you see cash flows maturing at lower rates being reinvested at higher rates. That was a tailwind in the third quarter. It will continue to be 1 in the fourth quarter and beyond. I'd also highlight the fact that in the past, we had terminated some interest rate risk management hedges and the negative drag related to that is already in our third quarter run rate, that's going to start to run down in the fourth quarter, which will become a recurring tailwind and in 4Q and in 2026, those 2 sort of mostly nonrate-related tailwinds are giving us some good confidence about not only net interest margin growth in the fourth quarter, but those tailwinds will continue into 2026. And I see some positive mix opportunities on an ongoing basis. So when you see how we're servicing I mean, serving our customers in the loan space, loan mix was an improvement in 3Q, and I can see that being a potential supporter over time as well. So yes, feeling pretty constructive about 4Q NIM and NII.

Our next question will come from Glenn Schorr with Evercore.

Maybe just a quick follow-up on that conversation. I think a couple of us have asked this in the past, but John, you being new to party and getting a fresh look. I wonder how you think about -- or how we should think about this year, State Street struggling around flat on net interest income last year, as you mentioned, record net interest income at your peers, this year is a good year. So I'm just trying to think from your fresh eyes, is there something different about the client mix? Is there something different about how you interact with the client base and ways you can talk through what operating deposits clients can park with you? Because your business overall grows plenty and deposits usually come along with that. So we don't have to rehash or the deposit beta stuff, but should we expect -- I'm curious to get your thoughts on that? And then should we expect similar enough performance going forward in '26 and beyond or is there something about the client mix that just deposits are different and you got to look at the totality of the earnings?

Yes. I mean a couple of comments, and we'll spend some more time on this as we get to the 2026 outlook. And we'll cover this in a fair bit of additional detail. But I do observe what drives the bus here on the balance sheet is going to be deposit levels, both the level and quality of the mix of deposits and pretty true for almost all banks, right? And so when I think about the trends in the deposit base, I think the macro is coming together relatively with a net tailwind, certainly heading into 4Q, we'll update in January, again, but in all likelihood into 2026.

And the few tailwinds I'd highlight, when you have the rate environment, we're adding -- we started the easing cycle that likely continues in the fourth quarter, maybe a bit into 26 as well as we see where rates are headed. That's typically a tailwind for deposit levels and often good for mix. You heard Chairman Powell talk about possibly Quanta's QT ending. That also is a solid tailwind for system-level deposits. And just bringing it back to really the core franchise in terms of our fee-based drivers, AUCA drivers are all coming together quite nicely, and we'll talk about that being a really solid tailwind for deposit levels, which is where we generate our deposits. So when I look at -- when I put all that together, I feel pretty good about the fact that the balance sheet being stable to rising over time is coming together nicely.

And then you flip over to the other drivers, which would be impact of rates where we're somewhat diversified across -- we've got a balance sheet majority of the balance sheet is in the U.S., but the asset sensitivity on the short end is close to neutral there. And then we have exposures to the euro area as well as sterling that -- where there's a different rates that we're asset sensitive outside the U.S., and it seems like rate stability there tells me that rates won't be nearly the headwind that it was year-over-year.

And then finally, the mix and the optimization work that we're going to continue to do. I think, along with the idiosyncratic factors I mentioned about 4Q with terminated hedges running off as well as the turnover of the balance sheet and investment portfolio in particular, where cash flows are getting reinvested at higher levels, which are less rate-dependent. All of that comes together with some pretty solid forces that we'll talk to you more about in January to put it all together, but feeling pretty optimistic about some of the tailwinds there going forward.

I appreciate all that. Maybe a quickie on the investment management side. You've a lot of product innovation, a lot of good flows and more to come like it. I don't know if you mentioned, I apologize if I missed it, what the outflows were on the institutional side. And then the bigger picture is maybe talk a little bit towards your aspirations outside of your core footprint, meaning it would be best for me in the past, if I asked if state was going to broaden their active actively managed footprint, but actually the world is a little different. There's more growth avenue. So outside of your core ETF and passive business maybe longer-term aspirations?

Glenn, it's Ron. Why don't I take that and John can add in. On flows were positive as you saw, but that was net of some outflows in institutional really around -- mostly around 1 particular client, and these things happen. To your broader question, -- we know what our strengths are and our strengths are in the passive and systematic exposures from an asset management perspective, we're also a leader in product structures, such as ETFs and target date funds. And we've been able to turn the Spider franchise into a platform that's recognized and operating around the world and operates really as a distributor for us and others. So what we have actually broadened quite significantly beyond that core passive but typically have been doing it. Well, in the fixed income space, doing it ourselves, but then outside of that with key partnerships, I talked about some of them. Some of them are recent, such as Apollo.

Some of them go back years, really strong partnerships with the likes of Blackstone. And we will continue to do that. More and more, you see firms coming together, recognizing that a platform like the Spyder platform is hard to replicate. There really is a limited number of platforms like that. And the fact that ours is open architecture in the sense that we will work with high-quality partners. So you'll see us expand that way. And then to the extent to which there's select opportunities for us to move into active, but we're only going to do that in places where One, we think we can actually add value to clients; and two, that it can generate scalable, repeatable revenues as a way to think about it.

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

Can you hear me?

We can, Mike.

So John, back to that fresh set of eyes, State Street stock for the last 5 years has underperformed the bank index by about 10 percentage points. And one of your big competitors by over 100 percentage points. So recently, State Street showed better fee growth, better operating leverage, innovation. And clearly, you wouldn't have from the State Street if you did see some potential to provide greater shareholder value than has been delivered for the last 5 years. So with that -- and especially with less credit risk compared to your old firm, too. So what do you think is not understood about the Stage 3 story and what would you do to help change that? And then kind of separate but related -- Ron, I was just wondering kind of how many more years you're thinking about staying on as CEO.

Thanks, Mike. I'm happy to take that first part. And I think here's what I find exceptionally interesting. When you look at the fee-based tailwinds here, and in the third quarter, in particular, the core growth, even when you strip out market and FX on the investment management side, since we just spoke about that, is 5% year-over-year just core net growth, excluding the other tailwinds. And same on the servicing fee side of things where there's 2% net growth year-over-year and the tailwinds there continue to grow.

When you look at the composition of our backlog and the pace of installations and in servicing and what you see from an innovation standpoint on the management side of things, I think that story is underappreciated. I think the opportunities over the medium term on the fee revenue side of things is underappreciated. I also think that the strategic overlap of our markets business with Investment Management and Investment Services is also underappreciated and just how integrated that service offering is.

And I think we'll try to do a better job of shining and highlighting all of those things across those 3 large businesses. The second thing that comes to mind is the stability and visibility to net interest margin and NII over time, I think we have opportunity there. And it's right in front of us. We have an exceptionally attractive deposit growth opportunity driven by our custody growth over time and a number of optimization opportunities that will allow us to, I believe, manage that in a way that creates more shareholder value in the future.

And then maybe I'll just close out with -- on the expense front. The management team has done a heck of a lot from what I can see in my -- in month 2 here. But from what I can see, there's been just massive movement in productivity, but there's a huge amount in front of us, which I find very exciting all of that is our resources to continue to reallocate to customer-centric investments as well as potentially share that to the bottom line on productivity. So I'm sorry, on profitability. So that's what I was hoping to see check the box across the board with some upside and even more excitement being inside the place than even when I was outside State Street. So that's how I would talk about it.

And Mike, on your question, I will remain as CEO is as the Board and myself are confident in my leadership and ability to add value that translates into continuing improving shareholder value creation.

Our next question will come from Ken Usdin Houston with Autonomous.

On the fee side, guys, I just wanted to ask, we saw another [ 350 plus ] of wins this quarter, good underlying strength on the services side. Can you just talk about any update to your expected trajectory of how that comes on, especially now that we're proud towards the year with 40-ish this year, and just more importantly, how are those installations going? -- just still some talk in the market about whether things are going as smoothly as we wanted to see on Alpha or not. So I just kind of want to talk -- ask to kind of talk through the installation cycle and the timing of those that win base.

Yes, great. I'll start off there and others may add. But so $400 million in backlog at [ 930 ] significant increase year-over-year that we see the installation outlook there to be quite attractive as much as half of that being installed by the end of the year. and a significant portion of the remainder being done by the end of 2026. So that backlog level probably comes down a bit, which is reflective of installation pace. But we're going to want a healthy backlog balanced by sales and installations over time, but we're feeling pretty good about the installation cycle on the backlog from [ 930 ].

Yes. In terms of how is it going? I mean we're largely on track to what we said we would do at the beginning of the year. We said that there was a real focus on installations that was a combination of, one, some of the early development kinds of things that we were doing with some of the earlier on output partners, we're coming to a close and being installed, and there's been a lot of progress on that this year. And then secondly, just getting better and more repeatable at it. We've really focused on turning this into a one-at-a-time kind of thing to a repeatable process and building installation into the early sales and engineering phases of the Alpha discussions, which is helping us immensely. And as John noted, as some of the later businesses come on, it's actually on a faster implementation pace than some of the earlier businesses, which is what you want to see from us.

Yes. And just adding to that, I'd like to add that the mix of the backlog is actually quite attractive, much more back office with all that ancillary opportunity to drive other products into a back office installation as well as private, which has attractive profitability associated with it. So we're pleased about where the backlog is and where it will get installed, but also the mix of that business is quite attractive as well.

Okay. Got it. And second question, just completely understanding the leak up in the expenses, FX translation and also better revenues. And it's obviously been a really good still being able to put up good operating leverage. Kind of want to triangulate what you're saying about NII back up in the fourth, and we'll see what happens with the curves in all next year. How do you think about the magnitude of operating leverage that the company is capable of? And how -- and maybe, John, a question for you, how are you starting to triangulate kind of the save and spend balance as you think about what the right expense growth rate is for [indiscernible]

Yes. A couple of different thoughts on that. I mean I'd first try to remind that in the year-over-year, although the expenses were up 5%, 1% of that is -- so -- and of the remaining 4%, about half of that is revenue related. And the rest of it is net investment. So which is really contains all of our productivity initiatives, which will continue and allows us to keep investing over time. there's real operating leverage year-over-year as we've articulated and feeling very good about the ongoing productivity as you head into 2026 as well to allow us to keep investing and to keep kind of the ability to maintain profitability.

The other thing I'd highlight is that even without -- if I go back to the top of the house, even without -- if you say fees up 12% ex notables year-over-year and if you take out the markets and FX tailwinds, you nevertheless have significant operating leverage against the 4% growth in expenses ex FX year-over-year as well. A lot of our marginal business that we've brought on is all fee and operating leverage accretive. And so the foundation and incremental activity all seems to be heading in the right direction for fee operating leverage as well as total operating leverage.

And what I would add to that, it's Ron here. As we -- as you know, we've had an ongoing kind of transformation and productivity efforts. And we are on pace to deliver what we said we would deliver for this year, which is about $500 million. At the same time, we like many others are doing, have leaned heavily into AI, and we're all early in that journey. But we're seeing lots of opportunity to create improvement in client experiences in the employee experience and productivity and unit cost and speed. And what's incumbent upon that where the team is really leaning in and we'll talk more about this next year is how do we capture all that and deliver that back to shareholders.

Our next question will come from Jim Mitchell with Seaport Global.

You talked about strength in -- on the market side. I think relative to some of your peers, it was stood out, particularly on the FX side. So can you just talk about the environment versus what you're doing to grab share and how you're thinking about the growth outlook in those businesses from kind of elevated levels here?

Yes, sure. I mean I think as you head into the fourth quarter, we had a sense of volatility is typically good for these businesses. We had a sense that volatility would rise from the third quarter, which was a little bit on the muted end of things. we didn't expect that it would be this high in October. But nevertheless, it's the from where you see volatility, both in terms of equities as well as in the FX space. Those are tailwinds to the markets business heading into the fourth quarter.

And so we see some opportunity there. But I would hasten to add, as I hinted out earlier, the overlap of the Markets business with our core investment services clients in what we call an integrated FX offering. That's just flow business that continues to grow as our custody business continues to grow as a global custodian. And so that's something that would be a core -- as core growth continues in servicing fees, which we had in the third quarter, we will have again in the fourth quarter. And as growth continues in investment management, where on the other side of the house, the securities lending business overlaps significantly with our investment management customers to a as investment management continues to grow, we'll see securities finance opportunities to continue to grow.

So there really is an integrated offering across each of those 3 businesses. And that's the underpinning of why we feel good about markets heading into the fourth quarter. And then, of course, there are market-dependent factors that you have to keep track of early on that, frankly, actually are constructive for the markets business. But that's how I think about it. We have the core strategic business and then you have the toggle and market dependent based upon the environment, but that's how I think about how we did so well in the third quarter and what the trends might be going forward.

Jim, what I would add to that is we've talked for a long time now about building up our channel capability within FX and meeting our clients where they want to be and how they want to trade. So we've built multiple venues and access points for our clients. Some of those are quite active in these decisions. Some of them are actually not since they set it on a sort of auto. And we've got all those offerings in place. And what I would point to is in addition to revenues being up FX revenues, which is a combination of volume and volatility volumes were up. Volumes were up on a double-digit basis year-over-year, and that just reflects the efforts we've taken to: one, build share and continue to grow share and secondly, to deliver a really strong client experience that then gets translated into repeated business.

Okay. Yes, that's helpful. And just maybe a follow-up on the expenses for next year on operating leverage. It seems like you -- John, you feel like there's an opportunity to even maybe accelerate expense saves and then you have to balance that with investment. So is the message that you have a good amount of flex if the revenue environment doesn't come out as good as you might think? Can you flex downward to maintain positive operating leverage? Just how should we think about your flexibility next year and beyond?

Yes. So we'll stay tuned in January. We'll give you the contours of this. But there's no question there's discretionary levers that we can pull as management. We do want to continue to invest through downturn should 1 occur. And there are crown jewels that we're going to protect. And we have that financial strength to be able to do that. However, if, in fact, there are drawdowns that put some pressure on servicing fees or management fees. A couple of things. I would hasten to add that the markets business and frankly, NII can be shock absorbers in that kind of environment.

So first and foremost, we need to think about that. And those are significant revenue categories that would mute the impact. And then, of course, there's the discretionary aspect of the pace of investment that we would recalibrate as we do on a continuous basis based upon what our revenue picture is and is expected to be. So I'd say there are a number of levers that would allow us to continue to drive strong profitability even if we ended up with some kind of downturn that hypothetically could occur.

Our next question will come from Ebrahim Poonawala with Bank of America.

I guess, John, maybe just following up on the capital piece. So it sounds like everything you said we should -- we are setting up for some version of a franchise efficiency plan on the expense side as well as how you can tap into growth even in a much more better way than you've done so far. Similarly, from a capital standpoint, are there opportunities to do things differently when we think about just the balance sheet management, I think the capital return has been about 80% payout. I would love your thoughts there, John.

Yes. I mean I don't -- on the capital side of things, I think we have an exceptionally strong capital profile as you saw at [ 930 ]. I think the -- when we think about how to manage capital we think about supporting a very strong dividend. You saw an excellent growth in the dividend in the second quarter that was announced. We think about the fact that making capital available to deploy that into growth in RWA as well as investing in strategic initiatives, and you also would have seen the use of our strong capital base to make a few bolt-on acquisitions that accelerate our strategy in a number of our businesses in the wealth space, in particular, and there were others those are all exciting uses of capital, and that will continue. But given our strong profitability, it does allow us to also be able to make the statement that we're also going to have a very strong return of capital to shareholders. of roughly 80% for 2025. We'll continue to work through that waterfall as you -- on an ongoing basis. balancing return of capital with the ability to deploy capital over time. So nothing -- no real huge pivots expected on the capital front other than continuing to evaluate the opportunities to put capital to work to serve our clients.

And just maybe sticking with that. You mentioned strategic investments as the third sort of capital priority. Given the regulatory backdrop that we are seeing, does that allow for something more larger as opposed to bolt-on acquisitions that could strategically put the firm on a much better growth trajectory or just step into businesses? I mean, obviously, we had the acquisition from a few years ago with BBH. But would love to hear in terms of just from appetite for larger deal making, is there an opportunity? And if so, where would that make more sense?

Ebrahim, as you know, we've been quite clear and disciplined about how we think about M&A. M&A is not a strategy, but it's a way to implement an accelerated strategy. And so it's a very high bar for us because shareholders have alternatives and alternative use of that capital. So we would agree with your assessment that the that the environment, particularly in the U.S., is probably a little bit more benign than it's been in the past, but that doesn't change our standards. So we will continue to we're confident in our organic growth capabilities, but we will continue to look at opportunities to accelerate our strategy. And what we did with Apex is actually a great example of that.

We've been talking about Wealth Services now for a little over a year with you. And we like the trajectory we're on, the opportunity to make this investment in Apex and more importantly, to have some significant influence and control over commercial direction of it as it relates to wealth custody was a way that we felt could absolutely accelerate our revenue gathering capability. So that's an example. And whether it's a large acquisition or a small acquisition, it will go through that same kind of disciplined par.

Our next question will come from David Smith with Truist.

On the topic about the Apex investment and overall, your integrated model. You spoke some about the investment services opportunities with well providers that this investment creates for State Street. Does that also create potential opportunities on the investment management side of the house?

It's a great question, David, because the rise of wealth management as creates real opportunities and has created real opportunities for investment managers. We are already actively participating in that space. And so a significant portion of State Street Investment Management, assets under management, well over 20% of it is associated with wealth. And you can see the growth there, for example, the low-cost S&P funds, which are growing at a much higher rate than the industry than the overall, and we continue to build share there. And so that is very much a part of our strategy as we think about well services, which is providing the infrastructure and the servicing capabilities to our clients, but also in a very user-friendly and convenient way, providing them with these asset management exposures that we can provide at very low cost.

Next question will come from Vivek Juneja with JPMorgan.

John, just a quick question on your loans that are very much in spotlight right now and the DFI or NFI whatever you want to call them. You've got -- what is your exposure there from what we can see seems like over 60% of it is to BDCs. Any thoughts on that? Any color on sort of what's the strategic rationale for that higher percentage going to [ received ].

Yes. Thanks for the question, Vivek. I'd say that 60% is broadly and DFI is not all BDCs. But the -- the way I would talk about this, first, we have a much smaller loan portfolio than most of the banks that you would be in the peer side first, just so from a quantum standpoint. When you look at the mix and where we're playing. Our growth and the loan portfolio itself is really concentrated in the private credit -- private market space. So subscription finance, which is exceptionally low credit risk over time, is a huge portion of our loan book, not only outstanding but also the marginal growth as well as we do a fair bit of AAA CLOs, second big category for us.

And then there is a category of supporting private credit and BDCs, but those are integrated clients that we're serving from a custody standpoint and from a servicing standpoint. And so these are really deep customer relationships. And so the substantial portion of our loan book is exceptionally high quality. It's relatively diversified. There is a Cree book, but it's relatively small and it's been shrinking over time. And broadly, no real signs of deterioration in credit that we've seen to date. We're keeping an eye on it, but feeling reasonably comfortable with what I've seen so far in the loan book.

Okay. When I said BDCs, I meant BDCs from the data we could pull looks like 60% half year and...

It's not -- yes, it's broadly MDFIs but rather than just BDCs.

Ron, a question for you maybe. What are you seeing as regards to Charles River with the fixed income clients. Obviously, there's been the issue with Invesco. But beyond that, are you seeing more outflows in the fixed income order management systems? Or any color, any update you can give us there because there have been some questions on that.

No. I mean the -- as you know, that was an area that we have put a lot of development effort into to not only bring it to par, but to bring it to be a distinctive platform A lot of that development was delivered last year, even more is being delivered this year. So not only we're not seeing outflows, but we've got much of the backlog that you see of the alpha backlog that you see includes clients that will be coming on to the fixed income side of it. So it's -- both equities and fixed income are equally important to us.

Our next question will come from Brennan Hawken with Bank of Montreal.

So I'd like to follow up on the Vivek's last question actually. I know that you spoke to a sustained optimism on the software and processing side. But within the marketplace, it does, at least in the minds of a lot of investors seem to suggest that Aladdin picking up some momentum. And so -- and from what we hear it's not purely in the fixed income side, there's some equity -- decent sized equity managers who were considering the shift as well. When you think about how the progress is positioned in the marketplace, what adjustments are you looking to make in order to better position competitively and maybe recapture some of the solid momentum you've had previously?

Brennan, the -- we remain we remain pleased with the momentum that we have. And when we think about Charles River, there's 2 important elements of it. There's Charles River stand-alone as a front office software provider -- and then there's the Charles River as part of an integrated Alpha offering. And sometimes Charles River is completely integrated into Alpha, where it is the front and then we're doing the middle and the back and other elements of health. And sometimes as we said from the outset on Alpha, we were going to build this as an open architecture interoperable platform. So we are also the largest operator of the competing platforms, where it will be another front office platform, but we are there as the middle office provider and is the and as the back office provider.

And the growth there in all those segments continues to be strong. It's a it's a competitive marketplace. But when you look at where the business is going and who's gaining share. I mean the -- first of all, it's one of these very interesting markets where there's some third-party players, but you're also competing with the in-sourced option. And there's still a fair amount that's in source that's probably not viable over time, which will remain a source of growth. So competition is good. And we view ourselves as a very formidable competitor, and we'll continue to put investment into it.

Last thing I would point out is, going back to the point on wealth, we're a significant player on the wealth front end, and we're building that out. and now being able to partner that with what we've done on the well the custody side, we think creates some significant opportunities in some of the out years in terms of having an additional source of revenue from the well side where Charles River is the front end in the portfolio construction of these adviser platforms and the custody being provided by our wealth custody offering.

Great, thanks for the color, Ron. John, love to drill down on reinvestment rates. So could you speak to where the investment rates versus roll-off rates are? How much you're picking up? And doing the math on the deposit beta in the U.S. dollar, which is clearly your largest base of deposits running around maybe low to mid-70s depending year-over-year versus quarter-over-quarter. Is that what gets -- is the roll-off rates, what gets to the U.S. rate neutrality? Or do you think you're rate neutral even before we account for the roll-off benefit?

I think you put it all in when you basically say in the U.S., we're in the neighborhood of, call it, I think we've said this previously, but in the neighborhood of around $2 million per cut per quarter, so near neutral with respect to the Fed, that's encompassing all factors. In terms of the reinvestment roll-off and reinvestment, you can kind of see that in the neighborhood of approximately -- and this jumps around quarter-to-quarter and up, but -- but a rule of thumb, and again, to be clear, it can be a little higher, a little lower in any given quarter. But rule of thumb is we tend to get about [ $5 billion ] of cash flows that get reinvested round numbers at about call it, 75 to 100 basis point round trip where you're kind of maturing in the low 3s and being able to reinvest somewhere near high 3s or in the low 4s over the last couple of quarters. And so that's a pretty good rule of thumb in terms of that. That will continue for -- into the future and certainly through 2026.

More broadly, the terminated hedge that I mentioned earlier, that's not been in our run rates in terms of the benefit. That benefit will newly present itself in the fourth quarter. and will also be a tailwind into 2026. And so it's those 2 items, which are mostly not rate dependent that add to the other forces I mentioned, which is some strong spot deposit levels at the end of the third quarter that directionally continue to be above the averages for 3Q into 4Q quarter-to-date that really underpin a lot of the support for rising net interest margin and NII in 4Q. And we'll come back to you in January with an update about where all that comes together and shakes out for '26. But those are my thoughts on that question.

There are no further questions. I will turn the call over to management for closing remarks.

Thank you all for joining us.

Have a good day. I'm degree to reach out to Investor Relations with any questions. Thank you. Bye.

Next up, very pleased to have State Street with us. From the company, we have Joerg Ambrosius, who's President of Investment Services; and John Woods, who's Chief Financial Officer.

Given this is the first time we have both on stage in their current roles, so I'll just provide a little bit of background. I think you guys all know John, CFO of Citizens for almost 9 years and State Street for 12 days. So we're going to really pepper him. And Joerg became President of Investment Services, which is State Street's largest business last summer. Prior, he was Chief Commercial Officer with overall leadership of Investment Services, client-facing activities and responsible for its international organization. We have the first AR question -- ARS question on the screen.

Before I ask these guys a question, though, Liz asked nicely for me to read this. Just to remind our audience that today's discussion may contain some forward-looking statements, and actual results may differ materially from those statements due to a variety of important factors, including those risk factors in State Street's Form 10-K and other SEC filings. State Street's forward-looking statements speak only as of today and may not be updated even if views change.

So with all the administrative work out of the way, let's dive in. John will put you on the hot seat. Obviously, I just mentioned you're relatively new to the role. So I think maybe the best place to start is kind of what drew you to the company?

Yes. I appreciate that question. I've been getting that a lot recently. And I mean, I think coming out of my last role, I was part of a great transformation and growth story there. And so it was a good time to pass the baton and take on a new challenge. And man, what an exceptional and compelling opportunity State Street is. It's just -- so many exciting things happening at State Street and just a couple of things that I find really attractive.

The first is one of the oldest banks in the United States with all of the heritage of trust and stability that comes with that. The -- and global scale, talk about scale around the globe is a huge competitive advantage. I mean I think the second one that's interesting, even though oldest -- one of the oldest banks in the U.S., just a track record of tech-led innovation over time that continues today.

And we'll talk a little bit about that during our session here today. But I find that exceptionally interesting about all that heritage, but still driving tech-led innovation. And then maybe lastly, an incredible management team that's driving strategic growth out into the future. So put all that together, and it was just an exceptionally compelling opportunity when Ron reached out. So I'm glad to be here.

I appreciate it's early days, but you've known about this new role for a while. So just maybe share your thinking in terms of kind of initial priorities you're going to be focused on looking ahead and what you expect your key areas focus to be over the next few months?

Yes. As you mentioned, I'm halfway through the week 3 here. So it's -- where I'm really spending most of my time right now is really diving into understanding the operating model across all of the businesses at State Street and how it all comes together as One State Street. And that's really exciting. I'm very kind of energized about helping to support that and understand that and communicate that over time.

So that's most of what I'm doing. But I mean, that said, I have some thoughts about where I'll likely be spending my time going forward. And first and foremost, just delivering on the performance expectations for '25 and momentum heading into '26 is probably first one that comes to mind. I mean the second one would be really looking at the balance sheet to see if there are optimization opportunities. And what I'm thinking about there is just partnering with the rest of the executive committee to maximize all of the balance sheet resources to kind of put into client-facing activities.

And on the other hand, just trying to drive greater visibility and stability to NII over time kind of over the medium term. I think that would be number two. Number three, it should come as no surprise, really focused on productivity and efficiency. And there is a huge opportunity here to continue to drive additional resources to put to bear for client-facing and innovative pursuits. And so that's certainly a huge part of it.

And then lastly, and this is the exciting part, is just partnering on the strategic journey. There's so much opportunity at State Street, not just within United States are extremely attractive. We have a phenomenal position there. And so geographically is really exciting. And then lastly, I'd say the client and product road map that I'm partnering with Joerg and Yie-Hsin and the other business leaders on kind of some of the stuff you may have heard recently about wealth services, and Joerg will talk more about that with Apex and kind of what we're doing in the private capital space is just very exciting.

I mean that's the agenda, drive performance, manage the balance sheet and invest in strategic growth over time. And I couldn't be more energized to do all of that.

No, congrats. Joerg, maybe kind of shift gears to your world. And over the past year or so, we've actually seen pretty strong momentum building an investment services since you took over. Maybe just talk through some of the changes you've made to turn the trajectory of that business around?

Thanks, Jason. And as you mentioned at the start, I've been in this role now around about 1 year, and I'm actually very thrilled to be in this role. Before I took the role and you alluded to that as well, I had the Chief Commercial Officer role, and that is when we started to really pivot on various points and kind of reset the strategy a little bit for the Investment Services business.

I've been in the organization now for close to 25 years. So I would argue I know success factors in that business well. I have lived through a couple of cycles in that business. And that is all what we took into account when we did pivot a little bit the strategy setting for Investment Services. That represents more than 2/3 of State Street's overall business. And it actually combines the custody business, the traditional fund accounting fund services business. It also now includes the financing business that we kind of moved closer to the core business and to the clients. And it also more recently includes the front-to-back servicing, what you all know as the Alpha proposition that we are now bringing closer to the core business as we would argue, given the size that we have reached in the Alpha proposition, we have now the critical mass that this is more and more representing the core business that State Street provides.

So what did we concretely do to reimagine the Investment Services business and to get back on a growth trajectory. There have a couple of very concrete initiatives that we have executed over the last 2 years that are now showing, as you say, some really good results. So we restructured client service and relationship management with a clear lens through client centricity. So the core of what we do is centering around the large institutional investors in the world.

We have a very attractive book of clients and there's a lot of room that we have seen and we continue to see to grow with these clients. But in order to get there, you have to really earn the right to grow with these clients. And the way to do that is to make them very happy clients. And that's what client centricity does, and we have now organized the way and how we operate really around our clients. We have enhanced and increased our sales capacity, and that has yielded in very, very good trajectory on sales results.

We have announced in Q2 that we are very well on track for this year to deliver against our $350 million to $400 million sales target. Q2 alone was $145 million. This was just to put it into perspective, the same number of total sales that this organization generated in 2020. So we have seen a continuous momentum on the sales side, and we are very confident that this year, we will deliver against the range of $350 million to $400 million that we have announced.

And then lastly, obviously, the revenue has to brought to life. So it's not only winning the business, then you have to implement the business. And we have committed last year and also through this year that we are working very actively and aggressively to bring the backlog of business that we have won onto our books. So we are on target to deliver against this goal for 2025. Irrespective of that, the backlog is still growing. Why is it growing? Because we are winning a lot of new business. So we have reached actually a record high in Q2 on backlog of USD 444 million. So taking this all into account, we are very confident that we will continue on this growth trajectory.

Maybe as a follow-up, as you look to drive this kind of growth of organic servicing fee growth in the years ahead, maybe what metrics should investors focus on to track your progress?

So sales wins is clearly a good lead indicator for the revenue growth to come. The backlog that I just mentioned is another good indicator. So that is business that we already have been mandated and now will bring to work. So therefore, for the foreseeable future, we feel very good. There's a couple of trends that we are benefiting from. I would like to call out one specific one, and that is private markets. So private markets continuously to be a real growth driver for us.

So when we look at the Q2 numbers, we have seen year-over-year a 19% revenue increase. The private markets servicing business as per today represents 10% of our overall fee revenue, but we expect that this is a real great opportunity for growth. We have the critical mass in that business.

We have partnered with various of the leading organizations in that space. And when you see on where the flows in that business go, you will see that this industry is more and more consolidating. So the winners get an overproportional share of new flows, and we have a very large presence with these leading organizations in the private market space. So that is an area or a long-term trend where we will definitely see continuous dynamics, positive dynamics for our revenue generation.

Helpful. Maybe shift gears to the operating environment. We can put up the next ARS question. I won't ask about this yet. John, you're new to State Street, but not new to the CFO, so I got to keep you on the hot seat. As we approach the end of the third quarter, just how are you thinking about the macro backdrop and the operating environment broadly for the rest of 2025?

Well, lots to comment on there. I mean, I guess I'd start off with when you look at some of the uncertainties that have been building, the unemployment picture has been weakening, right? I mean, whether on a nominal jobs print or this kind of breathlessly high revision number, which we're still trying to figure out the impacts of, that's worrisome.

Inflation is still above target. The fiscal picture isn't great. National debt is still kind of growing to levels that are not exceptionally comfortable. And you say, okay, well, against all of that, what are the opposing forces? And I'd say, well, inflation expectations seem to be under control. And we have maybe the Fed put here in play. That will happen next week. And by all accounts, it appears we're going to get at least one cut. You put all that together and out the window, we see a risk on environment. You've got the equity sitting at all-time highs. You got the corporate bond market at really tight and spreads are exceptionally tight. I think volatility actually fell today, which is really something that is really incredible to see to just give you a sense for that risk on environment and some correlations.

So I mean, I think what we're thinking about for the rest of '25 is that equities basically range bound and we will hang in there. I mean I think you've got the Fed teed up with 3 cuts. I think the bond market does. Our PPI print this morning isn't going to make that any less likely. Some conversation about whether it's 25 or 50 next week, not sure it matters. But -- and I'm also not sure we get all three cuts, but maybe CPI will inform us tomorrow. But nevertheless, we're going to get some Fed cuts here, which is a tailwind.

And so that's in part why we think equities are range bound for the rest of the year at all-time highs. I talked about the rates market. We do think volatility, notwithstanding the drop in volatility today, that volatility likely picks up modestly given all these uncertainties, and that tends to be a tailwind to our markets business. So we think about that. And that's the U.S. picture. I mean, I think broadly, there's some more rate stability likely outside the U.S. with the ECB and the Bank of England. Maybe valuation is not quite as lofty. But then, I mean, I think overpinning all of this is the binary situation with the geopolitical situation that seems to be unfolding in the last 24 hours. So absent geopolitical, our outlook is for a pretty benign and positive operating environment for the rest of '25.

Helpful. And I guess, against that backdrop, in July, the company talked about updated guidance for 2025 on the back of a solid quarter and improved market backdrop kind of nearing the end of the third quarter. Any updates you want to share?

Yes. I think -- so my commentary, I would focus on the year, year-over-year sort of views. And 2025 is shaping up very nicely, kind of just going down some of the key drivers. On the fee revenue side of things, I think we had a 5% to 7% guide out there. I think we now see that coming in at or slightly above the upper end of that range for 2025. That is driven by markets and FX. But importantly, it's driven by core business momentum across all of our business lines as well, which is very exciting to see.

NII, I think we would position that as roughly flat. The variability there is driven primarily by deposit levels and mix. There are some seasonal tailwinds that we tend to see heading into the fourth quarter, and we'll see how that plays out. And of course, the rate environment, although we don't have significant exposure to rates, we're mostly neutral here in the U.S. and more asset sensitive outside the U.S., but that also happens to be where we think the rate environment is a bit more steady.

So I'd say deposit levels and mix are the main source of variability on the roughly flat for NII. Expenses, we'll see coming in at the upper end of that 3% to 4% range, mainly driven by client-facing investments and tech investments. So that's something that we think about in terms of investing for the future. And then you pull it all together, it's very pleasing to be able to talk about not only fee operating leverage, but total operating leverage, which is what we expect for 2025. So that's how I'd comment on the year.

Helpful. Helpful. Joerg, maybe taking a step back, State Street has emphasized the importance of simplifying its operating model and just aligning it more closely with client needs. Just maybe walk us through how you're approaching that transformation, what progress has made so far from your vantage point? And just how you're measuring success as these efforts take shape?

Yes. Actually, it's a very relevant subject for our business as asset servicing is end of the day, a scale business. And once you operate at scale and have the critical mass across all your businesses, which we clearly have today, then you are really in the position to optimize the way and how you operate that business. Where are we today on our journey?

This is in line with what we have spoken about a lot over the last couple of years. And I would call out 3 concrete drivers. So first, simplifying operations and simplifying the organization. The second is reengineering and automization of the processes. And then third, optimizing our resources to eliminate any inefficiencies or redundancies that we have across the broader franchise. And that is actually something where we have had a lot of focus over the more recent past that we are looking really across end-to-end franchise, end-to-end processes. And the end-to-end processes doesn't stop at our border. It then includes co-creation, co-collaboration with clients to really eliminate the operational deficiencies that exist.

So when you look at the financial results that we have generated against these 3 pillars, assuming that we will deliver against our goal that we have given ourselves for this year, we are talking a cumulative amount of $1.3 billion productivity gain that we have generated over a 3 years period. And these are reoccurring and sustainable productivity gains. So we have really eliminated expense.

So we feel very good about this. But to John's point, at the beginning, there's much more opportunity that we see that we will be able to capitalize on in the years to come. So this is going to be a continuous focus of the organization. And we obviously will take advantage of the development of what we see as a very effective tool to do that, and that is the deployment of AI.

I guess you brought up, so maybe we'll go there. On AI, definitely, I think, an exciting potential benefit for the financial services industry. Maybe just share a bit more how State Street is currently applying AI. And looking ahead, just where you see the greatest potential opportunities in investment services.

So as I said, we see AI as a tool. And that tool obviously is developing. So we have been making usage of that tool for a long, long time, primarily in the machine learning space, where we have very effectively brought machine learning to life in very operational functions like reconciliations, where we were able to really bring a lot of effectiveness into the reconciliation space by deploying machine learning.

The other concrete example that I'd like to point out is fund accounting. So we have found ways in the fund accounting space to predict breaches, to predict deviations. And that allows then the fund accountant operating with this tool to operate far more efficiently. So what does it concretely mean? A fund accountant that was able to process, let's say, 7 or 8 funds is now by deploying that tool in a position to operate a much larger amount of funds because he's more operating on an exception basis and an oversight function as the machine is taking various tasks away and operates these in a very effective and also risk-controlled fashion.

When we now look ahead, what is next, then we are definitely going more and more also in the space of agentic AI. So that is something that we believe will have a real impact on the financial industry more broadly, but specifically our business. And that is something that we will ramp up over the years to come. What I'd like to point out here is something that is really close to our heart. While we continue to scale the positive impact of AI, it is very important to note that we are committed to doing this responsibly and ethically.

So we made significant investment over the last 2 years to establish a new responsible AI framework for the firm, including technology investments to centralize and deploy safeguards and controls for the responsible use of AI. So that was clearly an investment that we felt we have to make to really now ramp up this at scale. And the last point I'd like to make, we are also obviously now making usage of AI broader in the organization where we did roll out to the majority of the population, Microsoft Copilot. So that is obviously something that I would say is becoming more and more industry standard, but this is something where we are also now feel very well equipped to really get to the next level.

Maybe just to jump in and emphasize and those are important points. I would just emphasize that the productivity journey that we're excited about certainly includes AI and down the line, the opportunities in agentic. And separately, it's inevitable that organizations that have been built up both in terms of how they're structured and how processes and ways of working have all evolved over time with human intelligence as really the driver.

Now that there's artificial intelligence, a re-architecting of all of that is inevitable. And we're excited about that given all of the efficiencies that will come. But I would say that it is -- our productivity journey is not restricted to or solely dependent upon the AI journey. There are -- there's a zero-based mindset that we're espousing where we're going to -- we have significant opportunity with automation of manual processes and a number of other levers to pull that are just short of AI that I wanted to emphasize in the near term, there's going to be huge opportunity outside of AI. And then, of course, we're going to be well positioned for the AI journey as well.

I guess another hot topic is just digital assets. And just maybe, Joerg, I'd love to get your perspective in just terms of how State Street preparing to service digital assets? What services do you provide? And just what capabilities do you need to provide or looking to build out and grow in terms of just how you think about this in relation to services fees?

Yes. So this is something that we have been engaged with for a long, long time. But now obviously, after the signing of the Genius Act in the last quarter, we have, I would say, a different environment where we have more regulatory certainty in that area. And when you look at our digital strategy or digital asset strategy to be precise, we have 3 key factors. Digital asset custody is clearly something where we will be an active participant in creating the ecosystem of the future. Second is that we provide accounting and fund administrative services for products like crypto ETFs. So that is something that we are actively already doing.

And then let me end with the tokenization of funds, assets and cash. And you might have seen a great example of that is an announcement that we made in late August, where we announced that we as the first third-party custodian connected with JPMorgan's digital asset platform. So that milestone reflects a deep collaboration between the Investment Management and Investment Services divisions of our organization supporting Landmark Digital corporate debt issuance.

So this is one concrete example on how this comes to life. We expect much more in that space. What we also expect, though, is that our clients will come to us and say, we want a one-stop shop. So there is the existing world of assets and there will be the digital world of assets. And our role is going to be to be a bridge for investors that are operating in both worlds. We believe that both worlds will exist for a long, long time. So the reality is not going to be that we will all switch now to tokens within 2 years. So we will have to operate in these two worlds, and we have to make sure, and that is going to be our role that clients will have the ability to look at their assets in a consolidated fashion. And that is one of the values that we bring to the table.

So we feel actually excited about this. Last point on that, I mentioned financial ecosystem. The reality most likely will be that we have various ecosystems around the globe because regulation is moving in at a different pace, but coming back to the one-stop shop, clients will expect from us that we can support them in these different ecosystems that are -- will be established around the globe.

Interesting. Maybe we can kind of delve into maybe stablecoins for a second. Just curious how State Street is viewing the opportunity set around stablecoins. Is that an area you're looking to kind of expand your servicing capabilities? And just maybe talk to any risk threats for State Street associated with stablecoins.

So what I said before, stablecoins for us is definitely going to be a key element of the future financial ecosystem. And we are already supporting stablecoins in various forms. For us, that will be -- become a, let's say, core service that we provide. But what I said before is also true for the stablecoin world. Stablecoins might have a different flavor around the globe. So we have just seen the establishment of the first euro stablecoin that only happened last quarter.

So we are also moving in that area at a different pace in different parts of the world. Our ambition is to support our clients in that context on a global basis. So we are active in that, obviously, here in the U.S. We are active in that in Europe. And we also are very closely monitoring and are very engaged with key market participants in APAC. I don't know, John, if you want to add something from a risk perspective.

Yes. I mean, I would say that we're very well positioned for the stablecoin kind of emerging trend. Just a few maybe zooming out general comments. I think that the point that Joerg made about being a trusted provider for clients that want to seamlessly move between fiat and stablecoin and crypto, we're very well positioned to be able to play that role. So I think that's the first one I'd throw out there.

The second one, there's no question this is going to be a disruptive trend. It already is. The question is what revenue pools are going to be disrupted and what revenue pools are going to be created. I think we're well positioned to be part of the revenue pools that are going to be created. And we have maybe a lower footprint in those that are going to be disruptive. So if there's a new payments ecosystem around the world and you happen to be a huge payments provider and you have big revenue pools there, this is a shot across the bow there, and we are less exposed to those kinds of things.

And I think that the industry as a whole has been challenged in the past. I mean -- and we're related to this with the money market. Money market fund itself was a huge disruption to the banking industry back in the '70s. And we innovated as an industry to respond. This is a disruptive force that I think the industry will respond to, but I think will respond exceptionally well given our history of innovation and focus and capabilities, as Joerg mentioned, and I kind of summarized there.

Got it. And maybe, Joerg, just coming back to your businesses beyond digital assets from your vantage point, what do you see the most compelling opportunities in investment services?

So when we look ahead, private markets, I talked about that is going to be one key driver of growth for us. Another key driver of growth is the continuous success that we have on our Alpha front-to-back platform. So I mentioned that we are bringing this much, much closer now into the investment servicing business. The beauty of that business is that it really creates a very different dynamics between us and our clients because you will become basically the franchise outsource. So you will basically become an ecosystem for the clients that are partnering up with you. And there's a lot of upside potential for us with the organizations that we have signed up in that space. So we are making very, very good progress.

On the back of this Alpha proposition, there's obviously software revenue that we are growing, and we have been very well underway against our commitments that we made to the Street in that regard. So we feel very good about that trajectory. We are on target to deliver against our goals for 2025 on the Alpha journey. And that is something that over the years to come, again, will allow us to deepen the wallet that we have with leading organizations in the financial market that have selected us as their strategic partner of choice.

And just maybe for State Street more broadly in the near to medium term, and just how you're thinking about the One State Street opportunity?

So that is obviously a term that is being frequently used in the industry right now.

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I would argue that this is something that we started to actually implement and live with that mindset because this is a cultural and the mindset change 2 years ago. So when I took the Chief Commercial Officer role, that was part of the goal to really drive a different way of operating, drive a different way on how we define success, how do we look at client relationships. And when we look at client relationships today, this is a muscle that the organization has really developed well.

We always put the franchise first. So what does that mean for State Street as a whole? What can we, as a franchise really bring to the benefit of our clients. And we always put the client first. It is a real client-centric way of thinking and then also acting. And the organization has come a long way. It really also helped us to overcome silos because the key criteria for us is this actually a good action or not a good action is does it benefit the client? And does it benefit State Street as a franchise. That is clearly the way on how we look at commercial decisions, investment decisions. And I feel that I have a very good partner in that with John. So after the initial conversations that we had, it looks like that we are very much on the same page.

100%. Yes, all in. I mean I think the synergies across all of our businesses is really the excitement that State Street delivers. Each one of the businesses on their own are just fantastic franchises. And you put them together, the sum of the parts exceeds the whole, and that's an exciting place to be.

Okay. We have about 4 minutes left. I want to make sure I talk about inorganic growth opportunities. So I have 2-parter. First part, you mentioned earlier the partnership with Apex you just announced. Maybe just talk about the strategic rationale for that partnership and just how does that help with growth?

So you have heard us for a while speaking about the opportunity that we see in the wealth space. And we have been very clear about our ambition to enter the wealth servicing business. So when we were looking at the strategic options that we have, as you always have, so you can either build something, you can partner with someone or you can acquire. And in that exercise, we really analyzed the market in depth, and we got to know Apex, and we were really, really excited about the opportunity that a combination of State Street and Apex brings to the market.

We were especially impressed by the technology that Apex brings to the table. And you will definitely hear more about this in the months to come, but we are really, really excited about that opportunity. And it is a great example where we use M&A as a tool to deliver against our strategic goals.