State Street Corp

NYSE:STT

Earnings Call Analysis

State Street's Consistent Growth and Strategic Transformation

State Street reported solid financial results with a 3% year-over-year revenue growth in Q2. The company displayed strong fee revenue performance, supported by 6% growth in net interest income. Expense management was effective, with less than 3% year-over-year increase. The firm's pretax margin was nearly 29%, and return on equity stood at 12%. State Street's Alpha initiative secured significant new client mandates, contributing to revenue growth. The company also announced a 10% dividend increase, reflecting strong capital returns and a positive outlook. Full-year guidance was revised upwards, anticipating fee revenue growth of 4-5% and net interest income to be slightly up year-over-year.

Strong Financial Performance

In the second quarter, the company reported earnings per share (EPS) of $2.15, slightly down from $2.17 a year ago. Despite this small dip, overall revenue grew by 3% year-over-year, boosted by a 6% rise in net interest income and a 2% increase in fee revenues. The company's disciplined cost management resulted in a less than 3% increase in total expenses. This demonstrated the robust nature of the business and its capacity to generate continuous growth.

Record Levels in Assets Under Management

Assets under custody and administration (AUC/A) and assets under management (AUM) reached record levels by the end of the period, driven by favorable market conditions. Notably, client volumes in FX trading platforms improved despite a challenging trading environment. This indicates strong engagement and growing trust from clients, positioning the company for continued success.

Impact on Servicing Fees

Servicing fees saw a 2% decline year-over-year due to price competition and lower client activities, which were partially offset by higher average equity market levels and new business. Despite these challenges, the company generated $72 million in servicing fee revenue wins in the second quarter and over $330 million in the last four quarters. This reflects the company's strategic focus on faster-installing custody mandates and positions it well for future growth.

Growth in Management Fees

Management fees experienced an 11% year-over-year increase, primarily driven by higher market levels and previous net inflows. Although sequential growth was offset by lower performance fees, the investment management business boasted a healthy pretax margin of 32%. The company also launched new funds and expanded its product range and geographical footprint, underscoring its commitment to growth in the Global Advisors segment.

Increased Client Activity and Revenue Wins

There was a positive uptick in client activity within the markets business, especially in FX trading, which grew by 11% year-over-year. Additionally, the second quarter saw significant wins in asset servicing, with $291 billion in AUC/A added, including over $200 billion from back-office custody mandates. These metrics highlight the company's successful execution of its strategic priorities and robust pipeline for future growth.

Enhanced Capital Returns

The company remains committed to returning capital to shareholders, evident in the planned 10% increase in the quarterly common stock dividend to $0.76 per share. A strong balance sheet allowed for over $400 million in capital returns in the second quarter and more than $700 million year-to-date. This commitment ensures that shareholders benefit directly from the company's solid performance and strategic initiatives.

Optimism Returning

Looking ahead, the company expects further operational leverage and revenue growth, targeting both fee and total operating leverage for the full year. Anticipated positive developments include onboarding new sales and enhanced servicing fees. The outlook remains favorable with projected fee revenue growth of 4% to 5% and a slight increase in net interest income for the year.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and welcome to State Street Corporation's Second Quarter 2024 Earnings Conference Call and Webcast. 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 or rebroadcast or distribution in whole or in part without the express 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 introduce Liz Lynn, Global Head of Investor Relations at State Street.

[Elizabeth Lynn, executive]

Good morning, and thank you all for joining us. On our call today, our CEO, Ron O’Hanley, will speak first; then Eric Aboaf, our CFO, will take you through our second quarter 2024 earnings presentation, which is available for download on 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 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 factors in our discussion today and in our SEC filings, including the Risk Factors section of 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.

Now let me turn it over to Ron.

[Ronald O’Hanley, executive]

Thank you, Liz, and good morning, everyone. Before we begin today's discussion, I want to acknowledge the assassination attempt on former President Trump. It was a horrible active violence that has no place in our democracy and must be condemned. We are relieved the former President was not seriously harmed, and we are saddened by the tragic loss of innocent life and injury that resulted from this senseless action. Each victim was a participant in our democratic process, which makes this an act -- which makes this act in a front to all. We extend our thoughts and condolences to all those impacted. At this time, we hope for unity and respect in our country. Disagreement can and must sit along civility and a commitment to an even better America.

Now turning to the second quarter. Earlier today, we released our financial results, which represented sustained momentum as we delivered good year-over-year fee and total revenue growth in both 2Q and for the first half of the year, along with continued expense discipline. This resulted in modest positive total operating leverage, pretax margin of almost 29%, and a return on equity of nearly 12% in the quarter. We also continue to take important steps in the transformation and simplification of our operating model as we successfully consolidated our second operations joint venture in India in the quarter. These actions will enable State Street to continue to improve client experience and will unlock further productivity savings in the years ahead.

In May, the transition to T+1 settlement was a significant event for global investors. Importantly, it presented State Street with an opportunity to demonstrate our position as an essential partner to our clients. Our role in successfully assisting clients through this transition reinforced our value to clients and underscore the depth of our operational capabilities. The financial market context in 2Q was mixed, while daily average global equity market levels continued to move higher and equity markets again reached new all-time highs in the second quarter, gains continue to be narrowly concentrated in a few names. Meanwhile, fixed income markets struggled in 2Q as geopolitical risk continued, economic data generally remained robust and investors priced in more gradual cycle of rate cuts, even as the ECB delivered its first rate cuts since the pandemic. Through this market backdrop, we remain focused and successfully executed against our key strategic priorities.

Turning to Slide 2 of our investor presentation, I will review our 2Q highlights before Eric takes you through the quarter in more detail. Beginning with our financial performance. Second quarter EPS was $2.15 as compared to $2.17 in the year ago period. The durable nature of our business was evident in the quarter as year-over-year strength in management fees, FX trading and NII more than offset a previously disclosed client transition that negatively impacted servicing fee revenues, helping to drive revenue growth of 3%. We also remain focused on tightly managing our cost base while continuing to make investments in our businesses, 2Q total expenses increased by less than 3% year-over-year, supported by our ongoing productivity efforts.

Turning to our business momentum. While you can see -- which you can see in the middle of the page, we continue to execute well against our strategy, making progress in a number of key areas aimed at generating further fee revenue growth, which gives us confidence in our positioning as we look ahead. Within asset services, we generated AUC/A wins of $291 billion, which was well distributed regionally and included more than $200 billion of faster to install back-office custody in line with our targeted sales strategy.

Encouragingly, roughly 1/4 of the AUC/A wins this quarter came from an Alpha mandate in the APAC region. The win is a large new client for State Street, covering a broad set of our services, including the back office. This mandate is another proof point that Alpha is an attractive client value proposition globally. Alpha creates a clear competitive advantage for State Street that strategically positions us to deepen existing client relationship and as demonstrated this quarter, win new long-term client relationships in turn, helping to drive future growth. This ongoing new business performance, coupled with an anticipated increase in installations positions us well for future servicing fee growth.

Servicing fee revenue wins amounted to $72 million, up from $67 million in the first quarter. This is the fourth quarter in a row of strong servicing fee revenue wins totaling over $330 million over the last 12 months. Our pipeline is strong, and we remain confident in our ability to achieve our increased servicing fee revenue sales goal of $350 million to $400 million this year.

At Global Advisors, buoyed by higher average equity markets, 2Q management fees were $511 million, an increase of 11% year-over-year, with AUM reaching a record $4.4 trillion at quarter end. While GA experienced aggregate net outflows in the quarter, it was largely driven by a limited number of client rebalancings.

Encouragingly, we continue to make progress in a number of key strategic focus areas. For example, total net ETF inflows amounted to $6 billion, benefited from continued market share expansion in U.S. low-cost equity ETFs. Regionally, we also saw SPDR gain market share in EMEA. Elsewhere, Global Advisors announced the planned strategic investment in Envestnet, a leading provider of integrated technology, data and wealth solutions. This investment, consistent with State Street's wealth services strategy, will enhance Global Advisors' access to the independent wealth advisory and high net worth distribution channels driving future growth.

NII performance was strong driven by a number of targeted management actions over the last year to support NII growth. These include increased engagement with our clients to offer them financing and cash solutions resulting in higher deposit, loan and sponsored repo balances, while we also carefully expanded our investment portfolio in 2Q. These actions have contributed to 3 quarters in a row of sequential NII and revenue growth as well as positive total operating leverage in 2Q.

Our balance sheet remains strong, enabling over $400 million of capital return in the second quarter and over $700 million year-to-date. Our financial strength was evident with the release of the Federal Reserve's annual stress test results in June. Subsequently and consistent with our commitment to return capital to our shareholders, we were pleased to announce our intention to increase State Street's quarterly common stock dividend by 10% to $0.76 per share beginning in the third quarter, subject to approval by our Board of Directors. As we look ahead, we remain committed to returning excess capital to our shareholders this year, subject to market conditions and other factors.

To conclude, our strong start to the year continued in the second quarter. We delivered both fee and total revenue growth, which supported a modest total operating leverage year-over-year and a return on equity of nearly 12% in the quarter, all while continuing to make significant investments in our business, controlling expenses and returning capital to our shareholders. I am pleased with the progress we are making to drive better business momentum and sales performance as we execute against the sharpened revenue strategy. We recorded another Alpha mandate win in the quarter, which demonstrated the clear advantage that strategy brings to our organization by delivering a large and completely new client relationship to State Street.

We already have good line of sight into 3Q and remain confident in our ability to deliver on our goals of 6 to 8 new Alpha clients and $350 million to $400 million of servicing fee revenue wins this year.

And with that, let me hand the call over to Eric, who will take you through the quarter in more detail.

[Eric Aboaf, executive]

Thank you, Ron, and good morning, everyone. Starting on Slide 3, we reported EPS of $2.15 for the quarter as compared to $2.17 in the second quarter a year ago. EPS was slightly lower year-on-year, but would have been positive growth were it not for an $18 million reserve release last year. As Ron noted, we delivered 3% revenue growth year-over-year, reflecting both higher net interest income, up 6% as well as higher fee revenues, up 2%, which supported modestly positive total operating leverage in the quarter. The second quarter's strong performance contributed to an encouraging first half of the year with both positive fee and positive total operating leverage on a year-to-date basis, excluding notable items relative to the prior year period.

Turning now to Slide 4. Period end AUC/A and AUM again increased to record levels, largely supported by market tailwinds. As you can see on the right panel of the slide, market indicators related to our trading business remained challenging in the quarter, but we were pleased to see improved client volumes across our FX trading venues, which I will discuss shortly.

Turning to Slide 5. Servicing fees declined 2% year-on-year as higher average equity market levels and net new business, excluding our previously disclosed client transition, were more than offset by pricing headwinds and lower client activity and adjustments, including the asset mix shift into lower earning cash and cash equivalents. The impact of the previously disclosed client transition was a headwind of approximately 2 percentage points to year-on-year growth, while lower client activity and adjustments, including the asset mix shift into cash was a headwind of approximately 1 percentage point on year-on-year growth.

In addition, we saw the pace of quarterly installations track below expectations in 1Q and 2Q. We do, however, anticipate a pickup over the next few quarters as our higher level of recent sales begin to onboard. Sequentially, servicing fees were up 1%, reflecting higher average equity market levels and client activity as transaction volumes tick back up, and we saw clients start to put cash back to work. We generated $72 million of servicing fee revenue wins in 2Q and more than $330 million over the last 4 quarters with the vast majority in back office, consistent with our strategy to prioritize faster installing custody mandates. At period end, we had $276 million of servicing fee revenues to be installed and $2.4 trillion of AUC/A to be installed.

Moving to Slide 6. Management fees were up 11% year-on-year, primarily reflecting our higher average market levels and net inflows from prior periods, partially offset by the impacts of our strategic ETF repricing initiative, which we believe is starting to pay off in both volumes and revenues. Sequentially, the benefit of higher average market levels was offset by net flows and lower performance fees. We are pleased with the steady growth we are delivering in Global Advisors. In the second quarter, we continue to expand the breadth of our offerings through the launch of new funds as we continue to broaden our product range and geographies. Our investment management business had healthy pretax margin of 32% in the second quarter, up 3 percentage points year-on-year, and up 8 percentage points quarter-on-quarter.

Now turning to Slide 7. As I noted, we saw a very nice uptick in client activity in our markets business with higher volumes across our major FX venues. This helped to drive FX trading revenue growth of 11% year-on-year, though volatility remain needed with compressed margin.

Securities finance revenues also benefit from higher balances on both agency lending and prime services. However, our U.S. specials activity was subdued in the quarter, which impacted margins and contributed to the year-on-year decline in securities finance revenues.

Moving to software and processing fees. Second quarter performance continued to benefit from strong client engagement with CRD, though the cadence of on-premise renewals negatively impacted year-on-year performance, which is shown in greater detail on the following slides.

On Slide 8, as you can see, software-enabled and professional services revenues increased 17% in the quarter, and we expect these revenues to represent a greater proportion of our front office software and data business over time as we transition another 20 clients from on-premise to more durable SaaS model over the last year. As we outlined in May, we believe our software business can be a significant revenue growth driver for State Street, potentially reaching $1 billion in annual revenues over the next 5 years. In addition, we are pleased with the continued momentum we're seeing in Alpha. We reported an additional Alpha mandate win, and 2 mandates went live in 2Q, bringing the total number of live mandates to 23 at quarter end. As Ron mentioned, this quarter's Alpha win represents a brand-new 10-year relationship with a large APAC client. We view long-term Alpha mandates like this are a key benefit of our differentiated Alpha strategy.

Turning to Slide 9. NII was stronger than expected this quarter, up 6% year-on-year and up 3% sequentially to $735 million as higher investment portfolio yields and higher loan growth more than offset continued deposit mix shift in both periods. In addition, on a quarter-on-quarter basis, we proactively increased our investment portfolio balances at higher yields, which benefited NII. Looking at the strong quarterly performance relative to our expectations in early June, we did see an inflow of valuable noninterest-bearing deposits in mid-June and again in late June as clients geared up for the holiday weekend, although I would note that we did see some reversal during the first week of July.

Similarly, NII also benefited from higher interest-bearing balances due to our client engagement efforts as well as better spreads in volumes within our sponsored repo business as more clients join the program. Average deposits increased 7% year-on-year and 1% quarter-on-quarter. We would expect to continue to operate at this higher level of deposit balances as we look to the back half of the year.

Turning to Slide 10. Year-on-year expense growth was contained to less than 3%. In the second quarter, we continued to invest in the business while also delivering productivity benefits in 2 key areas. The first is associated with our decision to consolidate 2 operations joint ventures in India late last year in this quarter. The year-on-year savings associated with these 2 JV consolidations are approximately $20 million in the quarter, excluding integration costs.

Second, we benefited from our ongoing organizational process improvements and initiatives, including streamlining and delayering staff functions to increase our management span of control, which enabled us to lower our headcount on a pro forma basis, including the JVs by 5 percentage points year-on-year as detailed on the bottom left of the slide. Together, these actions helped to drive down compensation and benefit costs by 2% year-on-year in the second quarter and facilitate our ability to reinvest in our franchise. The combination of the JV consolidations, along with our ongoing initiatives, serves as a catalyst and importantly, gives us confidence as we continue to deliver on our strategy to simplify our global operating model with meaningful benefits expected to build over time, including more productivity saves as well as an ability to better serve our clients and invest for the future.

Moving to Slide 11. As you can see, our capital levels remain strong and comfortably above the regulatory minimums. As of quarter end, our standardized CET1 ratio of 11.2% was slightly higher from the prior quarter as capital generated from earnings was partially offset by continued dividends and share repurchases as well as higher RWAs as we support our clients which in turn drove higher fees and NII. We returned over $300 million in the first quarter to shareholders followed by $400 million through common share repurchases and dividends in the second quarter as we have tried to strike the right balance between our capital return goals and the support of our clients.

Looking ahead to the back half of the year, we have announced a planned 10% per share quarterly common dividend increase on the heels of a strong performance under this year's CCAR starting in 3Q and subject to Board approval. In addition, our intention is to accelerate the pace of quarterly buybacks relative to the first half of the year. However, given the more modest level of repurchase activity so far this year, the full year payout ratio for 2024 will likely be closer to the 80% to 90% range in line with our medium-term targets.

In summary, we are pleased with our second quarter and first half results, which demonstrate our ability to execute against our strategy to drive sustained business momentum while delivering positive total operating leverage, excluding notable items.

With that, let me cover our improved full year outlook, which I would highlight continues to have the potential for variability given the uncertain economic and political environment we're operating in. In terms of our current macro assumptions, as we stand here today, we are assuming global equity markets are flat to second quarter end for the remainder of the year. Our rate outlook broadly aligns with the current forward curve as of quarter end, while we expect both FX market volatility and specials to remain muted. Given our strong start to the year and higher average market levels, we now expect that total fee revenue will likely be in the range of up 4% to 5% on a full year basis, somewhat better than our prior expectations for roughly 4% year-on-year growth.

Turning to NII. Given our 2Q performance along with the continued benefit of management actions we have taken to support NII growth this year, we now expect full year NII will be up slightly year-over-year, which is also better than our previous guide of down roughly 5% on a full year basis.

Finally, given these improved top line expectations, full year expenses are likely to be somewhat higher than our prior outlook of up 2.5% this year. We now expect expenses, excluding notable items, to be up about 3% this year given the expected revenue-related costs. Importantly, given this improved outlook, we now expect to deliver both positive fee operating leverage and positive total operating leverage for the full year excluding notable items.

And with that, let me hand the call back to Ron.

[Ronald O’Hanley, executive]

Thank you, Eric. Operator, we can open it up for questions.

[Operator]

[Operator Instructions] Please limit yourself to one question and one follow-up before rejoining the queue.

[Operator Instructions] Your first question comes from Glenn Schorr with Evercore ISI.

[Glenn Schorr, analyst]

Question on Global Advisors. You had some institutional led outflows in the last 2 quarters despite the strong markets. I'm just curious how much of that is a function of rebalancing? And are we supposed to expect more going forward given the strong equity markets and are you seeing similar trends in your custody base?

[Ronald O’Hanley, executive]

Glenn, it's Ron. You have it correct there. The most of it, the vast majority of it is around client rebalancing. In one case, an extremely large client that's rebalancing away from certain asset classes. So it's idiosyncratic. We don't expect it to continue and we feel very comfortable with the trajectory that Global Advisors is on, both in the institutional business and in the ETF business.

[Glenn Schorr, analyst]

Okay. Ron, while we have you. There has been several articles over the last year or so talking about a certain European bank potentially selling their servicing platform. You've been linked to it. As you said, you've been great in consolidating things in the past. So I'm not asking to comment on that. I am asking, as some shareholders just prefer buybacks, which you might think is near-term, I'm curious on your thoughts conceptually on how you approach these things if there were any lessons learned from the Brown Brothers Harriman saga and just conceptually how you're thinking about any consolidation opportunities in services?

[Ronald O’Hanley, executive]

Yes. So Glenn, I mean, we've been pretty consistent about this. We have a very, very strong market position. Now some of that in the past has been built by M&A. If you go back to the 2000s. But if you think about where we are now, it's very strong. And the vast majority of our activity is around organic build-out of our business. Some of that just in terms of focusing on clients within geographies and some of that focused on building capabilities and extending them to other geographies. That is by far the -- what our focus is.

To the extent -- and I've said this in the past, I mean, M&A is not a strategy, but it can help us to effectively implement our strategy and it is superior to -- it passes the test of being superior to a return of capital to shareholders, then we'll consider it. But our focus is on building out organically, returning capital to shareholders at a reasonable pace and continuing to excel at what we do.

[Operator]

Your next question comes from Ken Usdin with Jefferies.

[Kenneth Usdin, analyst]

So great result on the NII, and we heard the updated outlook were slightly up this year now. Eric, just wondering if that would still imply a lower second half versus this really strong second quarter? And I know there's a lot of uncertainty still out there in the environment. So can you just help us think through what are you contemplating in terms of how deposits track from here? And what caveats should we continue to think in mind if, in fact, there is still a second half that comes off of the second quarter real strength?

[Eric Aboaf, executive]

Ken, it's Eric. As you said, we're pleased with the second quarter results on NII. Some of that is the interest rate environment. But good portion of that is the management actions we've been taking in terms of engaging with our clients and deposits and really being there for them on both sides of the balance sheet as we lend and support their growth as well. This quarter was particularly strong. We had a nice tailwind from long-term rates. During the quarter, that helped. You saw us build out our investment portfolio a little more. Deposits ticked up second half of June and towards the end, especially in noninterest-bearing.

But what I find pleasing is that deposits are coming in stronger across the, what I'll call, the pricing stack, the transactional deposits, the exception price deposits and the initiatives. So across the spectrum. And that's really a testament to the engagement that we've had with our clients to be there. I think as we look forward into the third quarter and fourth quarter, we still see some of the headwinds and tailwinds that we've talked about. Short-term rates seem like they will start to trend down. That will be a little bit of a headwind. Deposits. We're still seeing some of that rotation from noninterest-bearing to interest-bearing that, now that is slowing -- that was -- that rotated out about $2 billion this past quarter, and that's been less than the prior quarters, but that still continues and still a little bit of pricing and mix shift that we're seeing in the interest-bearing deposit base. So that, that we see is just playing out through the end of the year, but at a more modest pace.

The offset to that are mix of long-term rates, the lending that we continue to do, lending is up double digits, and that's been purposeful to support our clients and to support NII and then tactically adjusting the investment portfolio. And so it's the net of those that probably will come in with some erosion over the next couple of quarters. But we're seeing a place where deposits are -- could come in at a nice and robust level on our balance sheet, lending continues. And so we're getting to a point where we're going to start to see, I think, an inflection of NII and a bottoming, which is nice. And we can see that over the next few quarters. Hard to tell exactly when, but with the headwinds and tailwinds kind of, I'll say, equalizing over time, it gives us a good basis to look forward.

[Kenneth Usdin, analyst]

Okay. Got it. And then one, Ron, one question. You mentioned that you think that the kind of core fees growth should get better from here. And I just wanted to ask you to deepen on that a little bit. I mean, I know that you mentioned the onboardings and such, but we still have that deconversion working against, and you mentioned the episodic stuff and the ETF stuff. But like I think that's really people are looking for on the increment. So is that what drives that incrementally better fee guide for the second half is that we're finally going to see like those -- that servicing and management fee line start to show a better rate of change?

[Ronald O’Hanley, executive]

Yes. So there's -- I think you largely have it, but let me go a little bit deeper, Ken, because if you think about -- let's talk about core servicing fees, what really drives it. First is retention. Second is the amount and rate of onboarding. And then third is new business and sales, and then rinse and repeat. And our retention levels, which they -- we've talked about them before at the time and we're continuing to track well against them, even coming a little bit higher than what we had planned.

Second, onboardings. As Eric noted, they have been slower than expected this year but we see lots of visibility going forward to that increasing. We've got a big book there to onboard and that will start to onboard and should start to onboard in an accelerating rate.

And then third is sales, and there's 2 things going on there. One, the amounts, we upped it in '23. We upped it again in '24. We're on track for that increased servicing fee sales target, but we also have disproportionate focus on traditional back-office fees, either stand-alone or if they're associated with Alpha, making sure that when an Alpha assignment comes onboard, the back office conversions occur first as part of the learning in this whole Alpha process. So that by itself gives us encouragement and then -- and Eric will probably want to go into this a little bit more. The deconversion that seems like we've talked about forever, I mean we're hitting bottom right now in terms of that. So we'll start to see improvement on that as a comp and its effect and move beyond it starting in the next quarter or 2.

So that's servicing fees and management fees. We are very encouraged by what we're seeing at SSGA. It's been -- it's part of a carefully crafted strategy, both in the institutional and ETFs. We've talked about ETF flows. We've talked about market share in the very important low-cost ETFs, which in effect represent penetration into the retail market. All that is working well.

And then finally, we've had this historically low volatility in FX. Nonetheless, the team has been highly focused on continuing to build share within our clients to move up on the panels. And where you saw some of that pay off in terms of both FX and securities finance. Again, there's been a new strategy put in place there and some progress there. So this is -- much of what we do is a game of inches, but there's a lot of inches coming together here that we feel quite good about.

[Operator]

Your next question comes from Brennan Hawken with UBS.

[Brennan Hawken, analyst]

I would like to start with euro deposits, the ECB cut rates this quarter. So I'm curious to hear, I know euro, I believe, is your second biggest currency in your deposit base. So curious about what impact that you saw from that cut. Where was the beta on that cut? And was it roughly equivalent to the betas you saw on the final increases? And based on that experience, how does that inform your expectation for when we see cuts in the Fed funds?

[Eric Aboaf, executive]

Brennan, it's Eric. It's nice to see the industry environment top out and begin to reverse, so I think it will reverse slowly. We've seen the beginning of that, and it feels like it will take some time, which is -- which will be fine because remember, our portfolio and our balance sheet is roughly neutral and relatively insulated now from interest rate increases or decreases. We have a slight sensitivity across the balance sheet, but it's slight. It's -- if all central banks across the curve cut rates by 25 basis points, we're talking about $5 million per quarter impact on a $2.5 billion base of full year NII. So that's the -- we're talking about small effects.

To your point, euro is a good place to start because euro rates increased lagged on the way up and now are starting to move in the opposite direction. We have said and the euro experience on this first rate move has demonstrated that we expect largely to see symmetry in the betas. So as we -- as rates rose, we lagged and then the betas increased over time towards the back end of the rate cycle. And what we've said is, area by area, transaction rate deposits, exception rate deposits and the initial rate deposits will tend to see the reversal of that. And so specifically in euros, we did see that.

We -- the beta on the first tick down was similar to the beta on the last tick up, and I think is a good representation largely of what we expect to see. And that means that if you step back even further, we feel like our pricing is set at a healthy level. We have a range of pricing and pools of deposits and, in a way, have built real engagement with our clients. So they understood the model as rates floated up. And similarly, they understand the model as rates floated down in the balance of trade and it comes together nicely.

[Brennan Hawken, analyst]

Got it. I appreciate it. On thinking about another factor that has been a bit more robust recently repo has been pretty strong in recent quarters. Do you think based on what's been happening in the marketplace that, that strength is sustainable? And it seems as though the NII story is playing out better than you had originally anticipated? Obvious given you brought up guidance. But is that another x factor that could allow for the back half of the year to maybe see less of a pronounced step down, then your improved guidance seems to continue to embed?

[Eric Aboaf, executive]

Brennan, it's Eric again. There's been a lot of talk about repo, notwithstanding that most of the NII we earn on our balance sheet is really based on deposit funding and lending. So 90% of our NII is around deposits, loans, investment portfolio. We're talking about 10%, which is on repo. So just for context. And it is true, repo, NII came in a little bit better than expected in the second quarter. Why? Because there was some dislocation in the overnight repo operation of the Fed relative to SOFR. So clients came our way. We also saw a dealer balance sheet strain, but the higher than expectation was in the $5 million to $10 million range. It's not a -- it was nice to take, and it was nice to be there for our clients. But in fact, repo has been relatively flat to actually, down a smidge over the last couple of quarters, and that's because it tends to be a thinner margin, but a useful way to accommodate our clients.

And we think it's not going to be a large driver of the coming NII. It's fully included in our guide. I think the real big moving parts are really around deposits, loans and then followed by investment portfolio and the mix of long and short rates that we'll see.

[Operator]

Your next question comes from Jim Mitchell with Seaport Global.

[James Mitchell, analyst]

Eric, maybe just following up a little bit on the NII story. You talk about potentially an inflection coming. Can you discuss maybe the timing of that? And then when I look at your asset yields, the HTM book is still weighing that down. Can you talk about maybe the pace of maturity on that HTM book that's yielding a little over 2%? And how much -- how long it takes to kind of get that back coming back in? Is that a big part of your inflection story next year?

[Eric Aboaf, executive]

Jim, it's Eric. Calling an inflection or a turn in NII is one of the hardest things to do. And so we've been -- our outlook is that in the next few quarters, we'll begin to see that. But we'll first go from the trends that we're seeing to stabilization, it will bounce around some, and then over time, tick upwards.

The factors are multifaceted and with a number of ins and outs. You're right. The investment portfolio is turning over. It turned over quite a bit in the second half of last year. It's now turning over by about $3 billion, maybe $3 billion to $4 billion a quarter, and that's across HTM and AFS. And because there are some longer-dated bonds in HTM, those roll through a little more slowly. But in a way, what we have is a sustained amount of, I'll say, tailwind that comes with that because remember, the roll-ons in the portfolio versus the roll-offs, those are worth solid to 250 basis point of spread differential, and that will play through the books as a nice tailwind, assuming long rates stay somewhere in the area, and we -- and the primary change in the curve is at the front end.

So I think it will be a component. Right now, the biggest component is really the deposit mix, pricing levels of noninterest-bearing, that's what's moving the needle the most. I mean all these factors matter. And I think, as the deposits stabilize and we've started to see total deposit levels stabilized the last few quarters, we have to see now the mix stabilize. Once that happens, the natural benefit from the investment portfolio rolling through, right? And then the growth in loans, and you've seen us lean into lending. Lending is up more than 10% year-on-year because we're trying to be out there for our clients. And as we lend to our clients, they actually often do additional servicing business with us. That factor in the investment portfolio and the long-term rates will then turn to a net positive impact on NII in the coming quarters.

[James Mitchell, analyst]

Okay. That's really helpful. And maybe just to your point on deposit growth being a key driver. Now that we're looking at rate cuts, Q2 is less. Do you feel like rate cuts can be a catalyst for growth based on historical experience? How do you think about getting back to kind of more normal growth levels in deposits? What do we need to see?

[Eric Aboaf, executive]

I think the direct answer is that the rate environment has moved around quite a bit and we've seen the deposit effect from the rate environment. I think those are relatively been -- those have been telegraphed through the banking system. And we've also seen the Fed balance sheet actions as they've been tightening conditions with our balance sheet, although that's slowing and the overnight reverse repo operation isn't easing. We've seen that telegraph through.

So I think the exogenous factors that have driven deposits over the last 2 years have largely been telegraphed. And the modest number of interest rate cuts, I don't expect to have that much of an impact on deposit levels. We'll see, but that's our kind of sense from talking with our clients and analyzing the vast array of data that we have.

What we feel will make the difference over time is sales. So we talk a lot about servicing fee sales, targeting $350 million to $400 million this year. That's up from $300 million a year before and even less than the year before that. And with a tilt towards custody, and remember, it's the custodial activity, not just the accounting or the middle office, but the custodial activity that brings with it balances -- deposit balances because they're needed as part of the buffer or the -- to handle the transactional activities that we process for clients. And so as we look forward, as sales continue to accelerate and then we onboard those sales because both have to happen, that's what we expect will bring on additional deposits in a way, are part of our organic growth model, which will bring fee growth, but also bring deposit growth in this NII into the system at, I think, at a nice rate and it will be year by year by year that, that will help drive growth.

[Operator]

Your next question comes from Betsy Graseck with Morgan Stanley.

[Betsy Graseck, analyst]

I did just want to key off of the last comment around the sales. And to your point, $350 million to $400 million is the goal for this year. Obviously, on Page 5, you show us what the rev wins are for 1Q and 2Q, $67 million and $72 million. So that leaves us with an expectation that you're going to be able to bump that up pretty aggressively towards the $105 million level for each of 3Q and 4Q.

And so it gets to my question of, what gives you the confidence in that? Is that a function of these are already sales that are in contract and it's just the installation of the new wins that hits this page, and so that gives you a lot of confidence that you can generate that $105 million level in each of the next 2 quarters?

[Ronald O’Hanley, executive]

Betsy, it's Ron. Let me take that. Firstly, just to clarify, these numbers that we're talking about are sales and not installs, right? So it wouldn't include anything that's under contract and subject to onboarding at this point.

But what I mean, I think the way to think about it is this that if you -- that's why Eric gave the 4-quarter number there. Third and fourth quarter, historically for us, tend to be a little bit better. Second half of the year is a little bit better than the first half of the year. So that's point #1. Point #2, the pipeline. And we feel pretty good about the pipeline. So that's why we're continuing to affirm confidence in that target that we have of $350 million to $400 million.

[Betsy Graseck, analyst]

Got it. Perfect. Yes. And I can see in last year, the second half was 3x 2Q. So history, yes, obviously, shows that, that should happen. So that's great. Okay. So then a follow-up.

[Ronald O’Hanley, executive]

Betsy, let me clarify the first part of my message because I was not clear there. The number would include things that are in contract, but not include anything that's actually been onboarded. So when you see the to-be-onboarded number that we have out there, that includes basically past sales. So I hope that's clear. I didn't mean to confuse that.

[Betsy Graseck, analyst]

Okay. Appreciate it. And then the follow-up just on the buyback, I understand you've got the opportunity for increasing buybacks. And I'm expecting that you're going to be flexing that versus your SLR constraint? Is that fair? And with SLR at 6.3% and the minimum is 5%, that feels like you've got a lot of room. So I just want to understand how you're thinking about what the -- what level of SLR you want to hold? Regulatory minimum is 5%. What kind of buffer should we expect that you're anticipating holding on top of that, just as we're working through our models on how much buybacks we estimate for you?

[Eric Aboaf, executive]

Betsy, it's Eric. Let me take that. As we had said and you're reflecting on, buybacks were lighter in first quarter at $100 million, then we booked $200 million in the second quarter. We expect that pace to accelerate into the third quarter and then again into the fourth quarter. So that's our intention, and we have a good amount of room and capital generation each quarter to be able to deliver on that.

In terms of the constraints, the ratio constraints, the most important one for us, and I think for our various stakeholders is the CET1 ratio. And that we're -- I think we can continue to operate at a good pace at a good level, but also that allows us a good pace of accelerating buybacks.

The Tier 1 leverage or the supplementary leverage ratio are informative but actually relatively manageable, right, with the right level of preferred equity, we could -- we can operate where we need to. I think we've been clear on Tier 1 leverage, what our range is and we'll operate within that range. And we can adjust the preferred equity stack as necessary. We've not really formalized at least externally, a supplementary leverage ratio range. But it -- I'd say it kind of flows in a similar way as the Tier 1 leverage, and you can think of those as related from a conceptual and operational standpoint and both of them are eminently manageable and are not really the constraint when it comes to common share buybacks.

[Betsy Graseck, analyst]

Right. Okay. That's great. And then when we're thinking about the pace accelerating from here, is that total dollars? Or is that the pace of up $100 million Q-on-Q? How should we think about which pace you're talking about?

[Eric Aboaf, executive]

It's -- when we talk buybacks, there's always the -- it depends on market conditions and the environment and so forth. So we always want to be careful with that. And you'd expect that of us as a well run and a management team that's both careful but also leans into capital return, and you've seen our commitment. I think we certainly feel the $100 million in the first quarter was below what we would have liked to deliver. We feel that $200 million was below what we would have liked to deliver. So I think there's a solid increase coming. You can think about it in dollar terms. Two points begin to create a line, but that could be a curve as well. And I think you've got enough to go on. I think you've got enough to go on.

[Operator]

Your next question comes from Mike Mayo with Wells Fargo Securities.

[Michael Mayo, analyst]

I just want to make sure I understand what you're saying and not read too much into it. But I think what you're saying is, over the next 2 quarters, you should be pretty much done with the NII declines, you should be pretty much done with the noninterest-bearing deposit declines and you should be pretty much done with the decommission of the major client. Am I reading too much on that or did I hear that correctly?

[Eric Aboaf, executive]

Mike, it's Eric. With regard to NII and noninterest-bearing deposits, I've said the next few quarters so I'm giving myself a little bit of room to be honest, because it's hard to predict perfectly. And so I'll stick with a few quarters. I think that kind of works and that certainly covers your range and maybe a little bit more. So we just want to live through this, but we can see, I think, over the horizon here in a way, and that's what we wanted to communicate.

On the client deconversion, if you recall, we said this would be the largest year on a year-on-year basis. It was originally worth about 2 percentage points of total fees. We said about 1 percentage point year-on-year this year, 0.5 point year-on-year last year and about 0.5 point year-on-year next year. So by the end of this year, we'll be through, I'll call it, 3 quarters of the effect, but there'll still be a piece of that coming through next year and then it will be behind us.

[Michael Mayo, analyst]

And you also mentioned continuing pricing pressure, which we've talked about for about 30 years, which is nothing new, but you did highlight pricing pressure. So in what context are you referring to? I imagine like your new win in APAC, I assume spreads are better in Asia and outside the U.S. and in the U.S. So when you talk about pricing pressure, where are you seeing it?

[Eric Aboaf, executive]

Mike, it's Eric again. I think we talked about pricing pressure because it's just part of the natural course of events, right? We get a market, we get pricing increasing -- increases from market upticks. And then with clients, they ask for a part of that back. That's just how the business has operated as you say, for the last 30 years.

This quarter and last quarter and this year and for the rest of the year, we expect pricing headwinds to be in line with the previous years in guidance. We've said pricing headwinds of about 2% per year. We're not seeing any more or any less of that. It tends to be a little more geared towards the asset manager segment because those are the -- that is the group of clients that has mutual funds and some mutual fund versus ETF shifting. But it's not -- we're not seeing anything out of the ordinary or anything that is unexpected at this point.

[Michael Mayo, analyst]

And then one last one to follow up on that. I mean, I guess, maybe as goes your clients, as goes any company or as goes State Street, and with the record high stock markets and historically such a strong position with the mutual funds, which you just mentioned, are you seeing that uptick? Or is it still a slog for your big long-only asset managers that are your legacy strength?

[Ronald O’Hanley, executive]

Mike, it's Ron. Let me take that. I mean I think that the -- as you would know as well as anybody, the business continues to change. And we've seen the continued move from the mutual fund to the ETF to the SMA. But you're also seeing these firms, particularly the well-managed ones respond, and they're responding in a couple of ways. I mean, one, new product types. I mean, even the most traditional mutual fund companies now have pretty interesting ETF lines. Most of -- if they're involved in the DC 401(k) business. They've got a mutual fund offering, but they've got a collective trust offering too. So they're responding to that market pressure. Most of them are figuring out ways to participate in the wealth business. And we continue to respond and support them in that.

So the nature of the business is changing. In some cases, some things were more lucrative than others. And so what you're also finding in those businesses, they're very focused on their cost base, their technology stack, their operating stack. And again, that presses in our favor. As we think about the Alpha front-to-back solution, we're the largest middle office provider by far in the industry, and we've gotten quite good at that.

So the -- we describe ourselves as an essential partner to our clients, and I think that plays through both in supporting them in their revenue and product activities as well as their cost and operations.

[Operator]

Your next question comes from Vivek Juneja with JPMorgan.

[Vivek Juneja, analyst]

Eric, I just have a quick follow-up, trying to understand your NII guidance. If I look at your U.S. interest-bearing deposit costs linked quarter, they actually declined. Did you actually start cutting rates? Or was there something else that drove that? Can you give some color on that? And is that likely to continue?

[Eric Aboaf, executive]

Vivek, it's Eric. It's -- I would describe that as just part of the normal volatility that we'll see in deposits. I mean we run such a large franchise and our clients' transactional activity tends to vary over time. But we're seeing healthy levels of deposits across dollars across euros. And so we didn't -- we haven't seen anything particularly surprising in one area or another. I think total U.S. interest-bearing deposits, if you look at our addendum, are up slightly. Euros are up slightly and so on and so forth.

So -- and to the extent that there are some movements not driven by our pricing actions per se in truth. Clients need a certain amount of transactional deposits to fund their custody accounts. And the pricing tends to be something that we have negotiated and is well understood now given where we are in the cycle and isn't the determinant of movements at this point.

[Operator]

Your next question comes from Gerard Cassidy with RBC.

[Gerard Cassidy, analyst]

Ron, you mentioned in one of your answers about the servicing and management fees that foreign exchange activity, the volatility was actually quite low relative to history. Can you share with us what drove that? And then second, what macro factors should we keep an eye on to see -- to drive that volatility higher as we go forward, especially in view of the geopolitical environment we're all living in?

[Ronald O’Hanley, executive]

Well, I'll start. But Eric runs this business. So I'll quickly turn it over to him. But I think if -- what caused it. I mean there's been really remarkably low dollar volatility. And I think some of the things that have been driving that. One is just the simple strength of the dollar for an awfully long time. And it's almost become too dangerous thing to bet against the dollar. And so even in times where you would expect to see some volatility, we simply haven't. We haven't seen that. So I think that's been the primary driver of that, that you've got this inordinate strength of the dollar.

But Eric, why don't I turn it over to you.

[Eric Aboaf, executive]

Gerard, I think to add to that, maybe in 2 ways. The dollar has been strong and continues to be the dominant currency globally for whether it's petrol, whether it's for core commodities, and the currency of choice. And while we've seen ebbs and flows and potential substitution, euros won, et cetera, none of that has really come to pass. And so you have a bit of a stabilizing factor.

I think the other thing that we've seen recently is because of the clients have been underweight -- I'm sorry, overweight in cash and underweight in equities and bonds and they've started to put more of that cash to work, they're doing that both in the U.S. and abroad and internationally. And as a result, there's not -- we're not seeing a lot of speculation in currency markets. We're seeing more, I'll describe it as natural and transitional flows. And so we've not seen disruptions on one hand, knock on wood.

And on the other hand, we have seen consistent holding of dollars and consistent buying of other currencies. And so that's created. It feels like a set of muted volatility levels that are fine for clients. And our point of view is we need to serve clients during those times. And the more we can offer them ways to trade through us, through our multiple venues, some of them are platforms, some of them are single dealers, some of them are multi-dealer and then some of them are algos, we'll continue to do that and we'll support them. And that will -- because of the higher volumes we're seeing, notwithstanding the lower volatilities has been fruitful and help drive revenue growth for us on that -- in that area.

[Gerard Cassidy, analyst]

Very good. And circling back, you both touched on onboarding was slower than expected in the first half of the year, but you expect it to pick up as we go forward. What caused the slower-than-expected onboarding in the earlier part of this year?

[Ronald O’Hanley, executive]

Gerard, it's Ron. I'll take that. It's concentrated in some large clients that also happen to be development partners. And I think we've talked about this concept of development partners. These are early partners that joined us in this journey, and we're doing a fair amount of development around that. So that caused some of it. And then some of it has been idiosyncratic to those same institutions in terms of things going on in their own operations that have delayed some of the -- delayed some of the onboarding. So that's been a big part of it.

The second thing that's been driving it has been really around private markets. While we've continued to bring on new clients and we're really pleased with our offering and the clients that we've brought on, the whole slowdown in private markets is actually affecting us because we start to get paid, right, when the fund starts to draw capital and invest. And if you've been following this, many of the new funds that have been raised, including some of the very, very largest ones actually haven't drawn capital. So we've got "set up and ready to go," but we're not actually deriving meaningful revenues from that yet. So that would be the other major factor that's going on here.

[Operator]

There are no further questions at this time. Ron, please continue.

[Ronald O’Hanley, executive]

Well, thanks, everybody, for joining us.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.