State Street Corp

NYSE:STT

Earnings Call Analysis

Solid Quarter with Growth and Cost Discipline

The company reported an EPS of $1.25, reduced by a $294 million loss from investment portfolio repositioning, which is expected to benefit future net interest income (NII). Excluding this impact, the adjusted EPS was $1.93. Fee revenue increased by 3% year-on-year, led by growth in investment services and management fees, which, along with cost management, should contribute to positive operating leverage by 2024. Assets under custody/administration (AUC/A) rose by 12% year-on-year, with $41 billion of net inflows to the cash franchise. Management fees were up 1% year-on-year to $479 million. NII is projected to be between $550 million to $600 million per quarter next year. Shareholder returns included $1.2 billion, with 12% of outstanding shares repurchased. The company plans to maintain expenses flat in Q4, anticipating flat to 1% year-over-year growth in fee revenue.

Earnings per Share and Total Fee Revenue Movement

The company reported an earnings per share (EPS) of $1.25, a figure decreased by the impact of a $294 million loss connected with the repositioning of the investment portfolio. This strategic move is expected to benefit future net interest income (NII). Excluding this repositioning, EPS would have been up year-on-year at $1.93. Total fee revenue showed a 3% year-on-year growth, attributed to gains in investment services and solid management fee performance at Global Advisors, despite headwinds in Global Markets and a mixed macroeconomic backdrop. Managing costs effectively was a highlight, with only a 3% rise in expenses this quarter, contributing to a plan to achieve positive operating leverage in 2024.

Assets Under Custody/Management and Competitive Performance

Assets under custody/administration (AUC/A) increased by 12% year-on-year and 1% sequentially, driven by higher market levels and net new business. The AUM at Global Advisors soared by 13% from the previous year, mainly due to market surges and significant inflows of $10 billion. Notably, the quarter witnessed a record $41 billion of net inflows into the cash franchise, marking a substantial market share acquisition.

Management Fees and Strategic Business Momentum

Management fees rose by 1% year-on-year to $479 million, primarily because of elevated average equity market levels. Sequentially, there was a 4% increase, stimulated by market highs and record cash net inflows. The investment management franchise holds a robust position, with strong momentum in products like Defined Contribution and Index Fixed Income despite net outflows in institutional business. Fee reductions on certain products are expected to drive further growth in coming quarters.

Expense Management and Strategic Investments

Operational expenses excluding notable items went up by 4% year-on-year, but down by 1% from the preceding quarter, reflecting proactive expense management and productivity optimizations. Investments continue in strategic aspects such as Alpha, Private Markets, and technological automation.

Breakdown of Expenses

Itemized expenses showed an increase, with a 4% rise in compensation and employee benefits due to wage inflation, occupancy expenses up by 4% from relocating the headquarters, and other expenses increasing similarly. Information systems and transaction processing expenses also saw hikes due to higher technology investments and sub-custody vendor costs, though partially offset by savings in other areas.

Capital Ratios and Shareholder Returns

The company's Common Equity Tier 1 (CET1) ratio dipped to 11%, influenced by continual share buybacks and a slight uptick in risk-weighted assets (RWA), somewhat mitigated by retained earnings. Over the past year, approximately 12% of outstanding shares have been repurchased, underscoring the company's commitment to returning value to shareholders.

Effective Tax Rate and Forward Guidance

The company is expecting an adjusted effective tax rate of around 22% for the fourth quarter, indicating a level of stability in their financial planning.

Transition to NII Stabilization and Tailwinds

There's a transition from declining NII towards stabilization with expectations of an uptick from the fourth quarter into the next year. This outlook is buoyed by the maturing investment portfolio, where new bonds that replace old ones are at about 200 to 300 basis points higher, suggesting improved income prospects from these investments.

Talent Management and Operational Efficiency

The company is focusing on reallocating talent to optimize business investments and efficiencies, building on processes initiated in 2019. This strategy of careful human resource management is part of an ongoing effort to rebound from COVID-induced impacts like service quality disruptions and increased turnover.

Strategic Planning and Cost Guidance

A strategic planning exercise has laid the groundwork for the company's future, promising disciplined top-line and expense management through a detailed business-by-business approach. While still early for concrete numbers, the company is set on ensuring fee operating leverage and will provide a comprehensive guidance in January, setting the stage for what they envision as a healthy path forward.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, and welcome to State Street Corporation's Third Quarter 2023 Earnings Conference Call and Webcast. Today's discussion is being broadcasted 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 the State Street website. Now I would like to introduce Ilene Fiszel Bieler, Global Head of Investor Relations at State Street.

[Ilene Bieler, 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 third quarter 2023 earnings slide 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. During the Q&A, please limit yourself to 2 questions and then re-queue.

Before we get started, I would 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 slide presentation, also available on the IR section of our website.

In addition, today's presentation will contain forward-looking statements. Actual results may differ materially from those statements due to a variety of important factors, such as those factors referenced in our discussion today and in our SEC filings, including the risk factors 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. Now let me turn it over to Ron.

[Ronald O’Hanley, executive]

Thank you, Ilene, and good morning, everyone. Earlier today, we released our third quarter financial results. As we issue these results, the world has witnessed a surprise and uncomfortable terrorist attack on innocent Israeli citizens and the resulting enormous human toll in Israel and Gaza. These terrible events have shocked the world and created further global geopolitical uncertainty. State Street stands with the people of Israel and we are united with all those impacted.

Now turning to the third quarter. Global financial market performance was mixed as a positive start for equity markets in July turned decisively negative as the quarter progressed. Against the backdrop of softening economic data, market sentiment was negatively impacted by continued global central bank rate hikes and investor concerns of a higher for longer interest rate environment and an economic hard landing. As a result, equities fell, while global bond yields continued climbing around the world, reaching levels not seen for many years with the U.S. 10-year yield reaching its highest level since 2007.

Despite these factors, the third quarter continued to be characterized by relatively low currency market volatility.

Turning to Slide 3 of our investor presentation, I will review our third quarter highlights before Eric takes you through the quarter in more detail. Beginning with our financial performance. Third quarter earnings per share was $1.25 or $1.93, excluding a loss on sale from an investment portfolio repositioning, which was a notable item in 3Q. EPS growth year-over-year, excluding notable items, was driven by our significant common share repurchases during the period, coupled with a 3% increase in total fee revenue. This fee revenue growth reflects higher servicing and management fees, better front office software and data fees and an increase in other fee revenue. Taken together, the benefit of share repurchases and the improvement in fee revenue more than offset lower NII, market headwinds within trading businesses as well as the impact of year-over-year expense growth. That said, we are pleased with our ongoing transformation and productivity initiatives, which help us to contain that expense growth while allowing us to continue to invest in our businesses.

Turning to our business momentum. Within Investment Services, total AUC/A increased to $40 trillion at quarter end, and we recorded $149 billion of new asset servicing wins during the third quarter, largely driven by wins in official institutions and private markets. The estimated annual new servicing fee revenue to be recognized in future periods associated with 3Q asset servicing wins amounted to $91 million, which is the highest level of quarterly new servicing fees in over 2 years, demonstrating our ability to achieve our ambition of driving stronger sales performance.

Encouragingly, Alpha's momentum continued in 3Q. We deepened relationships with existing mandates and recorded 2 new Alpha mandate wins, including our first Alpha for private markets mandate for one of the world's most influential investors.

During the third quarter, we outlined a number of strategic focus areas for our investment services franchise as we aim to drive opportunities across key regions and product areas and realize the full potential of our State Street Alpha value proposition. Importantly, we are taking actions aimed at gaining market share and reinvigorating revenue growth. We are executing against our plan to improve core back-office custody sales performance as it is our largest revenue pool, installed quickly has significant scale and drives high-margin ancillary revenues.

As an illustration of our custody sales momentum in the power of Alpha, in the third quarter, State Street in [ Vontobel ], a premier global asset manager headquartered in Switzerland, entered into an agreement to expand our existing front and middle office relationship by providing back-office services subject to the necessary approvals. State Street had no relationship with [ Vontobel ] until discussions began in 2020 around Alpha, resulting in the adoption of our front, middle and now back office services.

Key client wins such as [ Vontobel ] demonstrate how Alpha can establish, broaden and deepen client relationships, further positioning State Street as our clients' essential partner. It illustrates the value of the Alpha proposition and confirms our strategic rationale of how Alpha can grow and tie together the full breadth and depth of State Street's capabilities in a true One State Street solution for our clients from front to back.

Accelerating the Alpha sales cycle and implementation time line, particularly back office services remains important strategic priorities to drive even more fee revenue growth.

Turning to our front office software and data businesses. CRD continues to perform well and has a strong pipeline. By the end of the third quarter, annual recurring revenue for our front office software and data business increased by 12% year-over-year to $299 million. At Global Advisors, assets under management reached $3.7 trillion at quarter end, supported by a record $41 billion of net cash inflows in 3Q. Importantly, our cash business gained market share in an expanding market, driven by strong investment performance, coupled with the higher yield environment. In aggregate, Global Advisors gathered $10 billion of total net inflows in 3Q. Record quarterly flow performance in cash was partially offset by outflows in the institutional business, coupled with the impact of risk off market sentiment in our ETF business in 3Q.

While our ETF franchise saw modest net outflows in aggregate in 3Q, our U.S. low-cost Spider ETF franchise continued to be a bright spot, generating $7 billion of net inflows, gaining further market share. To drive continued growth in 3Q, we reduced the price on 10 low-cost spider portfolio ETFs, demonstrating our commitment to delivering institutional quality investment solutions at competitive price points.

Lastly on business momentum, I am proud to highlight that State Street's foreign exchange business has once again been recognized as the industry leader. After being ranked #1 FX provider to asset managers by Euromoney Magazine in 2022, this year, Euromoney Magazine 2023 FX awards, named State Street as the winner across 4 categories including Best FX Bank for Real Money Clients, Best FX Bank for Research, Best FX Venue for Real Money Clients and Best FX Bank Sales.

Turning to our financial condition. State Street's balance sheet liquidity and capital positions remain strong. Our CET1 ratio was a strong 11% at quarter end, well above our regulatory minimum. This strength has enabled us to deliver against our goal of capital return to our shareholders. In 3Q, we returned $1.2 billion of capital, buying back $1 billion of our common shares and declaring over $200 million of common stock dividends. This means that cumulatively, over the last 4 quarters to the end of September, we have returned approximately $5.6 billion of capital to our shareholders through a combination of share repurchases and common stock dividends.

As we look ahead in the fourth quarter, it remains our intention to continue common share repurchases under our existing authorization of up to $4.5 billion for 2023, subject to market conditions and other factors.

To conclude, amidst the challenges of the market environment in 3Q, we remain dedicated to driving stronger business momentum and improving fee growth. To that end, in the third quarter, we outlined our sharpened execution plan for the Investment Services business, underpinned by a number of actions aimed at accelerating sales and revenue growth while simultaneously improving the discipline and accountability for this execution.

Our laser focus on expense discipline also remains high. We have a well-established track record of re-engineering our processes and transforming our operations to improve our efficiency and realize productivity growth. In the third quarter, we reduced expenses quarter-over-quarter and announced another step in our multiyear productivity efforts aimed at improving our operating model, while enabling even greater investment in our business.

As part of our ongoing transformation and productivity initiatives, we are streamlining our operations in India and have now assumed full ownership of one of our joint ventures in the country. This consolidation will continue the transformation of State Street's global operations and enable us to achieve productivity savings as part of our plans to deliver positive fee operating leverage in 2024.

Now 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. I'll begin my review of our third quarter results on Slide 4. We reported EPS of $1.25, which was down year-on-year due to the impact of the $294 million loss on sale in connection with the repositioning of our investment portfolio, which will benefit NII in future periods. EPS was up year-on-year at $1.93, excluding the repositioning, which you can see on the right-hand side of the page.

Turning to the core business. As you can see on the left panel of the slide, total fee revenue grew by 3% year-on-year, driven by growth in our front, middle and back-office investment services business as well as solid management fee performance at Global Advisors. This performance enabled us to offset some of the industry [ widens ] we saw in our global markets business as well as lower NII given the mixed macroeconomic backdrop in the quarter.

Lastly, we remain focused on managing costs in the current operating environment, limiting expense growth to just 3% this quarter and achieving productivity savings as part of our plans to deliver a positive fee operating leverage in 2024.

Turning now to Slide 5. We saw period-end AUC/A increase by 12% on a year-on-year basis and 1% sequentially. Year-on-year, the increase in AUC/A was largely driven by higher period end equity market levels and net new business. Quarter-on-quarter, AUC/A increased primarily due to client flows and net new business. While net new business was positive, long-term flows in the asset management industry have been muted, as you can see on the bottom right of the slide. This risk loss settlement leads to the current headwind across the servicing industry.

At Global Advisors, period-end AUM increased 13% year-on-year and was down 3% sequentially, relative to the period a year ago. The increase was primarily driven by higher quarter end market levels and inflows of $10 billion. Notably in the quarter, our cash franchise continued to perform strongly, generating a record $41 billion of net inflows as our competitive performance contributed to market share gains. Quarter-on-quarter, AUM increased mainly due to lower quarter end market levels.

Turning to Slide 6. On the left side of the page, you'll see third quarter servicing fees up 1% year-on-year, primarily from higher average equity markets, net new business and the impact of currency translation, partially offset by lower client activity and adjustments, normal pricing headwinds and a previously disclosed client transition.

Sequentially, total servicing fees were down 2%, primarily as a result of the lower client activity and adjustments and the previously disclosed client transition, partially offset by higher average equity markets.

As I've mentioned over the past year, we continue to see lower levels of client activity and flows, all of which impact transactional volumes, leading to a 2 to 3 percentage point headwind on servicing fees year-to-date. Part of this is the cyclical nature of the servicing business. The full year effect has ranged from minus 2% to plus 1 percentage point impact over the last 5 years.

Within servicing fees, back office services were generally consistent with total servicing fees. Middle office services, which is part of the Alpha proposition, had another quarter of good growth. On a year-over-year basis, metal office fees were up 3% and up 1% sequentially, largely driven by net new business.

On the bottom panel of this page, we highlight the business momentum we saw in the quarter. We won $149 billion of new AUC/A. We onboarded roughly $250 billion of AUC/A in the quarter, primarily in the asset management client segment. And importantly, as Ron mentioned, we achieved new annual servicing fee revenue wins of $91 million this quarter, which will be recognized in future periods. These servicing wins underscore the progress we're making towards stronger sales performance.

While we've historically only described wins in AUC/A terms, we recently expanded our disclosure to indicate that a healthy level of annual servicing sales is in the $300 million range this year. You can measure us against this benchmark. We now have about $2.3 trillion of assets to be installed and about $255 million of servicing fee revenue to be installed as well.

Turning to Slide 7. Third quarter management fees were $479 million, up 1% year-on-year, primarily reflecting higher average equity market levels, partially offset by a previously described shift of certain management fees into NII. Quarter-on-quarter, management fees were up 4% as a result of higher equity market levels and record quarterly cash net inflows.

As you can see on the bottom right of the slide, our investment management franchise remains well positioned with very strong and broad-based business momentum across each of its businesses. In ETFs, we had neutral overall flows but saw positive net inflows and consistent market share gains in the spider portfolio low-cost suite. As you know, we strategically dropped the fees on about 1/3 of our low-cost suite of products and expect more growth in the coming quarters from the action.

In our Institutional business, notwithstanding net outflows of $30 billion in the quarter, which were primarily driven by client in-sourcing, both our defined contribution and index fixed income products continue to drive strategic momentum.

Lastly, across our Cash franchise, we saw record quarterly cash net inflows of $41 billion as we captured some of the cyclical movement of cash in the financial system. I'll just remind you that cash flows can be volatile quarter-to-quarter.

Turning now to Slide 8. Third quarter FX trading services revenue was down 2% year-on-year, while up 3% sequentially. Relative to the period a year ago, the decrease was mainly due to lower direct FX spreads and lower FX volatility, partially offset by higher volumes. Quarter-on-quarter, the growth primarily reflects higher volumes. Industry volatility is down 25% to 40% across developed markets and emerging markets relative to the period a year ago and down 5% to 10% sequentially which is presenting fewer trading opportunities and lower spreads.

Securities finance revenues were down 6% year-on-year due to lower special activity and lower agency balances. Sequentially, revenues were down 12%, primarily as a result of seasonally lower activity and the recent industry drop-off of U.S. equity shorting activity and specials.

Third quarter software and processing fees were up 2% year-on-year, but down 15% sequentially, largely driven by CRD, which I'll turn to shortly. Other fee revenue increased $49 million year-on-year, primarily due to the tax credit investment accounting change and the absence of negative market-related adjustments.

Moving to Slide 9. You'll see on the left panel that front office software and data revenue increased 2% year-on-year, primarily as a result of higher growth in our more durable software-enabled and professional services revenue as we continue to convert and implement more clients to the SaaS environment, which now accounts for about 60% of our clients, partially offset by fewer on-premise renewals.

Sequentially, front office software and data revenue was down 20% and primarily driven by lower on-premise renewals, partially offset by higher software-enabled revenues. Our sales pipeline continues to grow and remains strong for our [ Charles River ] development from Office Solutions products.

Turning to some of the other Alpha business metrics in the right panel. We are pleased we had 2 more mandate wins in the quarter for Alpha. Most notably, we also had our first Alpha for private markets win. We also meaningfully advanced CRD's institutional fixed income capabilities.

Turning to Slide 10. Third quarter NII decreased 5% year-on-year and 10% sequentially to $624 million. The year-on-year decrease was largely due to the continued mix shift from noninterest-bearing deposits to interest-bearing and lower average deposit balances, partially offset by higher interest rates. Sequentially, the decline in NII performance was primarily driven by lower average deposit balances in the deposit mix shift, partially offset by the benefit of higher interest rates, including international Central Bank hikes and our investment portfolio repositioning.

The NII results were somewhat better than expected due to noninterest-bearing deposit levels coming down slightly less than expected and the portfolio repositioning, partially offset by client repricing, some of which will be delayed and will impact fourth quarter instead.

On the right of the slide, we show our average balance sheet during the third quarter with average deposits declining 4% quarter-on-quarter. Cumulative U.S. dollar client deposit betas were 73% since the start of this recent cycle, while cumulative foreign currency deposit betas for the same period continue to be much lower in the 25% to 50% range.

Finally, as I mentioned earlier, last month, we executed an NII accretive and capital accretive investment portfolio repositioning exercise to take advantage of both higher yields and spreads, which all else equal, should drive NII towards the higher end of the previously disclosed range of $550 million to $600 million per quarter next year.

Turning to Slide 11. Third quarter expenses, excluding notable items, increased 4% year-on-year. Sequentially, third quarter expenses were down 1% as we actively manage expenses and continued our productivity and optimization savings efforts, all while carefully investing in the strategic elements of the company, including Alpha, private markets and technology and operations automation.

On a line-by-line basis, year-on-year, compensation and employee benefits increased 4%, primarily driven by salary increases associated with wage inflation, higher headcount and the impact of currency translation. Sequentially, however, we brought headcount down and we also reduced incentive compensation this quarter, in line with our year-to-date performance.

Information systems and communications expenses increased 3%, mainly due to higher technology and infrastructure investments, partially offset by the benefits from ongoing optimization efforts, in-sourcing and vendor savings initiatives. Transaction processing increased 6%, mainly reflecting higher subcustody vendor costs. Occupancy increased 4% as we relocate our headquarters building and other expenses were up 4%, mainly reflecting higher marketing spend and professional fees.

Moving to Slide 12. On the left side of the slide, we show the evolution of our CET1 and Tier 1 leverage ratios followed by our capital trends on the right side of the slide. As you can see, we continue to navigate the operating environment with very strong capital levels, which remain above both our internal targets and the regulatory minimum. As of quarter end, our standardized CET1 ratio of 11% was down 80 basis points quarter-on-quarter, largely driven by the continuation of our share repurchases and modestly higher RWA, partially offset by retained earnings.

Our LCR for State Street Corporation was a healthy 109% and 120% for the State Street Bank and Trust.

In the quarter, we were quite pleased to return roughly $1.2 billion to shareholders, consisting of just over $1 billion of common share repurchases and over $200 million in common stock dividends. Over the last year, ending September 30, we repurchased approximately 12% of shares outstanding.

Finally, a few brief closing thoughts before turning to outlook. Our third quarter performance was solid with fee revenue growth of 3% year-on-year. We executed on our plan to improve sales capacity and reported $91 million in new servicing fee wins in the quarter as we look towards our goal of $350 million to $400 million in servicing fee wins in 2024. And as you have seen us do for the last 4 years, we again demonstrated expense discipline while continuing to invest in the business.

Next, I'd like to provide our current thinking regarding the fourth quarter. At a macro level, our interest rate outlook is broadly in line with the current forwards. We currently assume global equity markets will remain flat from now to quarter end, which implies the daily average is down about 3% quarter-on-quarter. Bond markets are also expected to be down about 3% on average quarter-on-quarter.

Regarding fee revenue in 4Q on a year-over-year basis, we expect overall fee revenue to be flat to up 1% year-over-year with servicing fees approximately flat and management fees to also be flattish as we expect the year-on-year business driver similar to what we saw this quarter. We do expect fourth quarter sales momentum to be similar to the strong sales performance we saw in the third quarter.

We also expect that our markets businesses will be down modestly year-over-year, given lower volatility and we expect software and processing fees to be up 10% to 12%, largely due to the timing of on-prem renewals and the expected new SaaS installations. And we expect the other revenue line to come in at around $30 million to $40 million in the fourth quarter.

Regarding NII, we now expect 3Q NII -- we now expect 4Q NII to be towards the middle of the $550 million to $600 million range we previously mentioned. This includes continued expected rotation of about $3 billion to $4 billion out of noninterest-bearing deposits and the impact of deposit pricing, which we previously noted, but with more stability in the total deposit averages.

Turning to expenses. We remain focused on controlling costs in this environment and expect to maintain relatively flat expenses in 4Q quarter-over-quarter. As always, this is on an ex notables basis, and in this regard, we are keeping an eye on the likely FDIC assessment. And we expect our adjusted effective tax rate for 4Q will be around 22%. And with that, let me hand the call back to Ron.

[Ronald O’Hanley, executive]

Thanks, Eric. Operator, we can now open the call for questions.

[Operator]

[Operator Instructions] Your first question comes from Mr. Alex Blostein from Goldman Sachs.

[Alexander Blostein, analyst]

Ron, Eric, I was hoping maybe we can touch on your comments earlier around positive fee operating leverage into 2024, which is definitely very encouraging to hear after a couple of years of very good cost management already. So as you think about the revenue uncertainty between the markets and customer flows, I guess, what is the range of outcomes you're assuming for fees as you look out into '24? And if revenues proved to be more challenging than the base case, is there enough room to still deliver that positive fee operating leverage.

[Ronald O’Hanley, executive]

Yes, Alex, it's Ron. I mean, we're facing that comment largely on 2 things. One is we feel like we've got quite good visibility around what we're doing from a cost perspective. So we feel like we've got a series of initiatives underway that will continue into 2024 on managing our costs while also continuing the investment program that we've got in place. That investment program includes some investments that will drive revenues in 2024 and beyond.

But also, the second thing it's based on is some of the actions we've taken around strengthening our sales and sales effectiveness. And just pointing to the results we had in Q3, the note that Eric just made to you in terms of the visibility we have on '24. So those 2 things are confidence in expenses and what we believe is a nicely developing pipeline and a set of sales capabilities and processes.

I mean, obviously, markets could turn everything upside down, but based on a reasonable market forecast and not necessarily one that's going to be necessarily a tailwind. We do believe we can achieve positive fee operating leverage.

[Alexander Blostein, analyst]

That's great. And I appreciate the new disclosure on the backlog and the revenue backlog, definitely helpful. So maybe within that, can you help us maybe understand the cadence of how quickly some of that $255 million of backlog will sort of get converted into service and fee revenues. Is that expected largely over the course of '24, some of that is going to spill to '25. And then ultimately, do you think that's going to be enough to offset some of the [ BlackRock ] related outflows and revenues that you still expect?

[Eric Aboaf, executive]

Alex, it's Eric. Let me answer that from a couple of different directions to give you some texture because as we think about go-forward fee revenues, right, part of what matters is installing the backlog. Part of what matters is new sales, right, sort of maintaining the third quarter momentum in the fourth quarter and into next year because some of those sales actually come through in the subsequent few quarters.

And then as we talked about back in September, making sure that we're very effective on our retention activity. So every one of those matters.

In terms of the backlog, we said there's a $255 million of revenues in the backlog on the servicing fees and north of $2 trillion on AUC/A basis. The implementation is a little bit different in each the regards. In terms of revenues, we think about 5%, 10% of that will come through specifically in the fourth quarter. So that's included in our guide. We expect 50% to 60% of the $255 million to come through next year and then the balance in 2025. So it's kind of a good mix and aligned with what we'd like. The AUC/A implementation is a little more -- a little quicker. Just sometimes that happens, it's quicker, sometimes lower. That's a little closer to 30% in the fourth quarter and around 60% next year. But those will move around as they play out. But we've got good visibility now.

And what we've been particularly pleased with on our third quarter sales in particular, but a lot of that was around back office services. And back office services, as you know, are one of the fastest to onboard and implement, and that's going to provide some momentum into the first half of 2024.

[Operator]

And your next question comes from Mr. Ken Usdin from Jefferies.

[Kenneth Usdin, analyst]

Eric, just one follow-up at the fourth quarter NII, you're expecting to be in that middle of that kind of [ 575 ] zone and then you're talking to the upper end for next year. I just wanted to ask you to walk us through that direction of travel. Like what are the factors that start to turn to perhaps positive as you exit the year into next year with regard to either [ website ] repricing or just deposits getting to the right zone? Just kind of walk us through the moving parts.

[Eric Aboaf, executive]

Yes, Ken, it's Eric. As you see, there are a number of factors that matter, especially at this point in the cycle as we transition from declining NII to some level of stabilization, and we see a good rationale for some uptick from fourth quarter into the first quarter of next year. So let me just go through them, right? There's a continued amount of rotation of NIB, noninterest-bearing deposits. We still expect some in the fourth quarter, but we expect that, that starts to flatten out the beginning of next year. We'll see exactly how much when. It's hard to call. It moves around. We've got quite a [indiscernible] into our repricing, especially for our largest and most sophisticated clients, I described that last year.

And then we're through a good bit of that. We have -- we executed on some -- more of it in the third quarter. We expect and we have very good visibility in the fourth quarter. And so kind of the repricing effects and the catch up is kind of a bubble that works its way through.

On the tailwind side, we then have the investment portfolio role and the investment portfolio matures $4 billion or $5 billion of bonds quarter. You've got the new bonds come on roughly at [ 2 ], sometimes 300 basis points higher than the ones that are maturing. And so that's what's giving us a positive trajectory. And so it's really the 3 factors plus a little bit of lending growth and some of our other actions that we can control that we think starts to shape stabilization of NII as we get from fourth quarter to the first quarter.

But it will depend. There will be some movements. And as you know, we update all of you as frequently as we are in public, and we'll continue to do that. But those are the trajectories and our expectations at this point.

[Kenneth Usdin, analyst]

Understood. And my second one is just the costs were, I think, a little better than you had thought and you're flat to 4Q also, probably a little better than the market thought and a slower implied year-over-year rate of growth. Just wondering, have you done anything incremental to slow the organic growth rate of expenses? And is that something we should think about as we go forward as well.

[Ronald O’Hanley, executive]

Yes, Ken, it's Ron. I mean, there's a number of initiatives underway as we, I think, always talked to you about, we've really got an ongoing productivity set of actions underway that is comprehensively looking throughout the organization.

Some of the things that are underway now, we mentioned what's going on in India. And this India JV, bringing that inside, I mean this JV goes back to our early days in India before we had our own center of excellence there. It's going to enable us to eliminate redundancy and eliminate a lot of oversight activities, so we'll be able to take down costs there, take down repetitive costs. We've got a comprehensive look at operating models throughout the business, which is -- will start to yield results into next year. We're looking at some -- where work gets done throughout the world and are there places where we can move and combine things, create more end to end.

So it's a series of things. Some of them -- a lot of the easy work has already been done. So some of these things have been -- the work has been underway for a while, and we'll start to realize the benefits of it. But we see visibility such that we can make the statement that we are that notwithstanding that we continue to make significant investments in the business that we feel we can keep our cost in reasonable check.

[Eric Aboaf, executive]

And Ken, I'd just add that the other thing that we have bear down on effectively that we talked about over the last quarter or so is our hiring freeze. I mean what we found is we've got outstanding individuals and people and our team and part of what we need to do is we reinvest in different features of the business or different areas. We actually need to reallocate some of that talent to those areas. And actually, at the same time, we need to find efficiencies in others. And so that's been while it is hard work, it's been an effective way to actively manage our team and our human resources. It still means we invest in all that we need to do for new products, functionality, regulatory requirements and so forth. But the reallocation that's born from the -- from this sort of freeze is actually a very effective tool for us at this stage in the cycle.

[Ronald O’Hanley, executive]

Yes. Ken, what I would add to this, I think what we're talking about now is the continuation of what we started going back to 2019. That was rudely interrupted by COVID and everything that occurred coming out of COVID. The disruption, the great resignation, the issues that arose out of that with service quality and where we needed to overinvest to make up for some of the turnover that we were seeing that led to the kind of cost increase that you saw. That's all been normalized. Service quality has stabilized. And so I would say that we're back on the path that we started back in 2019 and overcome what we saw in the kind of '21, '22 period.

[Operator]

And your next question comes from Brennan Hawken from UBS.

[Brennan Hawken, analyst]

One question on your expectations for 4Q, Eric. Encouraging to hear that you still are expecting noninterest-bearing to find a stable point here in the beginning of next year. But when you think about your fourth quarter expectations, are you thinking that the typical seasonality that we see in deposits will come through? And is that embedded within the middle of that range of $550 to $600 million?

[Eric Aboaf, executive]

Brennan, it's Eric. Yes, broadly, but with the asterisk that the seasonality that we've seen has moved around a bit, sometimes a little stronger or sometimes it's a little weaker than typical. So we do see a bit of an uptick in a normalization in total deposits. And so we'll -- we've guided to stabilization, maybe we'll see an uptick, we'll see. But this is based on really quite deep analysis of our client deposit base.

Remember, we manage it on a U.S. dollar, we manage each of the foreign currencies. We have -- just in [ IV ], for example, I think we have 30,000 accounts, right? The average account size is $1 million. We've seen the trends in the largest, most sophisticated clients and largest accounts come down quite a bit. The smaller ones tend to have a flatter line and evolution.

So the guide is based on that plus a little bit of the seasonality. And we'll just update as we go. But I think we started to see some amount of inflection here. But we want to be careful, right? There's still some amount of rotation playing out. There's some amount of balances and pricing coming through. A good bit of which we have visibility into, but it'll take a little time to just work through it in the next few months and quarters.

[Brennan Hawken, analyst]

Okay. Okay. Great. And then maybe following up a little bit on Ken's question. I'm sure at this point, you're going through the budgeting process for 2024. Do you have any preliminary expectations for what you could be looking at for expense growth -- operating expense growth here in the next year?

[Eric Aboaf, executive]

Brennan, it's early to do that. We -- I think what gives us confidence and actually the feel of necessity on fee operating leverage is we need to run the business in a way that is healthy for our shareholders and our various stakeholders at the same time. And we need to find a way through that. we've certainly gone through a strategic planning exercise. We do that through the summer, July, August and September, and we've got a path forward, we believe, both on the top line and on expenses.

It's a little soon to get into that, but we're working through that. And part of what we're doing now is actually making sure that we have detailed plans, business by business, function by function. We have -- we run alternative scenarios. We even developed contingency plans and we also -- we are careful about meeting out our spend next year. What we do add to spend. We're going to do that with stage gate. So there's a lot going on right now, and we'll come back with kind of a full set of guidelines and guidance in January.

But I think we're confident that we'll -- we've got a path forward here that will be healthy and fee operating leverage is a very good way for us to think about it and for -- I think, for you guys as well.

[Operator]

The next question comes from Glenn Schorr from Evercore.

[Glenn Schorr, analyst]

So weeks over time and today that our clients market, the whole access to passive trend, and that's how the advantage is kind of all of us. Can you talk about what you're seeing in all the private markets, both from a servicing standpoint and you sprinkle in a little comment about outlook for private markets like bring this to life a little bit. Could this be a growth industry for the next handful of years? Just curious on that.

[Ronald O’Hanley, executive]

Glenn, it's Ron. Obviously, you know the kind of growth that the private markets have seen whether private equity and more recently, private credit infrastructure, and we see none of that abating. Private equity may be taking a bit of a pause, but all of the fundamentals point to those industries increasing. And in fact, many of the large -- if you look at some of the large multi asset managers, a lot of their growth is actually coming from private.

Much of that business today remains in-sourced. And there's very few standards in the business. A lot of it gets serviced in very expensive locations and is not a very good experience for the ultimate [ LP ] investors. So it's a very fast growth area for us and it becomes more [indiscernible] for the sponsors, for the actual firms to actually get their arms around this because the average ticket size is going down. 10, 15 years ago, the [ LP ] investors -- typical [ LP ] investor, it was an institution. It was a pension fund of sovereign wealth [ fund ].

Today, the average investor is some affluent person that's in some kind of a pooled fund. And so getting this all right is actually quite important. And the demand is very high for us. We're investing a lot in it, a lot of technology in it. And increasingly, as these firms become multi-asset, not just focused on in one area. The idea of an Alpha front-to-back kind of thing and all that's associated with that becomes very important, both as providers, but also as investors. So the opportunity here is not just the big private providers, but also the big private investors, the sovereign wealth funds and asset owners here. So yes, we see it as a very significant opportunity for us.

[Eric Aboaf, executive]

And Glenn, just to add a little bit of the kind of quantitative elements of this. The private markets broadly to find around the world. From a servicing fee standpoint are growing in the 9%, 10% a year. We described our performance, which is -- which has been quite strong in that area. And based on our client base and our pipeline, our expectation is that we should be growing in the 15% range next year.

Part of that is because we serve so many large global asset managers who have a wide range, both in traditional products and in privates, right? So they're coming to us and partly because increasingly, we're serving the classic and private organizations, right, who increasingly want to focus on what their core investment processes as opposed to processing. And so we see more and more outsourcing and opportunities for us from that segment as well.

[Glenn Schorr, analyst]

Maybe just one follow-up to all that detail. You were early on the lot of the offshore outsourcing. You were early on hedge fund outsourcing and it helps you on your growth rate over time. Do you have a sense that you're early here? Do you think you have a head start in competitive edge on this private front? We just don't see the same competitive landscape. So I'm curious on your thoughts.

[Ronald O’Hanley, executive]

It's a little bit hard to tell, Glenn. I think that we -- certainly amongst the traditional asset servicers, we think that we're early. You've got some of the very focused fund administrators that do some narrow kinds of activities in there. And certainly, in terms of offering a full front-to-back solution that includes data, as far as we can tell, we're the only ones out there. So yes, we think in general, we're early.

[Operator]

Your next question comes from Ryan Kenny from Morgan Stanley.

[Ryan Kenny, analyst]

So the industry has been seeing servicing fee rate pressure for a while. Can you update us on what you're currently seeing in terms of fee rate repricing? And are the newer wins coming in at a lower fee rate than your existing contracts or a higher fee rate?

[Eric Aboaf, executive]

Ryan, it's Eric. The overall cadence of fee repricings have been stable for us, I think for the industry the last couple of years. As you know back in 2019, we went through a phase of higher repricing, but they've been relatively consistent in that kind of 2% or so headwind level, which is not that different from what it was over the last 5, 10 years. So that's been relatively stable.

What we have seen is very good fee rates on new business. And part of that is the discussion we just had in privates, where just because of the nature of the activity, the servicing, it tends to be a manual-intensive process. The fee rates are multiples of the average fee rate for our business. And in fact, the last couple of quarters, we've seen fee rates on new business comfortably above the average that we've seen. You can just do a little bit of comparison and we'd be cautious about doing it for every quarter, but take the last few quarters of AUC/A, take in the last few quarters of fees wins. And you kind of -- you get to that view.

And we've mentioned that in ways in our quarterly reports this year, in particular. So I think in some ways, what we've been able to find is that with Alpha, we bring more to a client across the AUC/A base, right? So we have fees on the front office side, which we disclosed separately, but both the middle and the back office, we have complex clients. And so that's been quite fruitful for us. And then the alternatives and private is a very -- is a much higher fee rate area just by virtue of that industry. And that together is what gives us some of the revenue kind of momentum that we've seen into the third quarter of this year, and we expect in the fourth quarter as well.

[Ryan Kenny, analyst]

That's helpful. And if we look at the quarter, it looks like the servicing fee rate over average AUC/A did come down a bit. Was there anything driving that? Is that just a function of lower volatility and timing? Or is there anything else in that number that we should think about?

[Eric Aboaf, executive]

No. If you just look at the aggregates, remember, you've got this kind of effect where when equity markets are up, right, you kind of have this natural sitting in the fee rate just because of how the fee schedules are structured, right and they're not quite like they are in the asset management business. So that's been fairly -- that was expected and in line with the ranges that we've been seeing.

[Operator]

Your next question comes from Brian Bedell of Deutsche Bank.

[Brian Bedell, analyst]

Just actually to follow on, on that last one, Eric, and just doing the math, just -- and if you can confirm if I'm correct on this, the $91 million over the $149 billion is the appropriate way to look at that, and that would be 6 basis points as opposed to the $255 million of servicing revenue to be installed over the $2.3 trillion representing more than [indiscernible] like a basis point or so. So I guess, first of all, is that -- are we -- am I looking at that correctly? And is it all characterized as servicing fee revenue, and I guess what's driving that is that differential sort of a sustainable type of new revenue in run rate for, I guess, some private market types of business?

[Eric Aboaf, executive]

Brian, it's Eric. I'm really glad you asked that question because with new disclosure comes, sometimes very simple answers and sometimes more textured ones. So what you've done is an analysis if you look at our fee wins provided by our new AUC/A wins, which, on average, over time, I'll stress that will approximate the rates that of the wins.

The challenge is in any one quarter, remember some of what we win is on existing AUC/A business. So Ron mentioned one of the global asset managers, we added back office to that relationship. Those AUC/As were already in our base. Why? Because we had already been doing both front and middle office processing for them. So in a way, those fees wins in the quarter cannot be compared to any of the new AUC/A. That's kind of apples and oranges.

On the other hand, sometimes the opposite happens, right, where we're -- we might be adding a AUC/A and a fee that's quite high, one that's quite low because we're just adding a small service, and we've had some of those over the last couple of quarters. So I'd just be cautious about the quarter-by-quarter math. I'd encourage you over time, we can look at that through time. But I think what we'd encourage you to do is take a look at the revenue, the wins on a revenue basis against the base of servicing fees, right, $91 million in a quarter against the $5 billion of servicing fees is a very healthy amount of revenue. And our ability to maintain that momentum gives you an indication of the kind of sales effectiveness and the growth dynamic that we can create net of the retention rates that we need to manage to.

So I encourage you to spend the most time. There you can do a little bit of AUC/A wins versus the AUC/A base, that gives you another indication. But I'd encourage you to do it in that direction because you'll get a better indication, I think, of our momentum.

[Brian Bedell, analyst]

Okay. That's super helpful. And then the follow-up would be on the deposit beta, the differentials between the U.S. and non-U.S. And we've heard this from the other custodians as well in terms of non-U.S. deposit betas being significantly lower than U.S. And just maybe some thoughts on as we move into this -- into 2024 and potentially Europe maybe even higher for longer versus U.S. potentially? And should we see more aggressive or I see more incremental deposit data moving through the non-U.S. markets to sort of almost catch up to the U.S. or not so much?

[Eric Aboaf, executive]

Our current indication, and we're well through the cycle in the U.S., at least we think so, we'll see. It feels like there's a little more to go on the international side, and it started later, so it's harder to read. We do see that there are some structural differences in the market around deposit betas between the U.S. currency and the non-dollar even for the same clients in some cases. And part of that is just the -- you've got this noninterest-bearing versus interest-bearing construct in the U.S. and internationally, you tend to have just an interest-bearing deposit construct. So it's a little more -- it's a little more straightforward.

So as I've described, we have cumulative deposit betas in the U.S. in 70% to 75% range. We expect that will float up a little more as we kind of -- as the cycle , let's say, finishes. Could go up another 5, 10 percentage points, but it's starting to level off. In Europe, we're in the 25% to 50% range of cumulative beta. And it can go up another 10 points, maybe 15 points, we'll see. But it's not going to reach the same levels that you have in the U.S. based on the indications we have. And the way we -- both we price and we see others competitively priced in the market. So fairly different between the U.S. and the international currencies. In some ways, that plays to -- that's good for us. We know how to manage in both U.S. and non-U.S. currencies. We've continued to have some tailwinds in NII in the international currencies. We obviously need to make sure that we share some of that with clients. But given the international composition of our balance sheet, that's one of the areas that continues to be supportive of our -- in a positive way of our trajectory.

[Operator]

Your next question comes from Ebrahim Poonawala from Bank of America.

[Ebrahim Poonawala, analyst]

Just a couple of quick follow-ups. One on capital, I think heard you regarding completing your up to $4.5 billion in buybacks for the year. Just give us a sense with the CET1 at 11% close to your target. How are you thinking about capital management going into next year? Would you rather operate with some amount of excess capital as you look forward to some of the macro uncertainties relative to just continuing buybacks and paying out any excess.

[Eric Aboaf, executive]

Let me start on that, Ebrahim. We -- it's Eric. Capital is one of the most important elements of the balance sheet. And we spend a lot of time thinking about what are the levels of capital, how to manage. And it is based on facts and circumstances, right, the economic environment, the uncertainty, our confidence in earnings and earnings momentum, what we can see in the strength of our balance sheet, right? We're incredibly liquid, and we have a very upmarket lending book, which is quite high quality. So many things come together.

I think what we've laid out on the page on capital in the materials is that our minimum requirement is 8%. We tend to run with a very healthy buffer above that. We've got a target range in the 10% to 11%. And we've been way above that range, partly because of a little bit of history over the last 2 years and we bring that down. But in both at pace and also in a thoughtful way.

I think what you'll see us do, and I get -- I say this is given what we know today because we're going to be careful. If markets disrupt, then you slow a little bit. If you've got a lot of confidence in market fees and there's confidence that you might go in the other direction. But the middle of that range is a good place for us to aim towards, partly because you want to keep a little bit of extra, that's still 2.5 percentage points above the requirements. On the other hand, there are some uncertainties in the world and doesn't feel like we should run down to the lower end of that range right now, right? That feels like it would be -- it wouldn't be appropriate.

So there's a range for a reason, I guess, is what I'd say. We've been returning capital at pace in the last few quarters, $1 billion or more. We certainly like to continue to return capital at pace. You can kind of do the math of 11%, go down to the middle of the range.

You got to remember there's pulled a par that matters from the [ AFS ] portfolio that provides a tailwind and capital accretion. There's earnings. And then there's the RWA management. You saw RWA tick up a little bit this quarter. Our goal is obviously to continue to optimize RWA and turn that into an advantage as well. So we see quite a healthy buyback going into the fourth quarter. We've got authorization, plenty of authorization to deliver on that. We know it's important to our shareholders and have, I think, a good path forward.

[Ebrahim Poonawala, analyst]

That's helpful. And just a follow-up quick question around NII or, I guess, as you're thinking about [ ALCO ] management, is there -- as things reprice on the asset side within the securities book, are we kind of holding duration relative to where the back book is, will at any point the thought process evolved to adding duration. I'm just wondering how you're thinking about the cycle, the environment we might be for the next few years and how that informs the duration you're willing to take on?

[Eric Aboaf, executive]

Ebrahim, the answer is all the above. So every one of those factors matter. If we get more steepness to the yield curve, right, that would encourage us to add some duration. At the right time, we want to -- we may need a little more duration to protect against falling rates, right? That's what you want, to ideally be ahead of that. On the other hand, rates could move upwards further, and so you want to be careful. I think we're careful in how we've configured the portfolio. You saw us do some of the repositioning. We unwound $4 billion or $5 billion of bonds, we've reinvested towards the middle of the curve, but also at the front end, right? We have -- so it's not just an average duration position that we are focused on. But where are the points across the curve. And then there's a whole window of work that we do around the U.S. curve, the euro curve and then the other foreign currencies. And then there's also a mix of duration -- clean duration we put on through treasuries and some of the convexity products like the agency [ MBS ].

So there's a wide range, but it's an active discussion, I'd say, at [ Alco ] and one that we think will both be -- we think of it both on an economic basis but also on a risk management and protective basis that we'll have, I think, quarter-to-quarter.

[Operator]

Your next question comes from Steven Chubak from Wolfe Research.

[Steven Chubak, analyst]

Eric, I want to ask a follow-up on the new revenue disclosure. In the past, you spoke about the level of gross asset flows that would be needed to offset natural attrition in the business. In a similar vein, I was hoping you could frame the level of gross revenue wins that are required to offset natural attrition, recognizing for -- I think it was Brian's earlier question that fee rates will certainly vary depending on new wins. But any way you could frame it in that context would be really helpful.

[Eric Aboaf, executive]

Yes. Here's what I described. In the past, we talked about AUC/A wins, we had talked about got [ $1.5 trillion ] of AUC/A wins a year. That's kind of volumetric benchmark. And as some of the discussions we've had, typically, we winning on average higher than the current fee rate, and so you can kind of work through that.

On the fee revenue side, and this is really around servicing fees, our goal for this year, 2023 is to deliver about $300 million of servicing fee wins. And you can compare that to the $5 trillion of -- sorry, $5 billion of servicing fees for the year, and that kind of gives you a sense for, I'll call it, gross revenue wins. As Ron described, we've got a series of initiatives, some of which are already playing through around adding to sales capacity, sales effectiveness, product feature functionality and so forth. And part of the disclosure that we provided just last month was that while $300 million of servicing wins is appropriate for this year, we'd like to get closer to $350 million to $400 million next year. And again, you can kind of compare that to the $5 billion of servicing fees. And that kind of gives you a sense of gross fee revenues.

I think the follow-on work you want to do is just think about the other drivers of servicing fee revenue growth on a net basis, right? There is typically some amount of attrition. We said we'd like to have retention at 97%. So we can think about 3% servicing fee attrition. That's about $150 million a year is a way to compare the gross wins versus the gross losses. And then there's some amount of fee headwinds, which is about 2% a year that we've described. So what we're trying to do is create clarity for all of you on the elements of that growth, kind of the growth [ Altaba ], I'll say it in an analytic manner so that you can see where we're really focused.

And every one of those levers matter. We have tens efforts on each one of those. But it's that mix of activity and the sales, the servicing fee, sales in particular that will help us then deliver a core organic growth from year to year to year and a good way for, I think, us internally to be clear about what we need to accomplish and externally with you all as to what the bar is for good organic growth and success.

[Steven Chubak, analyst]

And if I could just squeeze in one more clarifying question. There was a lot to unpack in the response to Ebrahim around capital management. It does appear given the 4Q buyback level, assuming you execute on the $4.5 billion in its entirety, that you'll be at the lower end of that 10% to 11% range of CET1, recognizing there'll be a pull-to-par benefit, but should we be anchoring to the 80% to 100% payout that you guys have managed to in the past? Just recognizing that there's not as much excess if you're going to run at those levels?

[Eric Aboaf, executive]

I think for the rest of this year, the analytics I'd encourage you to do is to think about where we ended third quarter kind of the middle of the range, and that's not necessarily a point, but the range to the middle of the range. For fourth quarter, there's pull-to-par, there's RWA management. That gives us quite a healthy amount of buyback. And I think the continuation of something that's quite accretive to shareholders that is substantial in terms of capital return.

I think once we get to the middle of the range, then we're more likely to be the -- that over 80% level of earnings but I think -- and that will be probably how we think about next year. But that's next year. I think there's -- I think we have good visibility into a good and healthy amount of capital return and comfortably over what we've committed to, I'll call it, in the medium term.

[Operator]

Your next question comes from Mike Brown of KBW.

[Michael Brown, analyst]

Okay. Great. So multi multipart question here on the asset management business. So first, it was just great to see the money fund flows come in this quarter, and you mentioned that you believe there was some market share gains there. Can you just touch on what contributed to those gains and maybe some thoughts on the coming quarters? And then I look at the equity side and consistent with the industry, there was pressure there on the flows. What's your thoughts on maybe when investor sentiment could improve and flex there?

And then just last part here, when you take a step back and you look at [ SSGA ] today, is there anything strategically that could be interesting to you from an M&A perspective to help bolster the asset mix or accelerate some of the future growth potential in the business.

[Ronald O’Hanley, executive]

Mike, it's Ron. So there's a lot there in your question. I think on the Cash business, I mean, this is a core competency that we've had for a long time. And it's also -- we've built up the capability both on the investment side and really on the distribution and channel side. So we've got distribution and if you will, kind of hooks in the water in many different pools. And that's including, by the way, lots of connectivity into the core custody business.

So as you've seen for example, rotation from deposits. We've captured some of that in the money market business. But the -- a lot of it -- most of it's been external. Most of it's been around investment performance and kind of being where the money is flowing. The other areas that are also growing, [ D.C. ] is growing and has been growing for a while. Share has continued to grow there in the [ DC ] investment only. And that's been very much product and product innovation-driven. [ SSGA ] was one of the first to figure out how to put an annuity product into a target date fund, did it actually before it got the broad regulatory go-ahead to do that, and that's actually now a source of real growth. So we see that as a growth area. The defined benefit just goes away and people realize that longevity protection is something that people need. I think that combination of a target date fund with some kind of insurance longevity product will be important, and we've got real distinctive expertise in that.

In terms of the growth areas, I mean there's -- we are really for the most part, an institutional shop. We've built out the product capabilities in the retail and the intermediary space. [ Ishan Hung ], who joined us as late last year. She's got a lot of expertise there, too. So some of it will be just moving and expanding share in the retail intermediary space. And then there's a real move into blending the line between public and private markets and the belief that those [ mines ] really don't make sense and the blended products where you've got sufficient liquidity, but enable those that don't need the liquidity to take advantage of the illiquidity premium. So some of this will be in product design, whether that's organic or inorganic, I mean we think there's opportunities in both.

And there's -- the team's got lots of product development going on. So we're fully committed to that business. We see lots of growth in that business and excited about the prospects there.

[Operator]

The next question comes from Mike Mayo of Wells Fargo Securities.

[Michael Mayo, analyst]

Well, it's been a long journey for you guys to get the front-to-back solutions in Alpha. And I'm just trying to figure out how much traction that has and where we're seeing that in the financial results. On the one -- I hear your excitement and you have alternatives now part of that program, and you're guiding for positive 2024 fee operating leverage and you have all these new mandates. On the other hand, I look at the fee growth this quarter and wasn't that great, right? And so are we seeing evidence of the front-to-back momentum in the results? Is it something that you expect to see? Or is it simply such a long sales cycle that we should be thinking 2, 3, 4 years out?

[Ronald O’Hanley, executive]

Mike, let me just start and maybe address the journey here because this was not something that you bought off the shelf. It was actually something that nobody had ever done before. So there was an awful lot of development that we need to do, and I think we signaled that at the beginning. I mean, [ Charles River ] was an important acquisition. But to be clear, that was a [ fund ] and in itself needed some investment, particularly in the fixed income area.

So much of what we've been doing over the last several years is selling and developing. Many of the early -- particularly some of the early large ones were explicit development partners. We targeted them. They targeted us and came in as development partners with the idea that they would help us to build this out. They've been -- it's purposely taken longer because they're the ones that are actually helping to shape what the overall things like this has been a very, very big year. Eric alluded to it in terms of some of the features and functionality, particularly around fixed income and getting up to not just par but to a market-leading position in terms of fixed income capability.

So in terms of just getting the program up and running, we're actually quite pleased with where we are. I don't think we would have thought back in 2018, 2019 when we launched this, that we have the number of clients that we do now.

The other thing that we we're convinced of, but we had to prove it to ourselves was that this could be a tool to actually generate new clients, that it wasn't just a way to solidify existing relationships, but it was a way to actually grow share and ship share. And that's what we're starting to see now. [ Tobi ] was one, there's others in the pipeline. So it's a journey that we believe will see revenue growth at an accelerated rate. And maybe I'll leave it there.

[Eric Aboaf, executive]

And Mike, it's Eric. On the financials, it's a very fair question. I just remind you the context for the current year because there is some other large movements on servicing fees. So if you think about it, we recorded a 1% growth in overall servicing fees. But there were tailwinds and headwinds away from the kind of organic new business creation that's important that we need to demonstrate year after year.

The market tailwind for year-on-year for this quarter was about 4 percentage points of servicing fees. So you'd say, hey, where is that? Part of that was about 3 percentage points of headwind came from lower client volumes and activity, right, a little bit of what we described as we've seen less trading activity out there, which is -- which comes and goes, tends to be cyclical. And then the other thing we did see this year and this quarter is that previously disclosed client exit was worth almost 2 percentage points as well.

So there are, I think, some larger move of headwinds and tailwinds, in particular, flowing through the financials. Net new business, right? If we just want to take a look at that was a positive 2 percentage points year-on-year this quarter, and that's where we'd like to see the value of Alpha, the value of traditional servicing fee sales, the value of private servicing fee sales. And part of the reasons why we're adding to our disclosures to make that more apparent to everyone over time.

[Michael Mayo, analyst]

And then just one follow-up, Eric, and then Ron, just the [ exit ] of that large client. What inning are you in as far as that's concerned? And then, Ron, as it relates to accelerating revenue growth from the long journey of Alpha timing, are we thinking quarter year, several years?

[Eric Aboaf, executive]

Yes, on the previously disclosed client, we're out 30% through that very roughly. The bulk of that will come through next year. And then there's another -- there's -- just because of how year-on-year comparisons were, you'll get a tail into 2025.

[Ronald O’Hanley, executive]

Yes. And Mike, just can you clarify the question? I just want to make sure I'm on [indiscernible].

[Michael Mayo, analyst]

My initial question was fees aren't growing that much, and Eric identified some headwinds to that. But you talked about the financial benefits from Alpha, the increased activity to result in accelerating revenue growth. I was just wondering a time frame around that statement that revenue growth should accelerate due to the benefits of Alpha.

[Ronald O’Hanley, executive]

Yes. So I mean, as we signaled, I think, at the beginning, I think probably -- I think it was out my answer to Alex, the -- we're telling you that we believe we're going to achieve positive fee operating leverage. There's revenues there and there's expenses on the revenue side, we believe we've got a program in place that includes Alpha that's going to enable us to do that.

Some of that is driven by Alpha. Some of that's driven by actions that we're taking, some of which have been implemented, others that will be implemented this quarter and into next in terms of strengthening sales and revenue-related capabilities. So what you should be hearing from us is confidence around our revenue growth generating capability related to the core business.

And what you should also -- and the point we normally don't go into a client example that we did there, but it's such a pure example of the strength -- the [ Vontobel ] example is such a pure illustration of the strength of Alpha because it's an institution we had no relationship with. We began the relationship with front and middle office. And then we have brought along the back office, which it felt as you know, Mike, as well as anybody generates other kinds of ancillary revenues. So this is -- that's an illustration of how Alpha is enabling us, we believe, to pick up share that we wouldn't otherwise be able to pick up and to do it in a way that's distinctive from our competitors.

[Operator]

Your next question comes from Gerard Cassidy of RBC.

[Gerard Cassidy, analyst]

Eric, can you share with us -- I know you're -- I'm not asking you to go into details on your budget for the upcoming year. But could you frame out for us though the outside factors that influence the budgeting process on expenses such as wage inflation or other types of inflation? Do you feel like there's less pressure going into 2024 versus this time last year when you were doing your '23 budget?

[Eric Aboaf, executive]

Gerard, it's Eric. Yes, the headwinds have lessened. They're still there, but they've lessened. If you think about it, when we were doing the budget for 2023, it was the fall of 2022, we actually, at that point, had done 2 formal merit increases that year, some of which we're going to then play through on a carryover basis for '23. So that was partly a headwind. And then we had a larger than probably typical merit increase by a little bit in the spring of this year in '23.

So that's -- we're not in that environment anymore. We certainly want to reward our employees with annual merit increases, but much more in line with what we've done over the last 5 or 10 years as opposed to something that was much higher. So that's on the kind of wage side benefits. We're actually continuing to see some amount of inflationary activity, medical claims, dental, et cetera, as you'd expect. I think that's pretty broad-based. So -- but that's probably similar to prior years.

And then I think the interesting area where we're doing a lot of work on is all the non-personnel spend, right, our various partners and vendors and software licenses, cloud computing costs, right? Every one of those is an area for us to think about what's appropriate. And so we have -- we've been having those discussions this summer and this fall, and we'll continue to have them into the winter around next year. We're seeing inflationary increases the way we were a year ago there. A little bit less so, but I think we're still seeing higher than we'd like, inflationary increases there.

And so important questions are how do we offset them. How do we use technology if it is a little more expensive to drive increasing process engineering and automation. How do we partner with fewer suppliers in some cases and get the benefits of our scale. So there's a number of initiatives that we're working through, but that's one that takes some more in a way. That's part of what we do during the budget process.

[Gerard Cassidy, analyst]

Very good. And then as a follow-up, obviously, our industry, the world has gone through an incredible turmoil in the last 3 or 4 years with the pandemic and such. And now we're in this interest rate environment that we have not seen since prior to the financial crisis. And if we assume that the Fed is higher for longer, let's say, it's 4% to 5% for an extended period of time versus the 0 to 25 bps that you all had to operate and the industry operated at post financial crisis going into where we are today, how is that -- or is it changing some of the strategies you may pursue now that the rate environment is not possibly not going back to the 50 basis points that we were accustomed to. Does that change the way you approach the business or approach your customers that you couldn't do because rates were at this level 3 or 4 years ago?

[Eric Aboaf, executive]

Gerard, it's Eric. I think it has several impacts on us, which actually in aggregate tend to be positive for how we manage and engage on our business, very tactically, higher rates and especially some steepness in the yield curve we talked about earlier, gives us some ability to add duration and feel like that's valuable. So there's some tactical effects there.

I think more broadly, with higher rates, the value of cash in our ecosystem, we described $1 trillion of cash in our ecosystem across deposits, money market and cash sweeps and our asset management business, our repo activity, our platform sweep activities is $1 trillion. To us, cash is valuable for our clients to keep, especially in risk on versus -- or especially in risk offer [ and ] risk-on environment. And they want to be rewarded for it, but it also means there's a whole cash wallet out there that for us is a way to engage with clients, right? We as a bank who've got not only the banking offering of deposits but the capital markets offering of repo, the money management offering of money markets and cash management. To us is a way to deepen our relationships with clients.

So I think over time, you'll see us add to our product offering. Some of that's quite broad today, but we'll think about how else do we integrate cash into, say, the Alpha proposition is a way to consider it, how do we think about it in terms of our platforms and our market activities. A number of those are important cash generators.

And then I think at the most senior levels with our clients, the C-suite actually cares about cash today. They care about who they keep it with, how it's masked, how they are remunerated, how it's safe, but also how it can be redeployed. And so it's become a real C-suite discussion in a way that we think can strengthen both our relationships given our broad offering, but also one that becomes more and more of a business activity and a business growth activity over time.

[Operator]

Thank you. There are no further questions at this time. I will hand over the conference to Ron O'Hanley. Please proceed.

[Ronald O’Hanley, executive]

Thank you, operator, and thanks to all on the call for joining us.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.