State Street Corp ($STT) Q1 2026 Earnings Call

Thank you, Liz. Good morning, everyone, and thank you for joining us. I'll begin with a few broader observations before John walks you through our financial results in more detail. Reflecting on the first quarter operating environment for a moment, several factors shaped investor sentiment in Q1, including the Iran war, divided views on the long-term impacts of artificial intelligence, and rising concerns on credit quality in certain parts of the financial system. Against this geopolitical and macroeconomic backdrop, we remain firmly focused on serving as an essential long-term partner to our clients and helping to deliver better outcomes for the world's investors and the people they serve. We continue to execute effectively on our strategy supported by our distinctive capabilities, deep operational strengths, and a conservatively positioned balance sheet. That strategic positioning allowed us to deliver strong growth underpinned by continued financial and strategic progress during the first quarter. Our results in the first quarter also underscore the inherent strength and diversification of our business model which allows us to successfully navigate times of uncertainty and heightened market volatility as we saw in Q1 with both FX trading and NII contributing meaningfully to our year-over-year financial performance. The scale, capabilities, and leading market positions of our core businesses, working together as one State Street, provide balance across varying market environments, reinforce the value of our platform for clients, and accrete value for our shareholders. Slide two of our investor presentation outlines our first quarter highlights, excluding notable items, which John will address shortly. We had a strong start to 2026 with broad-based positive year-over-year revenue performance across the franchise. Reported earnings per share increased 22% while excluding notable items, EPS grew a very strong 39% year-over-year, supported by record quarterly fee revenue, NII, and total revenue. Importantly, substantial positive operating leverage in the first quarter drove another quarter of year-over-year pre-tax margin expansion. Quarter after quarter, the proof points continue to demonstrate that our strategy is delivering consistent, durable improvements in financial performance with Q1 marking our ninth consecutive quarter of year-over-year positive operating leverage excluding notable items. Stepping back from the quarter for a moment, I want to highlight some of the many growth opportunities we are realizing and see ahead at State Street through disciplined business investments and focused execution against a clear set of strategic priorities. We believe we are well positioned to continue to accelerate growth and deliver substantial and sustainable returns for our shareholders. We are drawing on deep, broad-based technology-driven innovation and delivering digital platforms, compelling AI tools in Agentics and client solutions. Together, these capabilities help our clients succeed in a constantly evolving market while strategically pivoting State Street to faster growing segments of the industry. In digital, we are focused on building the market infrastructure clients need to bridge seamlessly between traditional and digital finance. Following the recent launch of our digital asset platform, we are executing against a clear and comprehensive product roadmap that includes tokenization of assets, funds, and cash for institutional investors. These capabilities are designed to drive greater efficiency, enhance liquidity, and support new avenues of growth for markets, our clients, and for State Street. We are well advanced with clients to support their launch of tokenized fund strategies this year. Furthermore, State Street is deeply engaged in a number of digital asset related industry initiatives, including DTCC's tokenization efforts, as well as Fenality's work to create an ecosystem of central bank connected blockchain-based payment systems. These initiatives are key to the development of digital markets and consistent with our track record as a critical market infrastructure provider and standards setter. Across alternatives, including private markets and hedge funds, we continue to see compelling long-term growth potential as the segment matures with clients leveraging State Street to bring innovative solutions to markets. Our leadership positions across both investment servicing and investment management position us well to capture opportunities as we broaden access and simplify operations for clients and our clients' clients. In wealth services, we are investing in leveraging Charles River's capabilities alongside our strategic partnership with Apex Financial Solutions to build a differentiated, fully digital and globally scalable wealth custody and clearing solution. This positions us to serve wealth advisers and self-directed wealth platforms and unlock a new avenue for growth that leverages our strength across investment servicing and investment management. And finally, at State Street Investment Management, our strong track record of innovation, differentiated solutions, and scaled franchises in areas such as ETFs, cash and retirement, to name just a few, create multiple avenues for growth. An illustration of our progress is the way we provide barbelled investment exposure at scale to serve distinct client needs. At one end, SPYM, our low-cost US S&P 500 ETF, is gaining strong traction in retail and wealth channels. It ranked as the number one asset gathering ETF globally in the first quarter with 27 billion of inflows in that fund alone. At the other end, SPY continues to anchor institutional usage as the market's liquidity benchmark with nearly 4 trillion of notional value traded in the quarter, representing roughly 17% of total US listed ETF volume. Together, this underscores the strength, breadth, and flexibility of our platform across client segments and our abilities to successfully extend from our leading position in SPY to other high-growth ETF segments. Our scaled franchises within investment management also create a competitive advantage and will enable us to capitalize on several important global trends, including the shift from savings to investment, the move globally towards funded retirement systems, the expansion of digital assets, and the continued democratization of investing. For example, in digital, we are preparing to launch the State Street Galaxy on-chain liquidity sweep fund, a tokenized private liquidity fund designed to support 24/7 on-chain liquidity for institutional investors. Together, these strategic initiatives underscore the broad range of opportunities ahead as we focus on driving near and long-term growth, enhancing client capabilities, and strengthening our platform. At the same time, the next phase of our operating model transformation will strengthen our ability to deliver sustainable growth and long-term shareholder value. We are scaling AI-enabled capabilities, embedding more agile ways of working across the organization, and continuing to modernize our technology with a continued emphasis on operational excellence, consistent execution of our strategy, and delivering for our clients. We are strengthening and improving our core end-to-end capabilities and technology through the deployment of our Agentic platform and AI foundry to scale and accelerate AI in high leverage areas while also advancing capabilities in areas such as State Street Alpha and Charles River Development. These actions position us to operate more effectively, partner more deeply with clients, and help drive the next phase of industry evolution. To conclude, we are pleased with our strong start to 2026 while recognizing that our potential is even greater. We see broad-based strength across the franchise and our first quarter results reinforce that our strategy is translating into consistent and durable improvements in financial performance. At the same time, we continue to transform across the platform and accelerate the deployment of AI agents, which holds significant opportunity for State Street and our clients given the investment, operational, and technology intensity of what we do. In July, we will provide a detailed update on our strategic growth and transformation initiatives and how these position us to drive stronger performance over the medium term. We are encouraged by our progress, mindful of the environment, and confident in our ability to continue delivering as we move through the year. With that, I'll turn it over to John to walk you through the first quarter in more detail.

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

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

Yeah, Mike. We're very positive on AI and a lot of that has to do with the nature of our business which you understand well. It's investment, operational, and technology intensive. So where are we on this? I would say it certainly is comprehensively embedded across the enterprise. We've got broad access and accelerating adoption. Virtually every employee where it makes sense has access to the tools and usage is continuing to scale rapidly, and a lot of repeat behavior indicating that the tools are becoming part of the distributed daily workflows. Secondly, in terms of development and technology development, systems development, we're fully enabled there and there we're already realizing productivity gains and it's giving us the ability to actually do more faster and get to those projects that we would have liked to have gotten to but wouldn't have made the cut before this kind of productivity gain. So again, all of our developers have access to these AI-assisted development tools and we really are seeing an acceleration both of new technology development but also technology modernization. Thirdly, it's what you do with it after that. And we have built a centralized AI hub which has a very deep use case pipeline that's beginning to scale and will scale over the back half of 2026. This platform supports over 200 AI use cases now with 70 of those already live. And as they mature, we expect tangible business impact to begin emerging in the back half of 26 and then accelerating going forward. Which then leads to the kind of fourth piece of all this which is agentic service delivery. I talked a little bit about that in my prepared remarks. Again, given the operational intensity of what we do, the opportunities are just manifest for us. We have agent-enabled service delivery that will become online in July. And we will at the same time put forth what we're calling the AI foundry to be able to do this and repeat this. The longer-term question that you're asking is do you think it destroys the business model? We don't see that. Now at the same time we also see that these are widely available tools. There's nothing proprietary here. So it is how you actually deploy them. John talked about in his remarks how you actually turn that not just into operational improvement but create real agility in the way the organization operates. And what does that mean? Many of these businesses have grown up kind of organized the way they are going back years and years. A lot of that won't make sense any longer. We're already seeing that change in our organization in terms of how we think about those things. So the real power of exploitation first is deploying the technology but second is recognizing what it means for how you square off against clients and how you actually organize the work internally. But for us we see this as an opportunity, more opportunities than risks.

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

Yeah. Ibrahim, I would say it's both. I mean obviously given the nature of our client base and our market share with the most sophisticated clients, you'd expect they expect from us and you'd expect us to be delivering the best that the market has to offer to them. But if you think about some of the use cases, they're already very real in terms of the tokenization of assets. That's in the end net new opportunity for us. And we've talked to you before and in other venues about tokenized money market funds. I mean, that's a real use case. And it's beneficial to the market. It's beneficial to liquidity and will result in more revenues for us. The whole on-ramp off-ramp bridge from traditional finance to digital finance is also a real opportunity. I mean, the way to think about what's going on here is there's lots of new railroads being manufactured and being laid. There's not yet the interchange to those. And that's a very real thing. And when you think about everything that whether it's the stablecoin providers are doing or some of the other digital platforms, again, the volumes are growing fast but against a very small base and part of the reason for that is the on-ramps and off-ramps really are underdeveloped at this point. Being part of that on-ramp off-ramp and providing that infrastructure is a second source of new revenues. So we see it as both going forward.

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

There's a lot in that question, Brennan. The active ETFs are absolutely growing and we're seeing, we're the beneficiary of that in our servicing business. And I think one of the reasons why they're growing in addition to the vehicle in many cases simply being a better vehicle and also aligned with the way distribution has gone either within the traditional wirehouses where you want to have control over how the portfolios are put together or with the rise of the independents. But the buyer's fee comparison is less about the active ETF versus the passive ETF and much more around the active mutual fund versus the active ETF. So I think that's also helped with the value proposition there. We see, and because of our platform we can realize opportunity and grow ETF growth literally around the world. So we talked a little bit about, John talked a little bit about the growth that we've seen in Europe. We were early on there both as a sponsor and as a servicer and it was slow growth at the beginning but you're seeing a much bigger take up. We actually think that the real growth is yet to come in Europe. Why do I say that? Because the distribution in Europe is still largely bank-based. Yet there's a lot of platforms and alternatives to banks that are going after them. They will employ and deploy ETFs as the tool and again will help us both on the sponsor side and the servicing side. You look even in places like the Middle East and there the funds business in places like the UAE and Saudi. I just came back from Saudi earlier this week. It's my second trip to the Gulf this year. You're just seeing those countries skipping over the old mutual funds and going right to ETFs and building modern platforms around ETFs. So all of this we see as real tailwind there. If you're a distributor like a Schwab, obviously you want to get paid for this and they're going to do what they need to do to be appropriately compensated. At the same time every distribution platform is going to have to look at what are other distributors doing and there's emerging a lot of these tech-forward, tech-driven distribution platforms that are going to provide competition to them. So it's a vibrant sector. There's a lot of growth in it. And we think we're just very well positioned both as a sponsor and servicer.

And I think we're pretty constructive on the proposed approach. I think it's delivering on the expectation that there would be a more targeted view of credit risk RWA and I think that's played through and it's our expectation that we'll see a benefit in the credit risk RWA side of things that is expected to exceed the additional RWA that we'll have to provide on the operational risk front. So, you know, we'll have to frame this and think about magnitudes as we continue to study it and determine what the finalization of these rules will be, which will happen over time. But generally, reasonably constructive on the proposal, and it's going to be a net benefit, it appears, for us. And then lastly as it relates to the 80%, that's on a GAAP basis in terms of the payout.

Yeah. I think it's also important to remember that all this attention on these products and redemptions is really around a very small piece of the private credit market. It's around those that are put into funds and available on a semi-liquid basis to investors. The vast majority of private credit is not in those kinds of structures and there's no reason to believe that private credit won't continue to grow. It's unlikely that you're going to see significant expansion of bank balance sheets in Europe or Asia. So yet the appetite for credit will continue to grow. You even think about bank-intensive kinds of markets again like the GCC. If you look at those banks, highly profitable banks but they don't have a lot of places for bank balance sheets to grow and if you think about the capital needs of that region that were already there today or before March 1st and what those capital needs are going to be going forward, that's just yet another pocket that will need to be fulfilled by private credit in some form. I do think what you will see is a careful examination of these vehicles and what actually goes in them. How do you manage expectations of retail and affluent investors appropriately? But again that's a relatively small segment of the marketplace.

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

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

I think it's a really good question, Gerard. I think the importance of scale certainly hasn't gone down. If you think just about the investments required around technology and cyber and those kinds of things just to stay where you are, right? Forget about growth, forget about new opportunities. The cost of doing that which is either being imposed regulatory on all the other players or increasingly by clients themselves who are saying this is our expectation in terms of what we're going to expect and demand of you. You then layer on to that the real revolution that we're seeing both on the AI front and what it means again not just to bring the technology in but to actually profit from it, the scale both around people, know-how, etc. is just really hard I think for a smaller player to do. And then if you believe that we're moving towards this true digitization of finance, that will take time. So, it's not just about showing up with the fancy new platform, but recognizing that there's this long-term transition between analog and digital that there are these on-ramps and off-ramps that need to be built. And if you want to make money, that's what you need to do. Again, puts more scale requirements. So I don't dismiss the innovators and we look at them and we follow them and in some cases we partner with them and even smaller number of cases we buy them. But in terms of do we see one of those developing into a true scaled player to compete in this little pocket that we compete in? We're not seeing that.