State Street Corporation (NYSE:STT) Q4 2023 Earnings Call Transcript

State Street Corporation (NYSE:STT) Q4 2023 Earnings Call Transcript January 19, 2024

State Street Corporation beats earnings expectations. Reported EPS is $2.04, expectations were $1.81. State Street Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. And welcome to State Street Corporation’s Fourth Quarter and Full Year 2023 Earnings Conference Call and Webcast. Today’s discussion is being broadcast live on State Street’s Web site 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 Investors Relation at State Street.

Ilene Fiszel Bieler: 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 fourth quarter and full year 2023 earnings slide presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.com. Afterwards, we will be happy to take questions. During the Q&A, please limit yourself to two questions and then requeue. 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 Web site.

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.

Ron O’Hanley: Thank you, Ilene, and good morning, everyone. Earlier today, we released our fourth quarter and full year 2023 financial results. As I reflect on 2023, the operating environment was dynamic with a complex set of challenges for the world’s investors and for our industry, and I am proud of how we carefully navigated State Street through various headwinds, while continuing to execute against our strategic agenda. We focused and delivered on that agenda in three key areas; achieve strong sales wins across our businesses, drive strategic change in our investment services business and remain disciplined on productivity and broader cost management. Further on that last point, during 2023, we implemented key productivity actions and announced additional efficiency measures that will enable us to enhance the productivity of our operating model in 2024 and the years ahead.

We took these many actions all while investing in our business and returning substantial capital to our shareholders, which helped to drive full year earnings growth excluding notable items. The world’s investors, State Street and our industry, faced a host of significant market events and macroeconomic forces in 2023. In the first quarter, turmoil in the banking sector ultimately led to the resolution from several banks, which was a catalyst for some of the largest fixed income market moves seen in decades. In the second quarter, anticipation grew about the potential economic benefit from artificial intelligence, helping to drive equity markets higher. However, as we progress into the third quarter and as the Federal Reserve raised interest rates to the highest level in 2022 years in July, the prospect of higher for longer rates led to a substantial sell off in bond markets with the US 10-year treasury yield exceeding 5% in October, for the first time since the global financial crisis.

Rate uncertainty and an increasing number of geopolitical concerns caused equities to struggle. Then during the fourth quarter, the equity market rallied vigorously as inflation receded and investors grew increasingly optimistic about a soft landing with positive sentiment gaining further momentum in the last month as the Federal Reserve signaled a pivot to lower interest rates this year. In sum, while our full year overall financial results benefited from higher interest rates globally last year and despite the strong market appreciation in the fourth quarter, daily average global equity markets only increased by low single digits in 2023, providing just a modest tailwind to our fee revenue, while client activity was muted as investors stayed on the sidelines for much of the year.

And even in such an eventful year, equity and FX market volatility continued to contract creating revenue headwinds for our trading businesses. Slide 3 of our investor presentation provides some of our highlights for the year. Beginning with our financial performance, full year earnings per share was 5.58 or 7.66 excluding notable items. Year-over-year, excluding notable items, EPS growth was supported by $3.8 billion of common share repurchases, a record level of NII, continued growth of our front office software and data business and higher securities finance revenues. The combination of which more than offset the impact of lower servicing and management fees and underlying expense growth, which was still well controlled. We continued to build business momentum and position State Street for longer term success.

To that end, we achieved a number of important accomplishments in 2023, as you can see on Slide 3. A key highlight of today’s results is the clear progress we’re making on innovation and advancing product capabilities, which in turn contributes to stronger sales momentum across our broad franchise aimed at generating better fee revenue growth in the year ahead. Within the Investment Services business, we are intensely focused on ensuring better execution against our strategy and revenue goals. We unveiled the sharpened execution plan last year, underpinned by a number of measurable actions aimed at driving servicing opportunities across key regions and product areas, realizing the full potential of our Alpha value proposition and accelerating sales and revenue growth, particularly in our core back office custody.

Encouragingly, as I just noted, today’s results demonstrate our proven ability to deliver the level of sales required for attractive organic servicing fee revenue growth for the future as we built upon the $91 million of new servicing fee sales in third quarter by recording $103 million of new servicing fee wins in 4Q, which is the highest level of quarterly new servicing fees in recent years. From its inception, we have noted that Alpha will further establish, broaden and deepen client relationships, positioning State Street as our client’s essential partner. Alpha distinctively enables us to grow and tie together the full breadth and depth of State Street’s capability as a true one State Street solution for our clients from front to back.

2023 was an important year for Alpha software delivery. Last two quarters of the year included the significant development of the fixed income portfolio management module, which propel CRD and Alpha capabilities and competitiveness forward. In 3Q, we recorded our first Alpha for private markets client. And in the fourth quarter, we continued Alpha’s momentum by deepening relationships with a number of key existing mandates and recording four new Alpha wins, while our front office software and data business had a record quarter of new bookings in 4Q, both demonstrating our ability to drive stronger sales. Within our Global Markets business, even as low volatility created a headwind, we continued to see proof points of our very strong market position.

For example, in its 2023 FX awards, Euromoney Magazine named State Street as the winner across four important categories, including the best FX bank for real money clients. We also continued to innovate and strategically expand our product capabilities and geographic reach, including the planned acquisition of outsourced trading firm CF Global Trading. At Global Advisors, we undertook targeted strategic actions aimed at gaining market share and driving occupancy growth in the coming years. As a result, we saw encouraging business momentum with GA setting a number of growth records in 2023. A number of key performance indicators make us optimistic as we look ahead. For example, in Q4, GA recorded the best ever quarter of aggregate total flows, including record quarterly flows within our SPDR ETF franchise, amounting to a capture of 21% of total global ETF flows in Q4 and ending 2023 with a record level of total ETF assets under management.

Our cash business had an exceptional year delivering record annual flows in 2023 with institutional money market fund AUM also reaching a record. Overall, we gained market share in a number of key areas, including institutional money market funds and US low cost equity and fixed income ETFs. Turning to our efficiency and productivity efforts. Underlying expense growth was well controlled in 2023 with full year expenses increasing 3%, excluding notable items. Q4 expenses, excluding notable items, rose just 1% quarter-on-quarter, reflecting the impact of our ongoing expense actions. Transforming our operations to improve effectiveness and efficiency and realize productivity growth remains a key priority for us. To that end, we announced important steps in our multiyear productivity efforts aimed at improving our operating model.

As we previously announced, we are streamlining our operations in India. We have now assumed control of one of our joint ventures in that country with a second joint venture consolidation expected to close in spring. We expect these actions will accelerate the transformation of State Street’s global operations, improve service quality and client experience and enable us to achieve productivity savings as part of our plans to deliver positive free operating leverage in 2024. Turning to Slide 4 of our presentation. You can see our fourth quarter financial highlights and business trends and indicators, which Eric will shortly take you through in more detail. Before I conclude my opening remarks, I would like to touch on our continuing balance sheet strength, which has enabled us to return substantial amount of excess capital in recent quarters.

For example, over the last five quarters to the end of December, we have returned $6.4 billion of capital to our shareholders. As we pivot to a more normalized level of capital return, in 2024, it is currently our intention to return approximately 100% of earnings in the form of common share dividends and share repurchases, subject to market conditions. Accordingly, as we announced this morning, our Board of Directors has authorized a new common share purchase program of up to $5 billion with no set expiration date. To conclude, while 2023 was an eventful year, we finished strongly in 4Q, which creates an encouraging starting point for our businesses into 2024. This year, we remain highly focused on both the execution of our strategy and the accountability for results.

Our goals are clear. We must continue the improvement in our sales performance that we demonstrated in the second half of 2023, continue to implement a set of productivity initiatives and product enhancements that will drive longer term improvements in our operating model efficiency and effectiveness and deliver positive fee operating leverage in 2024, all while returning capital to our shareholders. We are laser focused on these goals. Now, let me hand the call over to Eric who will take you through the quarter in more detail.

Eric Aboaf: Thank you, Ron, and good morning, everyone. Before I begin my review of our fourth quarter and full year 2023 results, let me briefly discuss the notable items we recognized in the quarter on Slide 5, which collectively totaled $620 million pretax or $1.49 of EPS. First, we recognized an FDIC special assessment of $387 million, which is reflected in other expenses. Second, we recognized $203 million of net repositioning charges to enable the next phase of our productivity program. As we had indicated in December, the bulk of this action primarily relates to severance of around 1,500 employees. Our initiative to streamline and delayer our operations, technology and staff functions and improve efficiency will allow us to sustainably reduce expenses.

We expect these actions collectively to have a payback of roughly six quarters and begin this quarter with roughly two-thirds of the benefit occurring in 2024. These actions and the related savings will contribute to our fee operating leverage goal for 2024 and in subsequent years. Turning to Slide 6. I will begin my review of both our fourth quarter and full year 2023 financial results. As you can see on the table, total fee revenue was flattish for all periods of comparison quarter-on-quarter, the year-on-year quarter and for the full year. The slight market appreciation, notwithstanding the combination of muted volatility, central bank pivot and geopolitical concerns, pushed investors to the sidelines for much of the year. In terms of our more durable revenues, we continue to benefit from strong momentum in our front office software and data business, which was up 5% on a full year basis and 13% on the year-on-year quarter.

In terms of areas that have begun to rebound, management fee performance was down for the full year at minus 3%, but has begun to rebound with an up 5% result for the year-on-year quarter as flows picked up and we gained share. Back office servicing fees was challenged for much of the year as the client’s transactional activity was muted but has started to turn positive and is up 1% this quarter as we’ve seen a recent lift in equity markets. And of course, we continue to be affected by industry wide headwinds in our global markets businesses, given the low levels of volatility in the FX markets and specials activity in agency lending throughout the year. NII has been tough to predict and surprise to the part of this quarter compared to third quarter.

I’ll turn to that in a few minutes. Expenses were well controlled in the quarter as we continue to thoughtfully allocate resources across the franchise and to areas where we see the greatest opportunities for top line growth. Relative to the year ago, total expenses ex-notables were up 2% year-on-year and reflect intensifying cost management in a tough environment as the year progressed. This expense control, coupled with the repositioning actions I just mentioned, prepare us to deliver productivity savings and positive fee operating leverage in 2024. Finally, despite a dynamic and challenging operating environment, we delivered full year 2023 EPS growth of 3% excluding notable items. This was supported by share repurchases, a record level of NII and the growth for our front office software and data business, which is less exposed to macroeconomic conditions.

Turning now to Slide 7. We saw period end AUC/A increase by 14% on a year-on-year basis and 4% sequentially. Year-on-year, the increase in AUC/A was largely driven by higher period end market levels and net new business. Quarter-on-quarter, AUC/A increased primarily due to higher period end market levels. At Global Advisors, period end AUM increased 19% year-on-year and was up 12% sequentially, largely reflecting higher period end market levels and strong net inflows. Notably, as Ron mentioned earlier and I’ll describe momentarily, in fourth quarter, GA recorded the best ever quarter of aggregate net flows of $103 billion, which sets us up well for 2024. At the center right, we’ve also added a table of market volatility indices, which we believe can be useful indicators of client transactional activity that drives servicing fees, specials activity in agency lending and flows in margins and FX trading.

On Slide 8 now. On the left side of the page, you’ll see fourth quarter total servicing fees up 1% year-on-year, primarily from higher average equity markets, partially offset by pricing headwinds, lower client activity and adjustments and a previously disclosed client transition. Sequentially, total servicing fees were down 2%, primarily as a result of the pricing headwinds and a previously disclosed net client transition, partially offset by higher client activity and adjustments, which was nice to see as clients started to come off the sidelines. On the bottom left of the slide, we summarize some of the key performance indicators of our servicing business. We were quite pleased to see new servicing fee revenue wins of $103 million this quarter, the highest in many recent years, primarily reflecting the enhancements to our sales processes and product offerings, including in North America where we saw strong outcomes after a period of underperformance.

These servicing wins contributed to the total full year fee revenue wins of $301 million and underscores the progress we’re making towards stronger sales performance. Recall, our goal for 2024 is even higher at $350 million to $400 million in servicing fee sales for the year. Finally, we had $270 million of servicing fee revenue to be installed at quarter end, up $57 million year-on-year and $15 million quarter-on-quarter. We expect about half of this to install in 2024. We also had $2.3 trillion of AUC/A to be installed at period end. Turning to Slide 9. Fourth quarter management fees were $479 million, up 5% year-on-year, primarily reflecting higher average equity market levels and some performance fees, partially offset by a previously described shift of certain management fees into NII and the impact of a strategic product suite repricing initiative that has aided ETF flows.

Relative to the third quarter, management fees were flat, mainly driven by higher performance fees, offset by a previously described shift of certain management fees into NII and the impacts of the strategic ETF product suite repricing initiatives. 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 ETF, we had record quarterly net inflows of $68 billion, driven by record net inflows into SPY as well as the SPDR portfolio US low cost suite experiencing consistent market share gains. In our institutional business, we saw quarterly net flows of $6 billion, primarily driven by defined contribution products.

And lastly, across our cash franchise, we saw quarterly cash net inflows of $29 billion, primarily into money market funds, which contributed to the record total full year 2023 cash net inflows of $76 billion and institutional money market fund market share gains. Turning now to Slide 10. Fourth quarter FX trading services revenue was down 11% year-on-year ex-notables and 2% sequentially. Relative to the period a year ago, the decrease was mainly due to lower FX spreads from muted market volatility offset by slightly higher volumes. Quarter-on-quarter, the decrease primarily reflects lower direct FX revenues from muted volatility. Fourth quarter securities finance revenues were down 6% year-on-year due to lower agency balances, partially offset by higher agency spreads, higher specials activity and prime services revenue.

Moving on to software and processing revenues. Fourth quarter fees were up 10% year-on-year and 26% sequentially, largely driven by CRD, which I’ll turn to shortly. Finally, other fee revenue for the quarter increased $15 million year-on-year, primarily due to a midyear tax credit investment accounting change, partially offset by the impact associated with the devaluation of the Argentinian peso. Moving to Slide 11. You’ll see on the left panel that fourth quarter front office software and data revenue increased 13% year-on-year, primarily as a result of the continued SaaS implementations and conversion, driving software enabled and professional services revenue growth. Sequentially, front office software and data revenue was up 38%, primarily driven by higher on premise renewals and go live implementations.

Turning to some of the Alpha business metrics on the right panel. We’re pleased to report four more Alpha mandate wins in the quarter, which means seven wins for the full year 2023. State Street Alpha continues to be an important differentiator of our business and creates an attractive value proposition for our clients with contractual terms usually covering five to seven, to 10 years. We’ve also gone live with three more Alpha clients which brings us to six for the year, which sets us up well for 2024, and added significant new functionality for fixed income portfolio managers. Fourth quarter ARR increased 16% year-over-year, driven by 20 plus SaaS client implementations and conversions, and we had a record quarter for front office new bookings at $32 million.

Turning to Slide 12. Fourth quarter NII increased 14% year-on-year but increased 9% sequentially to $678 million. The year-on-year decrease was largely due to lower average deposit balances and deposit mix shift, partially offset by the impact of higher interest rates. Sequentially, the increase in NII performance was primarily driven by the impact of interest rates and the full quarter impact of the third quarter investment portfolio repositioning, as well as higher deposits and loan balances. The NII results on a sequential quarter basis were better than we had previously expected, as both interest bearing and non-interest bearing deposits increased and certain client repricings were further delayed. Some of the higher deposit balances may have been seasonal but the Fed’s quantitative tightening appears to have been offset by the reduction of the Fed’s Reverse repo operation, which seems to have resulted in clients leaving higher bank deposit balances.

It’s hard to know how deposits will trend but we are pleased with this higher step-off going into the first quarter of 2024. On the right side of the slide, we show our average balance sheet during fourth quarter. Average deposits increased 4% quarter-on-quarter with non-interest bearing deposits up 3% for the quarter. Turning to Slide 13. Fourth quarter expenses, excluding notable items, increased 2% year-on-year or 1% ex-FX. Sequentially, fourth quarter expenses were up only 1% as we actively managed expenses and continued our productivity and optimization savings efforts, all while carefully investing in strategic elements of the company, including Alpha, Private Markets, Core Custody and tech and ops process improvements and automation.

On a line-by-line basis and year-over-year, ex-notables, compensation employee benefits increased 1%, primarily driven by higher salaries and employee benefits, partially offset by lower contractor spend and performance based incentive comp. Information systems and communications expenses increased 4%, mainly due to higher technology and infrastructure investments, partially offset by the benefits from ongoing optimization efforts in sourcing and vendor credits. Transaction processing increased 1%, mainly reflecting higher brokerage costs. Occupancy increased 24%, largely due to the absence of an episodic sale leaseback transaction in the prior period. And other expenses were up 3% sequentially, flat year-on-year, mainly reflecting higher marketing spend and professional fees.

Lastly, let me spend a moment on headcount. As we discussed in the third quarter, as part of our ongoing transformation and productivity initiatives, we have streamlined our operating model in India and have now assumed full ownership of one of our operations joint ventures, and we recently announced that we intend a similar undertaking with a second consolidation in the country this spring. This consolidation continues the transformation of State Street’s global operations and will enable us to unlock productivity savings, which we expect to start this quarter through a reduction in contractor services and in the years ahead as we simplify our fragmented operating model. As you would expect, consolidating the first joint venture increased our FTE headcount roughly 4,400 in the quarter as we in sourced global capabilities.

However, these costs were already in our expense base and reported historically under the comp and benefits line. These actions are contributing to our higher productivity savings targets for 2024. Moving to Slide 14. 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 of the slide. As you can see, we continue to navigate the operating environment with very strong capital levels, which came in above both our internal targets and our regulatory minimums. As of quarter end, our standardized CET1 ratio of 11.6% was up 60 basis points quarter-on-quarter, largely driven by episodically lower RWA and improvement in AOCI, partially offset by the continuation of common share repurchases.

The decrease in interest rates during December after the completion of our buyback contributed about 20 basis points to our CET1 ratios. And some market factors over the last week of December conveniently contributed roughly another 50 basis points to the RWA end of period print. Going forward, I would expect RWA to run at higher levels to support our various businesses. Our LCR for State Street Corporation was a healthy 106% and 122% for State Street Bank & Trust. In the quarter, we were quite pleased to return over $700 million to shareholders, consisting of $500 million of common share repurchases over $200 million in common stock dividends. Lastly, as we announced earlier today, our Board authorized a new multiyear common equity repurchase program of up to $5 billion with no expiration date.

Turning to Slide 15. Before I start, let me first share some of the assumptions and underlying our current views for the full year. Let me cover our full year 2024 outlook, as well as provide some thoughts on the first quarter, both of which have more potential for variability than usual given the macroeconomic environment we’re operating in. In terms of our current macro expectations, as we stand here today, we expect global equity markets to be flat point to point in 2024, which equates to the daily average being up about 10% year-over-year. Our interest rate outlook for 2024 largely aligns with the forward curve as of year end 2023, which I would note continues to move. We expect to see modest increase in FX and equity volatility, which should support slightly higher FX trading services fees this year, but we are still seeing muted volatility in the first quarter.

And we expect currency translation to have less than 0.5 percentage point impact on revenues and expenses due to dollar depreciation. And I would remind you that a weaker US dollar has a favorable impact on revenues and an unfavorable impact on expenses. So we currently expect that full year total fee revenue will be up approximately 3% to 4% ex-notable items with servicing fee and management fee growth driven by higher market levels and continued business momentum and continued strong growth in front office software and data. This includes a headwind of a little less than 1 percentage point to fee growth from the expected previously disclosed client transition. Regarding the first quarter of 2024, we currently expect fee revenue to be up 2% on a year-over-year basis with servicing fees expected to be up 1%, management fees up 7% to 8% and front office software and data expected to be up over 20%, largely due to increased SaaS new business and conversions and on-premise renewals.

We expect full year 2024 NII to be down about 10% on a year-over-year basis compared to a record 2023. This is dependent on the outcome of global rate cuts and deposit mix and levels, which are obviously difficult to predict. Regarding the first quarter of 2024, after a significant step up in 4Q ’23, we expect 1Q ’24 NII to be flat to down 3% on a sequential quarter basis given current deposit mix expectations. Turning to expenses. As you can see on the walk on Page 16, we expect full year expenses ex-notables will be up about 2.5% on a nominal basis in 2023, driven largely by our continued investment in the business, which we expect to largely offset through greater productivity savings worth $0.5 billion, which is approximately 1.7 times last year’s gross savings level.

Regarding the first quarter of 2024, we expect expenses ex-notable items to be up 1% to 1.5% on a year-over-year basis, keeping in mind that seasonal expenses usually occur in the first quarter. As a reminder, we expect to achieve positive fee operating leverage, excluding notable items for full year 2024, given the projected growth in fee revenue and well controlled expenses. Finally, we expect taxes should be in the 21% to 22% range for 2024. And with that, let me hand the call back to Ron.

Ron O’Hanley: Thank you, Eric. Operator, we can now open the call for questions.

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Q&A Session

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

Alex Blostein: I was hoping we could start with unpacking some of the NII dynamics, and I guess appreciate the uncertainty when it comes to deposits. But Eric, maybe talk a little bit about what drove the upside in the fourth quarter in deposit levels, and if you have a view on what sort of seasonal versus more kind of core client franchise driven? And maybe give us some insight on where you expect balances to ultimately stabilize in the back half of the ’24?

Eric Aboaf: Let me share with you the texture we have. But I’ll just say deposits and deposit levels continue to be volatile, they surprise to the upside. And in particular, we saw a nice uptick in deposits into September, October, we actually saw, on the NIB side, a downtick in November and then a large uptick again in December. So the averages came in up for the quarter, which made a big difference. $1 billion of NIB for a month is worth $5 million and you kind of multiply through and that quickly adds up as we had a spread in December of $5 billion, $6 billion relative to our expectations. And at the same time, we also saw interest bearing deposits up. Now some of that is just our regular way engagement with clients, some of that is there leaving more deposits with us.

And I think you did see, in the Fed reports, the banking system deposits are up 1%, 2% quarter-on-quarter from third quarter to fourth quarter. So it does seem like there’s something happening in the market that’s creating a little more stability, a little bit of buoyancy. There’s some amount of seasonality that we always tend to see at the end of the year as folks accumulate cash, sometimes to pay dividends and ETFs in the next year. So it’s just hard to read but that’s what played out. And it played out better through the quarter and through the end. If I then try to look forward, it’s very hard to look forward for the year. And we’d like to operate and expect to operate in the deposit range of $200 billion to $210 billion, that’s our kind of goal.

A lot of that is just client engagement and helping put their cash to work. And sometimes they put cash to work in deposits, in repo, in money market sweeps. But there’s a category — each one of those is an important category and outlet for clients. And what we’re seeing is clients using all the, I’ll call it, all the above, right, including just holding treasury securities. So that we expect to continue and we think deposits will be roughly in this zone in the first quarter. What’s a little harder to read is just how noninterest bearing deposits play out. We do expect those to continue to float downward. They tend to float downward for our clients with the largest funds, those are the ones that have been floating down over the last two years.

So we continue to see that expectation. There continues to be a little bit of repricing that plays out into the first quarter too as well. And that’s why I guided on an NII basis to flat to down 3% for the first quarter, just to give you a little bit of an indication, but we expect that to be roughly on flattish deposits.

Alex Blostein: My follow-up, sticking with deposits is around just deposit beta as we start to sort of enter the rate cutting cycle. So hoping you could articulate maybe what you’re assuming for deposit beta on the way down in your ’24 NII guidance? And then broadly, how we should think about sort of the cadence of deposit betas as we progress through the rate cutting cycle into the back half ’24, ’25 maybe. But just curious to know kind of high at the upper — at the beginning, lower towards the end or the opposite?

Eric Aboaf: Alex, it’s an important topic, because it’s how we interact with our clients, it’s how we price our products, it’s how the industry has operated in for many years. I think you know that our deposit betas on a cumulative basis have climbed quite a bit in the US. They’re 75% or so cumulatively since the start of the cycle. In euros, it’s around 60% cumulatively in pound sterling, closer to 30% to 35%. So they’re clearly moved up. What certainly happens as, and I’ll say when, if and when rates fall, is the deposits — beta is reverse, there’s some amount of symmetry. Now they reverse instantaneously, we want to be careful with our clients, we want to be fair. But we do think that over multiple quarters and certainly over any realistic time frame, the Fed cuts and there’s got to be an adjustment.

Now part of that happens because we have a good bit of our deposits that are indexed to market, they’re indexed to market indicators. There are quite a few that are indexed with a spread and then there are a small amount now that has a transactional kind of, I’ll call it, administered feature. But you’ll generally see a broad amount of symmetry in deposits down versus up. I think what you do need to keep in mind is that our asset sensitivity and liability sensitivity, though, are somewhat different between international markets and in the US, right? In international markets, because those cumulative betas are still in the 30% to 60% range, we’re still asset sensitive. So we make more money with increases in rates. And we actually — NII will trim down with decreases in rates.

And that’s where we’re most — that’s our interest rate sensitivity today. On the US, we have a slight positive bias towards being liability sensitive, but it’s still relatively slight. I’d almost call it neutral. So part of what we’re doing is just navigating this interest rate environment. It’s not exactly clear when the rates come, it’s not clear whether the US cuts before Europe or vice versa. And part of what we’ll do is actively manage our portfolios to try to take advantage of what’s coming. At the same time, we’ll price our deposits fairly and prudently.

Operator: You next question comes from Brennan Hawken with UBS.

Brennan Hawken: I think maybe some of what you just said on the non-US side might explain this. But when we think about triangulating the minus 10% to the fact that 1Q is either going to be flat, it’s only down a little on NII, it sort of suggests that your exit rate by the time you get to the 4Q ’24 based on what you can see today, it’s probably going to be rather low. Am I reading correctly in thinking that it’s that non-US piece and that’s going to drive some of that weakness? And am I extrapolating the comments correctly to think that we could see a little bit more back end weighted decline for NII?

Eric Aboaf: I think you’ve got the right general pattern framed in the area of NII. Clearly, we have very strong step off in particular, in December, but in the fourth quarter, which will flow into first quarter, and then we expect a trending down. We had a couple of — well, probably earlier last year, so a couple of quarters ago, I described an NII range of $550 million to $600 million. And we think we’ll get into that range, the top end of that range by around the third quarter. But it’s a little bit hard to know the exact shape. We just — but you’ve got the right direction of travel. And then we expect some stabilization in the second half of next year, maybe around the top half, the middle half of that range, just really hard to tell exactly where and when.