Aboaf, Vice Chair and CFO of State Street. I do have a disclaimer to read. For important disclosures, please see Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and use of recording devices is not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. Thanks, Betsy. Let me do my version of that. Just to remind our audience that today's discussion may contain some forward-looking statements, and the actual results may differ materially from those statements due to a variety of important factors, including the risk factors in our Form 10-K and our other SEC filings. Our forward-looking statements speak only as of today, and we may not update them even as our views change. We were saying in a prior session, maybe we could figure out an AI for these disclaimers. Talking about strategic priorities, let's kick off on just how you and the rest of the management team is thinking about your strategic priorities around servicing existing clients. I want to get into a question on, you know, just expanding some of the offerings and more global side to what you're doing. You've mentioned in the past that you don't necessarily need to expand your product or client set, but are looking more for expanding your existing clients' use of all your products. For example, taking a back office client and encouraging them to use your full suite of front-to-back. Can you give us a sense as to how you're going after that opportunity and how far along you think you are on the journey to fully servicing your clients' needs? It's a fair question because most of what we do is start with our existing client base. You know, we serve, you know, the world's leading investors around the world, 10% of the world's, you know, investable assets, which means we have as our clients, you know, 90%-95% of the largest investors. What we do is we actually think about our clients in groups, and we start with our top 60 clients, which represent 60%-65% of our revenues. If you think about them, they're a good microcosm for kind of how we proceed, and we do this with other groups and segments. For the top 60, you know, we do some back office servicing for all of them. We have all their back office know about 35% share of their back office, which means there's always more back office to be gained with our existing clients. We add another layer of, well, middle office services. It turns out about 30% of those clients we do middle office processing for. You go, we do middle office and back office. In fact, it's more than 30%, typically 50%. Most of our clients, we have back office with of some amount. 50% have, back office and middle office, and almost 30% have some version of an Alpha proposition, right? Back office, middle office, front office together. Maybe not on their whole book, right, which is why I say we have 35% more share of wallet, but they have some of those components, and so they can experience State Street. As we think about the opportunity, what we think about is: How do we lead? What do we do that we can differentiate ourselves with? A big part of that over the last few years has been the Alpha proposition. Why? Because it's new, it's different, it's unique. It offers that whole front-to-back offering. What that allows us to do is go to clients and say: Look, there's a new offering that's different than what others have, and one that has an opportunity in front of it. What's appealing for us is as we do that with the new offering, Alpha, especially the front office and the middle office, there's a big opportunity to then bring along the next part of the back office, which is core custody and accounting, which is very kind of economically beneficial to us and how we serve our clients. There's a whole sort of, I describe, process we use that is centered around the client's wallet, what part of the wallet we penetrate, and what group of clients. If you go further, what we've done is we've continued to spend time on markets that we think are fragmented and ripe for disruption. You know, the Alpha front office Charles River proposition. You know, we and Aladdin, the top two providers, have 25% of the market. The rest is small software companies who are internally provided. It's growing, it's fragmented. There's a lot of opportunity for us. Middle office, no one else really does middle office in scale. There are opportunities there to differentiate and then bring the full package. Finally, you know, there's always the other parts of the product array, right? Whether it's offshore funds in Europe, ETFs, privates, where what's important is having an industry-standing offering, and then having the kind of the client coverage, sales, and execution capability that matters. There are many different ways we think about it, but maybe that's just a start, Betsy. Okay, you know, the follow-up question I have here is just on how you're thinking about the global piece of the footprint. Part of the reason for asking is, as you know, BBH was going to be giving you some of that footprint. Now that you are not pursuing that anymore, how should we think about where you are on the journey to expand on the global side? You've done a few acquisitions of late, maybe we could speak to as well on this. Yeah. I mean, if you step back, remember, the Brown Brothers deal, at least as it was conceived, was really a bolt-on deal, right? It was about 10% the size of what we do. Right. It was a way to actually deepen our scale position. It had a little more of Japan, a little less of North America. By and large, it mirrored what we did, and was really about expanding scale. Actually, coincidentally, you know, even though we weren't able to consummate that deal, which was $4.5 trillion of assets under custody, but during that 18-month period, we actually won $4 billion of assets under custody mandates on an organic basis, right? It's just another way to move the franchise forward. In terms of international, we've had some of our best years over the last two. I think Asia had its best year ever in 2022. Europe in 2021 was particularly strong. We've been spending time, more time in the Middle East, right? An attractive area for us, where we actually bring all of State Street together. Oftentimes, asset management and custody are bought together in places like the Middle East from some of the sovereign wealth funds. Latin America is another area that we've been expanding into, partly by buying and establishing a bank footprint in Brazil. Part of it is some of the deal announcements that we've seen. It continues to be attractive, and part of the reason is that internationally, we see more growth than in some of the core markets, like our US, and the fee rates tend to be better. Part of that is the product complexity, the product differences, right, that we can deliver at scale because we're so large in these jurisdictions, but everyone else can't, you know, bring a set of revenues, fees, and margins that are attractive for us. Got it. Okay. Along the, you know, journey, when you think about what you think you should be able to accomplish, call it, over the next five years or so, how far along do you feel you are on this execution of client, increasing client, product and service penetration? You know, what I'd say is, what you tend to do is get to, you know, the seventh or eighth inning, and then you try to innovate. Mm. so that you have a new set of products and offerings that can create the next round of growth. That makes you feel like you're in the third inning, but there's a lot more ahead of you, right? Part of what we did with the purchase of Charles River and the front-to-back offering is said: "Look, here's another $7 billion addressable market of revenues we can tackle," right? With outsourced trading that we've that we had started to build, but we bolted on. With our CF Global acquisition, there is an addressable market of about $600 million of revenues out there that's highly fragmented. What we're doing is we're finding ways to innovate or bolt on capabilities and then tackle a market in size. In our minds, that's going to be something that we do on a continual basis because, you know, client needs are evolving. If we move forward, we can satisfy more of those needs and actually then penetrate more of their wallets, and some of their new wallets and some of their growing wallet areas, you know, or we can be left behind, and obviously, we'd rather lean in. Okay, makes sense. Moving from strategy to more tactical, questions here. As I'm sure you know, there's been a lot of debate, discussion, questions around how things are going with regard to deposits, net interest income. I'm sure that's on your question list for yourself. Maybe if you give us a sense, how deposit flows have been going this quarter and how we should think about the stickiness of your deposits. Let me... Those are two- Separate. Separate, but. Well, let's start with number one. All right, deposit flows. We printed average deposits in the first quarter of $210 billion, right, for context, and that was roughly between the highs and the lows that we've seen over the last three or four years, right? The high was about $235 billion just after COVID hit, and we had that influx of deposits. Which lingered, obviously, with quantitative easing. Several years backward, $165 billion. We're somewhere in the middle. We've been seeing a gentle rotation of deposits that continues. What I mean by that is, we have some evolution deposits from non-interest bearing into interest bearing, and then just some clients who are actually trending down their levels of deposits because they're looking at some of their alternatives. You know, we are exposed to all the industry trends that you see in the H.8 report. You know, this quarter, second quarter, is kind of coming in line roughly as we had expected. We had expected to be down in deposits 1%-2%. I think the industry AUA reports are around that, 1%-2% sequentially. The deposit book is behaving roughly in line with the industry. Okay. On to the question two, the stickiness. Stickiness is a long and complicated question because you have to think about it in pieces. First, deposits, there are a number of different deposit types out there which have different characteristics, right? We all know about insured retail deposits, right? We all learned in early March about those commercial deposits that seem to move around quite a bit. There's corporate, like, cash management, payroll-type deposits, there's wealth deposits, and there's custodial deposits, right? At least as major categories. Each of those has a different set of stability levels and characteristics. We operate primarily and, in fact, solely in the custodial deposit space, right? Not in commercial, not in corporate, by and large. What we find is the deposit accounts that our clients have are hardwired into our systems. Why? Because we're their custodian. We're processing thousands, millions of transactions through their accounts each day or each minute or second because we actually do it throughout the day. They need a deposit account there to actually cover the flows of transactions. It's not something that they can pick up and move.... As a result, you get a lot of stickiness. Remember, those custodial contracts tend to be two, three, four, five years in duration. Again, another level of stickiness. It's not like a custodial client say, "Hey, I'd like to, you know, close an account here, open it there." They actually need it for us to provide the custodial service with us. It's deeply embedded. The next thing that you find when you drill into our deposits is we have clients with several billion dollars of deposits, but the average deposit account that they have, because they each typically have thousands of accounts, is about $1 million bucks. Each of those tends to be associated with a legal entity, a mutual fund, a mutual fund board, who needs to make a decision about the account. There's kind of this embedded I'll call it complexity and hardwiring that is that sits with our accounts, which is one of the reasons if I step all the way back and ask the question, you know, how sticky are they? They're actually relatively sticky, which is why, you know, early on in Basel II and Basel III, the regulators actually developed an assessment of custodial deposits. They put them in a different bucket, right? Just like they're a retail insurer is a defined category. Operational deposits for custodial banks like us is a defined area of regulation. It's got a set of rules, of tests, of oversight, and you know, we report about 75% of our deposits are operational. Anyway, long answer to a short question, they're pretty sticky and pretty hardwired into our clients. Okay. That said, there is a mix, right, between non-interest bearing and interest bearing. I think you said in the 2Q earnings call that you would expect some NIB outflow, $4 billion-$5 billion or so. Is that still playing out like that? Yeah. Through the end of May, so two months into the year, non-interest-bearing deposits have been rotating out by about $5.5 billion so far. Part of that is just clients are going through their process of assessing what they earn on deposits, could they earn more, and is it worth the switch? What we find is that the clients with large accounts, you know, if you have $10 million or $50 million in a non-interest-bearing account, you'll move that over time. If you've got $1 million, it's worth about, I don't know, $30,000-$40,000 to you a year. If you think about it, if you're a mutual fund board, if you're a collective fund, like there's a question of whether it's worth, you know, the, you know, that amount to actually move. Maybe over time, there's a fair amount of then, you know, behavioral stickiness there. We have seen this trend. You know, we saw it this past quarter from, you know, fourth quarter to first quarter, we saw about $5 billion rotate out. Through May, I said $5 billion-$5.5 billion. We'll probably see another, you know, couple billion. We might be down, you know, $6 billion-$7 billion by the end of the quarter. We'll see, because the, you know, we still have a few more weeks to print here. That's moving into interest bearing? It tends to move into interest bearing. Sometimes it tends to flow down and out of the system. It comes back into interest bearing. Sometimes it's converted right away. What clients realize is they need a certain amount of deposits to handle those very significant payment flows that they have. If they test the frontier of that, they end up overdrawing. They have overdraft charges and, you know, a little bit like consumers, they don't really like to have those because there's accounting that comes with it, and there's a little bit of, "Hey, that's why I have my deposits here." You know, you'll see some ups and downs until and over time, some stabilization problem. With all of that as a backdrop, how should we think about your NII guide for 2Q 2023? In April, we guided that NII would be down about 5%-10% sequentially, larger range than usual, just because there's a fair amount of activity going on, you know, quarter- by- quarter. We still feel like that range is appropriate for where we're coming out. You know, we're seeing deposit rotation, non-interest bearing, some of it back into interest bearing. We're seeing the effect of, you know, the rates on the back book continue to creep up in the U.S. On the other hand, we still get some benefits from the betas, the lags, and some of the international jurisdictions that offset some of that. We still feel, you know, at this point, in the quarter with about three more weeks to go, you know, the minus, the down 5%-10% around, is about right. While we're on second quarter outlook, any other topics or themes that you could share with us about what you're seeing so far 2Q to date? Sure. Let me give you the update because it's a, it's a good time. I guess what I'd preface it is that the macro environment is slightly better than we had expected, right? You know, equity markets are up a bit, although we've seen some deep volatility in some of the, you know, trading markets in April, May, which, I think other dealers have noticed. Let me go through the P&L, right? Total fee revenues are expected to be up 4% to 4.5% on a quarter-on-quarter basis, which is largely in line with our prior guide. If I break it down, servicing fees will be up 3%-4% as compared to our previous expectations of up 1%-2%, reflecting higher equity markets and momentum and onboarding that we talked about at the earnings call and some underlying revenue performance. Management fees are now expected in the second quarter to come in slightly above our previous outlook range of flat to 1% quarter-on-quarter, primarily driven by those same uptick in equity markets. FX trading, however, is seeing lower volatility and lower industry trading volumes quarter-to-date. That obviously means lower markets revenues for this particular quarter, as clients have ended up on the sidelines, partly as they've tried to define the direction of interest rates, partly to the, you know, the debt ceiling kind of concerns have led some risk-off behavior. In the front office software, we continue to expect to see a significant sequential increase in second quarter, reflecting strength in the on-premise renewals and SaaS conversions. Finally, in other revenues, we expect to see a sequential uptick of about $5 million-$15 million. Okay. That $5 million-$15 million in other revenue is, any sources there or? Yeah. I chuckle because this is the area where we have the accounting change that we talked about in April, which has to do with some of the tax-advantaged investments for wind farms, where the accounting is getting changed this quarter. Let me try to describe what's happening here. If you remember, for most tax-advantaged investing, the accounting is simple and logical, and that's true except for wind farms, where what we have is a situation where the amortization of the investment goes through the other fee revenue as a contra revenue, so you end up with negative revenues. That's offset by a tax credit in the tax line, which offsets the amortization and provides a modest benefit in the, you know, on a net basis, much like affordable housing credits. What's changing now is the something called proportional amortization method, and that effectively means that starting in the second quarter, there won't be a contra revenue in the revenue line. There'll just be an appropriate tax benefit in the tax line, and it simplifies the accounting and actually harmonizes it with the rest. All that said is we've got a year-to-date catch-up in second quarter, which is related to the second quarter guide that I gave. What it also means is that in this other fee line, which folks have found difficult to model, including, you know, your team and that, and have asked us more about it, the wind farm, affordable housing, BOLI, and so forth, elements of that line are worth typically $30 million-$35 million a quarter, relatively stable. There's another piece there, which is around investments, you know, in areas like some vehicles, like some Rabbi trusts and so forth, associated with the asset management business, which tend to fluctuate with equity markets. Those can move around by, you know, ± 10% with equity market moves about those same magnitude. You get volatility, ± $10 million. There's another piece of minority investments and balance sheet revals that are actually quite hard to forecast, and we'll just give guidance. All in, it's a, it's a lumpy line, but now there'll be a base amount that is more consistently going through this of $30 million-$35 million, but with a range around that. Less volatility going forward? Yeah. Is this second quarter reset now fully baked, or is this something that we should expect the next two quarters? There's a modest catch-up in the second quarter that's included in our guide. On a go-forward basis, the $30 million-$35 million per quarter will be relatively stable. There'll be the range around that we'll have to guide to. Right. Which is around the investment vehicles and the balance sheet revals. Anything that's cleaner and smoother is good for us, so appreciate that. All right. Just to wrap up on that then, the tax rate guide that you have for 2Q, 21% is still in place? Let me finish. Let me do the rest of. Okay. - the, uh, the, the outlook- I jumped the gun on the line item. You jumped the gun. I know. Sorry. We covered fee revenues. Yes. Right? Up 4-4.5% sequentially. NII, we said, was in line with what we had previously expected of down 5%-10% sequentially. Loan loss provision, we expect some puts and takes in the second quarter with the release of the provision related to our support of a U.S. financial institution, right, which we did with many others. We'll release that provision, but it'll be offset by a little more than half by some credit rating downgrades and some loan growth in the portfolio. That'll come through as well. Before I get to taxes, turning to expenses, we now expect the second quarter expenses will increase 1.5%-2% on a sequential basis, excluding the first quarter seasonal compensation cost of $181 million, as compared to our previous expectation of sequentially flat expenses. This is due to higher revenue-related costs, partially associated with the higher servicing fees and higher equity markets that I just mentioned as part of servicing fees and management fees. With that, you know, we'll obviously continue to remain focused on driving productivity and controlling our costs, given the environment, and actually expect quarterly costs to stabilize roughly at this second quarter level for the rest of the year. Finally, on taxes, we've been continuing to do some good work on tax planning. There'll be some discrete elements coming through. So instead of the tax guide of about 21% that we gave at earnings, we think it'll be closer to around 19% for the quarter. Okay. Excellent. Well, there's a lot there. Appreciate it. I'll just take a pause and see if there's any questions in the room before we move on. Okay. I did want to lean in a little bit on the business yet to be installed, right? Your announced, but not yet installed flows, because clearly, that can be a nice driver for your fee lines going forward. Can you just give us a sense as to how we should think about the run rate for the rest of the year? Sure. I mean, the important part of our business model, especially as we've launched the Alpha proposition, is to win some of these, Alpha front-to-back deals. At first, it was some small and mid-size deals, and then there were several trillion-dollar deals that were won and effectively sit in our backlog, right? The $3.5 trillion of backlog. We're now starting to get to the point, because remember, the bigger the deal, the more complicated they are, the longer it takes to install as we start to pull them through. The first one of those will start in the second quarter, start to contribute some of the revenue uptick that I described. What I'd say is that the deals don't come through, kind of all or nothing, right? Mm-hmm. You may put in place custody first, or you may put in place middle office first. That comes with a, you know, backlog coming into the books and records, but there tends to be a stack of products that are coming through. Part of what Ron and I were signaling, at the April earnings is we're starting to see some of these larger deals come through, but it'll take time. I think we've said that, you know, they'll come through in revenue or AUCA terms over the course of roughly a two-year time period, with about half this year. It takes time, and our view is we want to install them right. The clients need to make a lot of changes for them to secure the benefits, and that'll come through over time. Is the majority of this happening on your SaaS model? For the new Charles River offering, sales and the, front-to-back offerings, they are typically on a SaaS model, just because it's the way we can provide the most functionality for our clients, yes. That's a model that is more profitable for you? It's, Right. We are at scale. It tends to be more profitable for us and actually more beneficial for clients. Right. Right? They're not calling up and saying: "Can you send over a developer to recustomize my system to add some functionality?" It's a way we can push functionality to clients in a consistent way. Right. It's a win-win, you know, obviously. Very much so. Okay. When you think about the installed business that you've got and your migration of new clients towards SaaS, do you feel that SaaS is a model that will become the majority over time of your client interface? Or is this, you know, as new business comes in, it'll be SaaS, and you'll just have the two different models? No, very much so. This will become the predominant model that we have. In fact, you know, in any given quarter, what we're trying to win is, you know, four, five, six new, you know, new clients, you know, in Charles River or as part of the front-to-back offering. We're actually, at the same time, trying to convert that many, you know, four, five, six clients in a particular quarter in the installed base, because to us, it's like you say, it's a win-win. It's better for us as a way to deliver our offering and better for us in terms of scaling what we do, and it's better for clients. You talked a little bit about expenses for the quarter, specifically, but could we, you know, take it up a notch and just think about how you're thinking about driving operating leverage for the business over time? Last year, you were successful in holding expenses flat, obviously. I just wanted to get a sense as to how you're thinking about operating leverage as you go through, not only the full year of 2023, but in your medium-term outlook. I guess the context I'd give you on this, to step back from the quarter, as you've said, is that, for three consecutive years, we've actually widened our margins and expanded ROE by about one point per year. If you go back to 2019, you know, we had margins in the 26% range, and we've steadily taken them up to 27%, 28%, 29%. We had some quarters even hit 30% from time- to- time. I think we've been on the right trajectory, and part of that is finding ways to grow the top line. Part of that is controlling costs and driving productivity while we reinvest in the franchise at the same time. I think clearly we'll have some, you know, some headwinds as NII floats downwards quarter- by- quarter on margin. You know, our view is we need to continue to drive fee revenue growth on one hand, and then continue to drive the kind of productivity programs that have made the difference on the bottom line. You know, our view is that that's an ongoing process. You know, in a way, State Street's core custody and accounting offering was built over the last 30 years, really. I wouldn't say there's 30 years ahead of us in that, but there's a number of years ahead of us that continue to automate, simplify, consolidate centers, simplify with clients, which you do at client rollover points, because they are part of the complexity that we have. There are a number of initiatives that we continue to work through. You know, we're working now, right this summer on the initiatives for 2024, because it's that kind of lead time that we need to build into, you know, some of this more systemic change. You know, obviously, very big investment in tech that drives these efficiency improvements. Can you just give us a sense of the tech budget today? Any sense on how you're thinking about leveraging today's hottest tech topic, AI? Sure. Tech budget for us is north of $2 billion, about a quarter of our expense base. In truth, we've been working on a wide range of technology, simplification, automation processes, I'd say, for the last three or four years. You know, robotics was important, you know, several years back, that was the talk of the day. There's machine learning in terms of how we process NAVs. When we process NAVs, we need to check them. You can do that with human beings watching. You can do that with machine learning. There's a set of tools that we've developed over time. I think the ChatGPT is more natural language processing, not as applicable to the core of what we do, but I'd say the broader range of AI tools are actually quite valuable for our business. In truth, what we wanna do is we wanna automate to the core, right? There is no checking or discretion that's needed. On the other hand, there is a layer of checking, of NAVs, of accounts, of report that's necessary, and that's where the AI technology is actually quite valuable for us. Great. All right. Last question for me has to do with Basel endgame, capital, and buybacks. Maybe you could give us a sense as to how you're thinking about the impact of Basel III, and if it does impact at all, your buyback plans. I think you mentioned that you have $4.5 billion in 2023, so maybe give us some updates there. Yeah, we're making good headway on our buyback for this year. You know, we had an authorization of up to $4.5 billion. In the first quarter, we bought back $1 billion to. You know, more than a quarter of the authorization. This quarter, we're north of $1 billion. You know, what we're trying to do is get capital distributed back to shareholders, you know, at pace, and that's our goal, get it down into the 10%-11% CET1 range that we should be operating at. We printed 12.1% last quarter. I think our path is pretty clear in that direction and comes with significant buybacks this quarter and into the second half. What we do wanna do, though, is we need to stay conscious of everything that's going on, right? The economic environment, you know, we have this FDIC assessment coming in third quarter for some of the bailouts they had to engineer, but which will come back to the industry. To be honest, we need to keep an eye on the Basel III endgame, as you mentioned. It's hard to know when what that's gonna mean for banks, but, you know, the work that we did with some of the industry associations a couple of years back suggested capital is going up, so we expect that to be the case. It could be up, you know, double digits in terms of percentages. We'll see for the industry. You know, we don't know how we'll be affected, but we're one of the industry participants, so, you know, that's on our mind. I think we'll see more in June. I mean, that's two, three more weeks or July. Mm-hmm. -is what we continue to hear. I think at that point, we'll have an assessment, but we're also conscious it's gonna come with an implementation horizon. Is it three years, four years, five years? Maybe more, you know, something we'll see. It'll factor in, but I think it'll factor in over time to our capital return, and what we'd like to do is continue to do what we can, you know, between now and then. Right. To migrate to your CET1 of 10%-11%. Great. Yes. Eric, thank you so much for joining us today. Appreciate your time. Thanks very much.