Q1 2026 Earnings Call Transcript

Good morning, and welcome to State Street Corporation's First Quarter 2026 Earnings Conference Call and Webcast. Today's call will be hosted by Elizabeth Lynn, Head of Investor Relations at State Street Corporation. We ask that you please hold all questions until the completion of the formal remarks, at which time you will be given instructions for the question and answer session. Today's discussion is being broadcast live on State Street's website at investors.statestreet.com.

This conference call is also being recorded for replay. State Street Corporation'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 Corporation website.

Now I would like to hand the call over to Elizabeth Lynn.

Good morning, and thank you all for joining us. On our call today are CEO, Ron O'Hanley, who will speak first, and then John Woods, our CFO, will take you through our first quarter 2026 earnings presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.com. Afterward, we will be happy to take questions. 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 earnings release addendum. In addition, today's call will contain forward-looking statements. Actual results may differ materially from those statements due to a variety of important factors, such as those referenced in our discussion today and in our SEC filings, including the risk factor section in our Form 10-Ks. Our forward-looking statements speak only as of today; we disclaim any obligation to update them even if our views change.

With that, let me turn it over to Ron.

Thank you, Elizabeth. Good morning, everyone, and thank you for joining us. I will 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 Corporation, 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 pretax 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 Corporation. 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 AgenTx, and client solutions. Together, these capabilities help our clients succeed in a constantly evolving market while strategically pivoting State Street Corporation 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 Corporation. We are well advanced with clients to support their launch of tokenized fund strategies this year. Furthermore, State Street Corporation is deeply engaged in a number of digital asset-related industry initiatives, including DTCC's tokenization efforts, as well as Fnality'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 infrastructure provider and standard 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 Corporation 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, in 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 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 U.S.-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 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 Onchain 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 in technology, for the deployment of our AgenTeq 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 Corporation 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 will turn it over to John to walk you through the first quarter in more detail.

Thank you, Ron, and good morning, everyone. We had an excellent start to 2026, with broad-based year-over-year growth across the franchise, driving record quarterly revenues and over 600 basis points of positive operating leverage in the quarter, excluding notable items. These results reflect disciplined execution alongside ongoing investment across our portfolio of strategic growth areas. Now let me dive into the details of the quarter, excluding notable items, starting on slide three.

In the first quarter, total revenue increased 16% year-over-year to a record $3.8 billion. Fee revenue of $3 billion increased 15% year-over-year, driven by strong performance across investment management, investment services, and markets. Net interest income of $835 million increased 17% year-over-year, primarily reflecting continued net interest margin expansion. Expenses of $2.7 billion increased 9% year-over-year, driven by higher revenue, strategic investments, and the impact of currency translation, which was a headwind to expenses but a benefit to revenues.

Taken together, this performance drove a significant improvement in profitability with 400 basis points of pretax margin expansion and a roughly four percentage point increase in ROTCE to 20%. Before moving on, let me briefly touch on notable items recognized in the quarter. Notable items totaled $130 million pretax in the first quarter, or $0.35 per share after tax, reflecting repositioning charges and the rescoping of a middle office client contract. Turning to slide four, servicing fees in the quarter increased 11% year-over-year to $1.4 billion, reflecting higher average market levels, the benefit of currency translation, and continued organic growth supported by net client asset activity, flows, and new business.

AUCA ended the quarter at a record $54.5 trillion, up 17% year-over-year, primarily reflecting higher period-end market levels, positive client flows, and net new business. First-quarter servicing fee sales were $56 million. These were well distributed across regions and aligned with our strategic focus areas, particularly back office services and alternatives clients. Looking ahead, we continue to target $350 million to $400 million of sales in 2026. The pipeline remains healthy, with broad geographic and customer segment representation including APAC, EMEA, emerging markets, and alternatives.

Additionally, we reported one new Alpha mandate win during the quarter, highlighting continued client engagement with our integrated front-to-back platform. Moving now to slide five. Management fees increased 23% year-over-year to $724 million in the first quarter, driven by higher average market levels and net inflows. Assets under management increased 20% year-over-year to $5.6 trillion, reflecting higher period-end market levels and continued client inflows.

Net inflows totaled $49 billion for the quarter, led by strength across index strategies and solutions including ETFs and fixed income, as well as our cash franchise. Within ETFs, net inflows were $25 billion, driven by strong flows and market share gains in our U.S. low-cost suite. As Ron noted, SPYM, our low-cost S&P 500 ETF, was the largest asset-gathering ETF globally during the quarter. We also continued to advance product innovation and strategic partnerships, launching 57 new products and solutions during the quarter that are creating new avenues for growth.

As a signpost of that progress, our State Street Bridgewater All Weather ETF surpassed $1 billion in assets under management during the quarter. We were also pleased to see our investment-grade public and private credit ETF, developed in partnership with Apollo Global Management, reach a new high watermark during January with AUM of over $800 million. Turning to slide six. Markets remains one of the key pillars of our One State Street strategy.

It plays a key role in linking our investment services and investment management platforms, strengthening the connectivity across the firm and enabling more cohesive client-led solutions. FX trading revenue increased 29% year-over-year to $435 million in the first quarter, reflecting a strong 25% increase in client trading volumes, which reached a new record level as we supported clients amid a dynamic market environment. Securities finance revenue increased 2% year-over-year, supported by growth in client lending balances. Moving on to slide seven.

Software services revenue increased 7% year-over-year in the first quarter, driven primarily by higher professional services and software and data revenues, reflecting continued SaaS go-lives and platform adoption across our client base. Software business momentum is also reflected in our annual recurring revenue, which increased 12% year-over-year, and our revenue backlog, which increased 11%. Turning now to slide eight. First-quarter net interest income of $835 million increased 17% year-over-year, primarily reflecting a 16 basis point expansion in net interest margin to 116 basis points, and average interest-earning asset growth of 1%.

The year-over-year increase in NIM reflected improvements in funding mix, continued benefits from investment portfolio repricing, and runoff from terminated hedges, partially offset by lower average market rates. Growth in interest-earning assets was driven primarily by higher client deposits, partially offset by a reduction in short-term wholesale funding. Turning to slide nine. Expenses were up 9% year-over-year in the first quarter, excluding notable items.

Currency translation accounted for approximately two percentage points of the increase. Of the remaining seven percentage points, approximately five percentage points reflected higher revenue-related costs, with the remaining balance of two percentage points driven by continued strategic investments and run-the-bank expenses, net of productivity savings. Moving now to capital and liquidity on slide 10. Our capital levels remain strong, enabling disciplined capital deployment aligned with our strategic priorities. At quarter end, our standardized CET1 ratio was 10.6%, down approximately 100 basis points from the prior quarter.

The decrease primarily reflects higher risk-weighted assets associated with a normalization of RWA in our Markets business from episodically low levels in the prior quarter, along with the impact of U.S. dollar appreciation in March and, to a lesser extent, equity market appreciation on the final day of the quarter. Turning to capital return, in the first quarter, we repurchased $400 million in common shares and declared $233 million in common stock dividends, resulting in total capital return of $633 million, equivalent to a payout ratio of 90%. Before moving on, I would call your attention to a new slide 13 in the appendix on our NDFI loan portfolio.

This lending remains disciplined and client-focused, primarily supporting investment services clients. In addition, this is a highly collateralized and diversified portfolio that has performed resiliently across cycles and continues to support durable client relationships. Turning to our full-year outlook, which, as a reminder, excludes notable items. We continue to assume that global equity markets are flat this year on a point-to-point basis from 2025, while remaining mindful of the potential for variability in the operating environment.

Against this backdrop, we now expect fee revenue growth in the 7% to 9% range, an increase from our previous outlook of 4% to 6%, reflecting a stronger-than-expected Q1 along with continued organic growth and solid momentum across the franchise. Turning to net interest income, following our strong first-quarter performance, we now expect NII growth in the 8% to 10% range, representing an improvement from our previous outlook for low single-digit growth. We currently expect expenses to increase by 5% to 6%, up from our prior 3% to 4% outlook, primarily reflecting higher revenue-related costs. Finally, we continue to expect an effective tax rate of approximately 22% for the full year and a total payout ratio of roughly 80%, subject to board approval and other factors.

We will now open the call for questions.

At this time, we will open the floor for questions. You may remove yourself at any time by pressing star 5 again. Please note, you will be allowed one question and one related follow-up question. Again, that is star 5 to ask a question. We will pause for just a moment. Our first question will come from Glenn Schorr with Evercore. Your line is open. Please go ahead.

Hi. Thanks very much. I am happy about the pickup in NII, and I think the NIM expansion during the quarter was great. I find it interesting that average interest-earning assets were only up 1%, so I am interested if you could talk to the tug-of-war dynamic of better NIM but not a ton of earning asset growth. And does any of that change within your updated guidance? Thank you.

Thanks for the question, Glenn. I would say that we are very pleased to see our net interest margin progress, and as mentioned, much of that is coming on the funding mix side of the balance sheet. As we see growth in deposit levels, which surged in the first quarter, we are continuing the plans from the last couple of quarters of reducing our short-term wholesale funding. That is higher-cost, and we find that to be an appropriate rotation to higher-quality funding on the funding mix side.

Interest-earning assets will be less of the story. Q1 was driven almost entirely by net interest margin. I think that is a similar story for our guide for 2026. The range that we talked about earlier is almost entirely driven by net interest margin as well. Interest-earning assets are really going to be something we keep an eye on, but not what is going to drive net interest income in 2026.

Operator, we can take the next question.

My apologies. Our next question will come from Alexander Blostein from Goldman Sachs. Your line is now open. Please go ahead.

Hi. Good morning. Thank you for the question. I was hoping we could spend a minute on the goals you are trying to achieve from the next chapter of State Street Corporation's transformation.

I know you alluded to the fact that you will provide a lot more detail in July, but since you opened that door, can you give us the overarching goals you are trying to achieve? Is that faster revenue growth, better profitability, or both? I believe your last official medium-term pretax margin target is somewhere in the low 30s. Is the goal to get that into a higher range over time?

Any high-level framework would be helpful.

I will start off here. As you may have heard me comment on this in prior sessions, we had a goal to get to 30% pretax margin, which we delivered on in 2025 and again here in early 2026. You are seeing us meet that threshold, and the guide that we delivered today, if you play that through, implies in the neighborhood of 31% pretax margin. We think we are moving the platform forward from a profitability standpoint. The second big driver will be growth.

In July, you will hear from us an updated view about what we think this platform can deliver over the medium term from a profitability standpoint. We feel there are extremely attractive opportunities to grow profitability metrics—pretax margin and other metrics—and we also believe we have very unique opportunities to grow this platform overall from a revenue standpoint. The building blocks of all of that will be the increasing business execution discipline that is emblematic of what you are seeing in organic growth across our fee line items. We will talk about what that can deliver for us.

The other two big categories I would highlight: first, a distinctive portfolio of strategic initiatives that can drive unique, outsized benefits into the platform over the medium term; and second, transformation. Within transformation, there are several pillars. We will talk through our ongoing operating model transformation, embedding agile ways of working across the entire enterprise, and really solidifying a product-platform approach to delivering our services to clients. A second pillar will be the ongoing modernization of our technology and infrastructure, which we are excited about.

And lastly, all things AI, where we have continued to make investments and make progress. We will wrap all of those building blocks together and what we believe they will contribute over the medium term in our commentary you will hear from us in July.

That sounds great. Looking forward to that. My follow-up: a question around ETFs, both in terms of growth and expense perspective. There has been increased focus on distribution platform fees that may come online towards the end of the year—Schwab is discussing that.

Any early thoughts on the implications that might have on both ETF growth for State Street Corporation and incremental expenses that you might be willing to incur if you were to stay on the Schwab platform?

Alex, it is Ron. We are 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 performance, we are not concerned about this.

If you have been following what we have 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 client segments in the low-cost wealth channel and in channels outside the U.S. You will see pockets of the kinds of things you are talking about, but we do not see it as any kind of substantial risk or headwind to our overall ETF business.

Thank you. Our next question will come from Kenneth Usdin with Autonomous Research. Your line is now open. Please go ahead.

Hi. Thanks. Good morning. This quarter, you showed the ability to put up meaningful operating leverage and also have a higher cost growth rate to even deliver that.

Were you able to pull forward some spending, or was it mostly revenue-related costs? And as you look forward to the new 5% to 6% cost guidance, how are you balancing expected efficiencies, and how much FX translation are you including in the full-year guide after the hurt that it was in the first quarter?

A couple of comments. In the first quarter, there was about a 2% impact from currency. When you take that 9% expense growth, you are really starting with 7% ex-currency. That 7% is predominantly revenue-related; five percentage points of that would be revenue-related, which leaves a net 2%.

Within that 2%, we have run-the-bank costs and our strategic investments. Those are in the neighborhood of, if you break that out, call it 6% of spend in running the bank and investing in exciting initiatives. We fund a lot of that through productivity, which is the net 4% of productivity that we delivered in the first quarter. We will continue to monitor our productivity trajectory, and the same storyline holds with the 5% to 6% full-year guide: the incremental growth you are seeing is majority revenue-related, and then there will be other costs as we continue to fund strategic investments, partially offset by productivity.

The storyline for Q1 holds for the full year as well.

Thanks, John. As a follow-up, with strong NII and strong FX trading, do you expect that to run-rate, or do you expect a natural come-off given the types of volatility and environment that we saw in the first quarter?

On FX, we had a strong quarter. Two things have to come together: first, you need the franchise in place to take advantage of opportunities and be there for clients. The investments in client acquisition, product extensions, and geographic expansion in Markets have served us well in Q1. Second, we had elevated but healthy volatility where liquidity was still good but there was a lot of turnover. Those combined to deliver Q1. For the rest of the year, when you think about our fee guide of 7% to 9%, we assume those FX conditions moderate gradually throughout the year.

We are not depending on Q1’s highly favorable conditions being maintained to deliver 7% to 9%. For NII, our original guide was up low single digits; now it is 8% to 10%. We originally viewed NIM at 100 to 110 basis points; for 2026 you could see 110 to 115 basis points, slightly off from Q1’s 116. NIM is the main driver, with funding mix a larger tailwind. Overall deposits will be up, helping that funding mix.

We previously said maybe $250 billion of deposits; probably in the range of $250 billion to $260 billion for the rest of the year. We will look to pay down some higher-cost debt and continue to optimize the funding mix to drive NIM. All of those building blocks are incorporated into the 8% to 10% NII guide.

Ken, I want to underscore a point John made on FX. We have invested for years in expanding client volumes and ensuring we serve as much of our investment servicing clients as possible. We expanded geographic capabilities and, importantly, expanded the ways in which we can meet our clients technologically and how they can trade with us. We did that when there was not a lot of volatility, preparing for when normal volatility returned.

We are seeing the benefits of those past and ongoing investments.

Thank you. Our next question will come from James Mitchell with Seaport Global Securities. Your line is now open. Please go ahead.

Maybe just a follow-up on deposits. Up nicely with a big mix shift to noninterest-bearing deposits, which I think was a particular benefit quarter over quarter. How can any further optimization around pricing affect deposit growth from here, and how are you thinking about the mix in your guide? Thanks.

I mentioned the level of deposits; I would anchor to that $250 billion to $260 billion range. On mix, we originally talked about around 10% noninterest-bearing. That is still a good anchor over time, but in 2026 it appears we have a slightly higher noninterest-bearing opportunity than that 10%. For deposit drivers, there are external and internal drivers.

Internally, we control continuing to grow our platform, serving clients, and growing AUCA—another record this quarter—which is where we source those deposits. Second, client segment growth: alternatives is growing faster than non-alternatives and, pound for pound, brings more deposits with a more attractive mix. Externally, deposits tend to rise when money supply and GDP are growing, when rates are stable or falling, and given our business, if volatility and risk-off rise, we tend to grow deposits. Broadly, our NII line is a bit of an offset to other line items, similar to what happens in Markets during higher volatility like in Q1.

Any thoughts on April from here—what you have seen so far?

I would say moderating from here. We had extremely positive conditions in Q1. Still very solid trends. I would stick with the $250 billion to $260 billion deposits and maybe slightly better than our 10% noninterest-bearing guide, as mentioned earlier. April trends are good in NII and deposits.

Great. As a follow-up on the wealth management business—across regions, EMEA was the largest contributor to net flows in the first quarter, I think $29 billion. What vehicles and asset classes drove that? Was it lumpy, and can that momentum in Europe continue?

On net asset flows, fixed income was very strong and led the way, followed by multi-asset. And you heard how well our low-cost suite did this quarter, and ETFs in general. Those were the bigger drivers, with fixed income one of the biggest.

Our next question will come from Michael Mayo with Wells Fargo. Your line is open. Please go ahead.

One short-term question and one long-term question. Short term, I think you said revenue backlogs are up 11%. If that is correct, can you size that a bit more in terms of the level of backlog versus history and where that is coming from? Long term, Ron, back to AI: some say they will remodel their entire business around AI; one bank has specified expected AI benefits; some say business models will be destroyed due to the AI scare trade; others say it is overrated.

Where do you stand?

Thanks for the question, Mike. That 11% was with respect to the Software Services line alone, and that is correct. Uninstalled revenue is up 11%. Multi-year revenue growth in this space has been around that level, so that continues our expectation of around 10%—low double-digit growth—over the medium term, and as we continue investing, we may do better.

ARR grew 12% as well. I will turn it over on AI.

Mike, we are very positive on AI, and a lot of that has to do with the nature of our business, which is investment, operational, and technology intensive. Where are we? First, it is comprehensively embedded across the enterprise. We have broad access and accelerating adoption—virtually every employee where it makes sense has access to the tools, and usage is scaling rapidly, with repeat behavior indicating the tools are becoming part of daily workflows.

Second, on development and technology systems, we are fully enabled there, and we are already realizing productivity gains. It is giving us the ability to do more, faster, and get to projects that previously would not have made the cut. All of our developers have access to AI development tools, and we are seeing acceleration in new technology development and modernization. Third, it is what you do with it after that.

We have built a centralized AI hub with a deep use-case pipeline that is beginning to scale and will scale over the back half of 2026. This platform supports over 200 AI use cases now, with 70 already live. As they mature, we expect tangible business impact to begin emerging in the back half of 2026 and then accelerating. Fourth, agentic service delivery: given the operational intensity of what we do, the opportunities are significant. We have agent-enabled service delivery coming online in July, and our AI Foundry to repeat and scale this.

Do we think AI destroys the business model? We do not. These are widely available tools; the advantage is in how you deploy them. The real power is not just operational improvement, but creating real agility in how the organization operates—how we face off with clients and organize work internally.

We see more opportunity than risk.

The three words “annual business impact”—can you dimension this in any way, starting late this year or next year?

It will start scaling in 2026, and we are going to dimension what the impact will be over the medium term. It will be very meaningful and a very important pillar of how we drive value and bottom-line impact, while also expanding resources to invest in our strategic roadmap. As we get later in the year and start looking at run-rate benefits exiting 2026 into 2027, we will come back and articulate the near-term benefit.

So we will get this on the second quarter earnings call?

Earnings call.

Our next question will come from Ebrahim Poonawala with Bank of America. Your line is now open. Please go ahead.

You spent some time in your prepared remarks around tokenization and your digital asset platform. Should we think about all of this as mostly retaining the customer activity that you already have, just moving from analog to digital, or are there new revenue opportunities from tokenization and moving on-chain?

It is both. Given our client base and market share with sophisticated clients, they expect the best the market has to offer. Some use cases are already very real. Tokenization of assets is a net new opportunity for us.

Tokenized money market funds are a real use case—beneficial to the market and liquidity, and will result in core revenues for us. The on-ramp/off-ramp bridge from traditional finance to digital finance is also a real opportunity. Think of new railroads being laid; the interchanges are underdeveloped. Volumes are growing fast off a small base, and part of the reason is underdeveloped on- and off-ramps.

Being part of that infrastructure is a second source of new revenues. We see both retention and new revenue.

Are these capabilities built in-house, or are there targeted platforms where M&A or partnerships make sense?

We always think about make versus buy. Even on make, partnerships are another lever. Our Galaxy product is a partnership with Galaxy. We are tied into emerging fintech platforms in the U.S. and hotspots in Europe and India. We will continue to explore M&A, but we also have confidence in our organic capabilities. It will be all of the above.

Our next question will come from Brennan Hawken with BMO Capital Markets. Your line is open. Please go ahead.

Good morning. John, you gave clear color on deposit trends and how those feed into NII. I was curious about expectations around the euro and GBP deposits. The forward curve there has gotten hawkish with two hikes in the outlook. Are those hikes included in your updated outlook? And betas on those currencies were low during the recent rate cuts. Should we expect low betas when those rates move up?

In the guide, we assume one hike, with the Bank of England and the Fed on hold, and the ECB in for one hike. We acknowledge there could be more than one. From a sensitivity standpoint, it is not a huge quarterly driver—around $5 million per quarter. On betas, for U.S. dollar, betas were relatively symmetric in the tightening and easing cycles, around 75% to 80%.

For the euro, a similar expectation but lower than the U.S., maybe in the 50% range, and relatively symmetric up and down.

Follow-up for Ron: you do not expect much impact to your ETF business from changes wealth firms are working on. Active ETFs are not big for you, but could you share your perspective on active ETF platform fees and why the impact would be manageable for SPDRs?

Active ETFs are absolutely growing, and we are a beneficiary on the servicing side. One reason for growth is the vehicle often being better aligned with distribution trends—control over portfolios in wirehouses and the rise of independents. The buyer’s fee comparison is less about active ETF versus passive ETF and more around active mutual fund versus active ETF, which helps the value proposition. We can realize opportunity in ETF growth around the world.

We were early in Europe as a sponsor and servicer; growth was slow at the beginning, but take-up is accelerating, and we think real growth is yet to come as distribution shifts from banks toward platforms that will deploy ETFs. Even in places like the Middle East, funds businesses are skipping over old mutual funds and going right to ETFs, building modern platforms. It is a vibrant, growing sector, and we are well positioned as both sponsor and servicer.

Our next question will come from David Smith with Truist Securities. Your line is now open. Please go ahead.

Thanks. On the capital front, you have been running more at the high end of the 10% to 11% CET1 range for most of the last year, but you were in the middle this quarter. Are you now more comfortable running mid-range, or is this just a transitory move down given elevated balance sheet at March-end? Then any early impressions on potential impact of the new RWA and GSIB surcharge rules proposed last month?

And is the 80% payout ratio target on a GAAP or adjusted basis? Thank you.

Our operating range is 10% to 11%, and we have articulated recently that we have been operating at the upper end. That has not changed. You can see some variability on quarter-ends based on the specific day’s activity. March 31 was an exceptionally active day, with larger movements that drove the 10.6%.

If you look at the averages for Q4 and Q1, average CET1 was at the upper end of 10% to 11%, and that is how we continue to operate. On Basel III, we are constructive on the proposed approach. It delivers a more targeted view of credit risk RWA, and we expect a benefit on credit risk RWA that exceeds the additional RWA on operational risk. We will frame magnitudes as we continue to study and await final rules, but generally we see a net benefit.

Lastly, the 80% payout is on a GAAP basis.

Our next question will come from Analyst with Morgan Stanley. Your line is open. Please go ahead.

Hi. Good afternoon. On the private credit side, appreciate the incremental disclosure on the NDFI loans. It looks like the majority of those loans are non-BDC loans, and you also mentioned some of the safeguards on the BDC loans themselves. How are you thinking about growth in that NDFI portfolio going forward, and how do you assess safety around that portfolio?

These are our clients—non-depository financial institutions broadly are an important part of how we support the customer segment, primarily investment services clients. As part of the broad suite of services, we support them from a balance sheet standpoint. This is highly strategic lending for us. The categories are extremely well positioned from a risk-return standpoint.

We have never had losses in subscription finance or in the triple-A CLO book, which comprise the large part of the NDFI book. On BDC lending, we are down to $1.6 billion, senior secured with substantial subordination—about 80%—behind our positions. It is diversified with ongoing structural protections. This will be a growth area for us; you could see low- to mid-single-digit growth, commensurate with continued penetration of this attractive segment.

On private markets servicing, elevated redemption requests can have a marginal impact, but it is limited. The round trip is a net positive for us: redemptions may have a small impact on servicing fees but result in higher deposits. Net-net, very stable in terms of revenues and fees. We see this as a temporary flow-related issue rather than systemic.

It is important to remember the attention is on a very small piece of private credit—those in semi-liquid fund structures. The vast majority of private credit is not in those structures, and there is no reason to believe private credit will not continue to grow. In regions like Europe or Asia, significant expansion of bank balance sheets is unlikely, yet credit appetite will continue to grow. In the GCC, for example, banks are highly profitable but do not have many places for balance sheets to grow; capital needs are significant and will be fulfilled by private credit.

You will see careful examination of semi-liquid vehicles and expectations for retail and affluent investors, but that is a relatively small segment.

To tie back to the $1.6 billion on the slide, less than half of that is in the non-public, semi-liquid space that is getting attention. Overall BDCs are 4% of loans; less than half of that—around 2% or less—is in the space getting headlines, and well less than 1% of total assets.

Our next question will come from Vivek Juneja with JPMorgan. Your line is now open. Please go ahead.

Thanks. First, you had a scoping charge of $41 million. This was the second one in the last 12 months. Can you give some color?

Is it the same client? Same type of issue? What is driving these, and why have we seen two in the last 12 months? Second, on Schwab charging a fee for their distribution platform—will you absorb it, or pass it on?

Lastly, on the charge-off jump this quarter—what type of loan was that?

These are idiosyncratic. It is not the same client and not for the same reason. In this case, it was an existing Alpha client that will remain an Alpha client. It was one part of their insource-to-outsource journey within our middle office business.

They intended to outsource more; we mutually agreed this was not the time to continue that outsourcing journey. It is within the middle office and is an insource versus outsource decision by the client. On Schwab, we do not have a concrete plan yet because we have not seen the final. We will decide once we see it and come back to you.

On the charge-off, this was a COVID-era commercial loan. Coming out of high-margin contracts from around 2021, when those rolled off, the name had pressure and went into nonaccrual. We took the opportunity to exit. It was substantially reserved, so not a big P&L impact; we crystallized it and moved on in Q1. It does not extend into other portfolios and has nothing to do with NDFI.

Our next question comes from Analyst with Wolfe Research. Your line is now open. Please go ahead.

Hi. Good morning. This is actually calling in for Steven today. We appreciate the color on the drivers of expense growth, including the 4% from net productivity savings. Given headcount was down 2% year-on-year, how much did that contribute to overall efficiency savings? Looking ahead, do you see potential for further headcount optimization?

Headcount will be something we consider, but there are puts and takes. We are growing and investing in businesses, so we may add in some places. Gross productivity levers—automation, reengineering, zero-basing processes—reduce reliance on headcount where possible, and we use that capacity to hire in other areas. Round trip, we expect continuing contributions from headcount, but with puts and takes as we invest elsewhere.

It is a meaningful portion of the 4% productivity.

Our final question will come from Gerard Cassidy with RBC. Your line is now open. Please go ahead.

John, you have had strong positive operating leverage—ninth consecutive quarter excluding notable items. How much of it is structural—your scalable platform and mix shift—versus cyclical tailwinds like FX volatility or rising market levels? And Ron, with investing in AI today, does scale become an even greater challenge for smaller players to compete against companies like yours and the large money center banks? How important is scale to successfully compete in this business?

Across the board, we have had organic growth in the quarter—durable, reflecting multi-year investments, business execution, and a sales culture that is paying dividends. We are seeing organic growth across all fee line items. In Markets, from a distance one might say environmental factors, but it is not only environmental. Long-term client relationships and platforms we have built are very attractive, and connectivity between Markets and our Investment Services and Investment Management clients is very strong.

We believe we have a durable opportunity to drive attractive positive operating leverage that will reflect in pretax margin improvements over time. Environmental factors can help, but even without them, we believe we have a very attractive opportunity to grow pretax margin through positive operating leverage given the organic drivers.

The importance of scale has not gone down. The investments required around technology and cyber just to stay where you are—forget about growth—are significant, imposed by regulators and increasingly by clients. Layer on the revolution we are seeing with AI—not just bringing in the technology but profiting from it—the scale around people and know-how is hard for smaller players. If we are moving toward true digitization of finance, that will take time; it is not just showing up with a new platform, but recognizing the long-term transition and building on- and off-ramps, which is where you make money, and which require scale.

We do not dismiss innovators; we follow them, partner with them, and in some cases buy them. But we are not seeing one of them developing into a true scaled player to compete in our pocket of the market.

There are no further questions. I will now turn the call back over to Elizabeth Lynn for closing remarks.

Thank you all for joining us today. Please feel free to reach out to Investor Relations with any follow-up questions. Thank you again, and have a nice day.