Prepared remarks
Good morning, and welcome to State Street Corporation's second quarter 2026 Earnings Conference Call and Webcast. Today's call will be hosted by Elizabeth Lynn, Head of Investor Relations at State Street. 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's conference call is copyrighted and all rights are reserved. This call may not be recorded for rebroadcast or distribution in part or in whole without the express written authorization from State Street Corporation. The only authorized broadcast of this call will be on the State Street website. Now I would like to hand the call over to Elizabeth Lynn.
Good morning, and thank you all for joining us. On today's call, our CEO, Ronald O'Hanley, and our CFO, John F. Woods, will review our second quarter 2026 results and provide an update on our medium-term financial outlook. Both are included in our earnings presentation, which is available in the Investor Relations section of our website at investors.statestreet.com. Following prepared remarks, we will be happy to take your 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-K. Forward-looking statements speak only as of today, and we disclaim any obligation to update them even if our views should change. With that, let me turn it over to Ronald.
Thank you, Liz. Good morning, everyone, and thank you for joining us. Today, we will focus on two key topics. First, we will review our strong second quarter performance momentum we continue to build across the franchise and our improving outlook for 2026. We will then discuss our new medium-term financial targets, which we released this morning. We are excited to outline the strategic pillars that will drive this next phase of State Street's growth, the significant opportunities we see to further strengthen our compelling value proposition and competitive position, and the actions we are taking to further transform our operating model. Together, these initiatives reinforce our confidence in our ability to deliver sustained growth, expand margins and returns, and create long-term value for our clients and shareholders. But first, let me begin with our second quarter highlights on Slide 3. We delivered a strong set of financial results in the second quarter driven by disciplined execution, deep client engagement, and continued momentum across our businesses. These results reflect the strength of our platform and position us well for continued progress as we look ahead. Second quarter EPS was $3.65, up from $2.17 in 2Q 2025. Excluding prior year notable items, we delivered significant earnings growth of 44% year over year driven by record quarterly fee revenue, including record servicing, management, and FX trading revenues, together with record NII, driving total quarterly revenue up 17% year over year to an all-time high. This performance drove continued margin expansion and stronger returns. Taking a step back, this quarter's results reinforced the durability of our franchise and the sustained progress in our financial performance. 2Q marks our 10th consecutive quarter of positive operating leverage, excluding notable items, reflecting disciplined execution and the momentum we are building across the business. In addition to our strong second quarter financial results, we also meaningfully advanced our strategic agenda in the second quarter, further strengthening our franchises and positioning us for continued growth. Within investment services, innovation continues to be a key driver of future growth. For example, our digital asset platform is an always-on financial infrastructure that will enable clients to rapidly bridge from traditional to digital finance, and we continue to make strong progress in advancing this strategy. In 2Q, we announced our intention to deliver a tokenized fund servicing capability by year-end subject to regulatory approval. Following a competitive process, a leading European asset manager selected State Street to serve as the servicer for tokenized money market funds expected to launch later this year. Importantly, State Street Investment Management is also expected to be an early adopter of this offering, underscoring the strength of our One State Street approach. Our investment management business continued its focus on innovation and product capability to position the franchise for sustained growth, and it demonstrated further evidence of the power of our franchises working together as an integrated One State Street. In 2Q, a State Street Alpha client entered into a strategic partnership with State Street Investment Management, paving the way for a suite of active cobranded ETFs. This is a clear example of how we bring the value of our combined firm to clients through a One State Street approach, as well as how we drive innovation within the industry, deploying our extensive expertise and capabilities to identify and create solutions for the world's investors. We also recently announced that SPYM, our low-cost S&P 500 ETF, has been selected by the U.S. Department of the Treasury as the exclusive default ETF for 529 accounts. These accounts are designed to make investing simple and accessible, giving children a straightforward opportunity to begin early in life as asset owners, benefit from the power of compounding, and stay invested over time to build wealth. We are proud to help Americans through that journey with SPYM. Turning to State Street Markets, we continue to demonstrate the strength of our integrated liquidity and financing capabilities, driving strong client activity. We experienced record FX trading volumes and revenues in the second quarter, with securities lending also up significantly year over year. Our markets franchise provides industry-leading capabilities to our investment services clients, deepening client relationships while driving revenue diversification and earnings growth. Before I turn the call over to John, let me briefly touch on the strength of our capital position, which was reflected in the Federal Reserve's recent stress test. Following the release of those results, we announced an increase to our quarterly common stock dividend of 10% to $0.92 per share beginning in the third quarter. Dividend growth remains an important component of our capital return as demonstrated by the double-digit average dividend per share growth we have delivered over the last four years. In closing, we delivered a strong second quarter driven by disciplined execution, deep client engagement, and broad-based momentum across the franchise. Our results highlight the strength of our businesses, both individually and as One State Street, and the role innovation plays in driving performance today and growth ahead. We are encouraged by our progress and confident in our ability to continue delivering improved performance through the balance of the year and over the medium term, supported by solid financial and strategic momentum. With that, I will turn it over to John to walk through the quarter in more detail.
Thank you, Ronald, and good morning, everyone. Starting on Slide 4, our second quarter results excluding the impact of notable items in the prior year period reflect continued momentum across the franchise with broad-based revenue growth driving 645 basis points of positive operating leverage. Total revenue increased 17% year over year to a record $4 billion. Fee revenue of $3.2 billion increased 16% year over year, reflecting strong performance across investment services, investment management, and markets, while net interest income of $860 million increased 18% driven by a 17 basis point increase in net interest margin to 113 basis points. Against the backdrop of strong revenue performance, expenses of $2.7 billion increased 10% year over year primarily reflecting higher revenue-related costs as well as continued strategic investment in the franchise. These results drove another quarter of improved profitability, with pretax margin expanding 470 basis points year over year to 34% and ROTCE increasing over six percentage points to approximately 26%. Turning to Slide 5. Servicing fees were $1.5 billion in the second quarter, up 13% year over year primarily reflecting organic growth of approximately 7% driven by client activity, flows, and net new business, with the remainder from higher average market levels and currency translation. AUCA ended the quarter at a record $57.9 trillion, up 18% year over year reflecting higher period-end market levels, client flows, and net new business. Servicing fee sales totaled $87 million in the second quarter, reflecting continued client demand across regions and strength in strategic growth areas, including alternatives. Turning to Slide 6. Management fees were $772 million in the second quarter, up 29% year over year reflecting approximately 9% organic growth and strong support from higher average market levels. Assets under management ended the quarter at a record $6.3 trillion, up 23% year over year, supported by higher period-end market levels and positive net flows. Net inflows totaled $114 billion in the quarter, marking our fifth consecutive quarter of positive organic growth. This performance was primarily driven by strong index, ETF, and cash net inflows of $66 billion and $35 billion, respectively. Net inflows were broad-based across geographies, led by the Americas and complemented by solid contributions from Asia Pacific and EMEA. We launched 38 new products and solutions during the quarter, including a tokenized money market solution and a stablecoin reserves fund, further advancing our digital assets strategy. As Ron mentioned, SPYM was selected as the exclusive default ETF for 529 accounts, expanding access to investing for U.S. children. Beyond the near-term asset gathering opportunity, the program introduces a new generation of investors to State Street Investment Management and reinforces our position in the growing U.S. wealth market. Turning to Slide 7. Our global client franchise continued to support healthy activity across our markets business in the second quarter. FX trading services revenue increased 27% year over year, excluding a notable item in the prior year period, to $494 million driven by record-high client volumes. These volumes reflect both our distinctive capabilities and the continued deepening of relationships with clients. Asia Pacific was a particular area of strength with robust equity market-making activity in a number of markets across the region supporting client volumes. Securities finance revenue increased 19% year over year, reflecting higher client lending balances. Turning to Slide 8. Software services revenue declined 14% year over year in the second quarter, excluding a notable item in the prior year period, reflecting elevated on-premises renewal activity last year. That said, underlying trends were strong, with software and data revenue up 10% year over year driven by client onboarding and conversions. In addition, annual recurring revenue increased approximately 14%, and revenue backlog grew 6% year over year reflecting continued SaaS implementations and conversions as well as ongoing sales momentum across the software platform. Turning now to Slide 9. Net interest income of $860 million increased 18% year over year driven by a 17 basis point expansion in net interest margin to 113 basis points. The improvement in NIM reflected a more favorable funding mix, continued benefits from investment portfolio repricing, and the runoff of terminated hedges, partially offset by lower average market rates. Average interest-earning assets of $305 billion were largely stable from the prior year quarter as growth in deposit balances was partially offset by lower short-term borrowings. Moving to expenses on Slide 10. Expenses increased 10% year over year in the second quarter excluding notable items, primarily reflecting strong revenue performance. The majority of expense growth in the quarter was tied to higher business activity, with revenue-related costs contributing approximately six percentage points. Additionally, we continue to invest in our business, including capabilities, products, AI, and technology. These strategic investments contributed an additional 2.5 percentage points. While underlying run-the-bank costs net of productivity savings accounted for the remaining 1.5 percentage points. Headcount was down approximately 3% from a year ago, consistent with our focus on productivity and disciplined resource allocation across the enterprise. Turning to Slide 11. Our capital position remained robust at quarter end, providing flexibility to support client activity, invest in the business, and return capital to shareholders. Our standardized CET1 and Tier 1 leverage ratios were 10.8% and 5.3%, respectively, broadly stable relative to the first quarter. We returned $631 million to shareholders during the quarter, consisting of $400 million of common share repurchases and $231 million in declared common stock dividends for a total payout ratio of 62%, bringing our year-to-date payout ratio to approximately 73%. As Ron noted, we announced a 10% increase in our quarterly common dividend per share beginning in the third quarter, reflecting the strength and resiliency of our business. Let's turn to our full year outlook on Slide 12, which, as a reminder, excludes notable items. Our outlook assumes global equity markets remain flat on a point-to-point basis from the end of 2Q through year-end. Our rate outlook is broadly aligned with forward curves and assumes the Fed and BOE remain on hold while the ECB delivers one additional rate hike this year. We now expect fee revenue growth of 12% to 13%, up from our prior outlook of 7% to 9%, reflecting continued organic growth across servicing and management fees as well as healthy client activity in markets. We expect NII growth of 14% to 15%, up from our prior outlook of 8% to 10%, primarily reflecting stronger average deposit balances. Consistent with our stronger revenue outlook, expenses are expected to increase by roughly 8%, up from our prior outlook of 5% to 6% reflecting higher revenue-related costs and continued investment. Based on our current outlook, we expect to deliver roughly 500 basis points of positive operating leverage in 2026 implying a pretax margin of approximately 32%. 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. Our strong first half results and improved outlook for 2026 reflect the strength of our franchise and continued execution against our strategic priorities. With that, I will turn it back over to Ronald to discuss our medium-term financial targets.
Thank you, John. Let me turn to the second part of our discussion on Slide 14. Our strong execution in the second quarter combined with our improved outlook for 2026 provides meaningful momentum as we begin the next phase of our journey towards achieving new medium-term targets. State Street is well positioned for its next phase of growth and value creation. That begins with the scale and strength of our franchises. The breadth of our platform is substantial, enabling us to compete and serve clients from a position of strength. Globally, we are the second largest custodian, the largest ETF servicer, and a partner to the world's largest asset managers and asset owners, entrusted with more than 10% of the world's financial assets, and we operate in more than 100 markets worldwide. We are the fourth largest asset manager and the third largest ETF manager globally. And in our markets franchise, we are the number one provider of asset FX to asset managers as well as a top three securities lender, with capabilities that are deeply integrated with our investment services business and client relationships. Not only do these businesses hold leading market positions, they come together as a powerful One State Street, an integrated firm creating meaningful synergies and delivering greater value for both our clients and our shareholders. Importantly, our businesses are integrated not just in how they go to market but also in how they serve a shared client base across asset managers, asset owners, and wealth managers. As illustrated on the right side of the page, we serve as an essential and trusted services and investment partner to the world's leading investors. As a result, we are strategically aligned with firms positioned to grow enabling us to drive further value as we broaden and deepen our relationships and participate in their growth in the years ahead. This One State Street is the foundation for everything you will hear from us today. It is the platform from which we will deliver the medium-term financial targets. Without an understanding of who we are and how we go to market as One State Street, let me turn to what all of this translates into strategically and financially, starting with our track record where we are committing to take the franchise from here. Turning to Slide 15. In recent years, State Street has delivered structural improvement across the metrics that matter most. Excluding notable items, and over the past two years through the end of 2025, pretax margin expanded by approximately 300 basis points and return on tangible common equity increased to approximately 20%, supported by revenue growth of more than 14%. That strong performance continued into 2026, pretax margin expanded to 32%, and ROTCE increased to roughly 23% excluding notable items. This reflects the deliberate choices we have made in recent years to strengthen the franchise, improve operating efficiency, and invest in areas that positioned us for durable growth. As we look ahead, our continued momentum and next phase of growth will be driven by three key strategic pillars which are outlined in the center of the slide. First, our core businesses. Many of our most compelling growth opportunities lie within the franchises we already lead. These are businesses where we have built deep capabilities, operate at scale, and enjoy strong competitive positions. We remain focused on strategically investing to accelerate these opportunities and executing with discipline to deepen client engagement and deliver durable growth over the medium term. Second, to complement the growth of our core franchises, we are prioritizing three strategic growth initiatives: alternatives, digital assets, and wealth services. These span and connect our investment services, investment management, and markets franchises creating opportunities across the breadth of the firm. These three initiatives are adjacencies that align us with evolving client demand and some of the fastest growing and most attractive revenue pools while also deepening our essential role to our clients as the industry evolves. Importantly, these initiatives are diversified across the maturity curve, driving growth from our already strong position today in alternatives, positioning us for the next phase of market structure and digital assets, and enabling access to the largest and fastest growing pools of client demand through wealth services and investment solutions. And third, our next phase of technology and an AI-enabled transformation will be a critical enabler, simplifying how we operate, accelerating time to market, and fundamentally improving productivity through a more integrated product platform model which John will speak to shortly. Finally, as we execute against these three strategic pillars, we believe the firm is advantaged by the interconnected capabilities across investment services, investment management, and markets, enabling us to deliver through a One State Street model that provides whole-portfolio solutions at scale rather than just standalone products. Taken together, our consistent track record of stronger financial performance positions us well for the next phase of growth. We enter that phase with positive momentum supported by the continued strength of our global franchises, differentiated portfolio of strategic investments spanning multiple stages of maturity, and the evolution of our operating model through technology and AI-driven transformation. These efforts underpin the new medium-term targets we are announcing today, which include the milestones of expanding our pretax margin to 35% and increasing return on tangible common equity to the mid-20s over the cycle. We are confident in our ability to achieve these ambitious targets as we build on our strong momentum and continued improvement in financial performance. With a clear path to sustained organic revenue growth and positive operating leverage, we believe we are well positioned to unlock long-term value for our shareholders. With that, let me turn it over to John who will walk through our path to achieving these objectives in greater detail.
Thanks, Ronald. Turning to Slide 16. The pretax margin expansion we expect to achieve over the medium term is broad-based with contributions across investment services, investment management, and markets. In investment services, the approximately 300 basis point contribution to enterprise margin expansion is expected to be driven by a combination of organic revenue growth and productivity initiatives. On the revenue side, we see opportunities to deepen our existing client partnerships. Our key growth priorities include extending our ETF servicing leadership, broadening our reach across key international markets, expanding adoption of our differentiated alpha front-to-back capabilities, and capturing growth across alternatives, digital assets, and wealth servicing. We also expect continued support from net interest income, which remains closely tied to client deposit growth and the underlying strength of our servicing business. On the productivity side, given the scale of our global operations, investment services is expected to be the largest contributor to the expense saves in our technology and AI and digital transformation program. By simplifying our operating model, scaling common platforms, modernizing our technology stack, and increasingly leveraging data and AI capabilities, we expect to deliver an upgraded client experience and improve service quality while lowering unit costs over time. In investment management, we see significant opportunities to drive growth through scale and expanded client access. ETFs, index investing, fixed income, and other solutions remain core growth engines for the business. In addition, wealth is a key strategic focus as we expand our presence across advisory, intermediary, and retirement channels while partnerships with next-generation wealth platforms extend our distribution to new investors and bring differentiated investment solutions to market. We also see substantial opportunities in alternatives and tokenization where we are broadening access and developing new ways for clients to incorporate private market and digital asset exposures into their portfolios. Taken together, these opportunities support our confidence in delivering sustained organic growth, operating leverage, and approximately 200 basis points of enterprise margin expansion from investment management over the medium term. In markets, we see continued opportunities from geographic expansion and product innovation. This includes scaling our financing and trading capabilities in our faster growing international markets, expanding our product offerings, and deepening engagement with our core investment services clients. Beyond this, growing demand across alternatives, digital assets, and wealth is creating new opportunities to expand our solution set. Supporting these growth drivers, enhanced data capabilities, automation, and operating efficiency initiatives are expected to enhance execution and help to deliver approximately 100 basis points of enterprise margin expansion over the medium term. Underlying all of these opportunities is our One State Street approach, which enables us to connect capabilities across investment services, investment management, and markets to deliver more integrated solutions, deepen client relationships, and increase wallet share. Turning now to Slide 17, let me expand on the transformation initiatives that will accelerate execution, enhance service quality, and create capacity for future growth. First is the migration of our operating model to a technology- and AI-enabled product platform structure. Rather than just reengineering legacy processes, we are taking an end-to-end view of the enterprise and are planning to rewire how we operate, embedding AI and modern technology into our core business processes. Under this model, business operations and technology resources are reorganized into integrated agile delivery teams with business leaders holding end-to-end ownership of the client delivery process and experience. The result is meaningful efficiency gains from simplification, automation, and AI enablement. Beyond these efficiency benefits, faster time to market for new products, enhanced service quality, and improved client experience are expected to drive incremental revenue opportunities across the franchise. Supporting this operating model is our technology simplification and modernization agenda. By reducing legacy applications, expanding the use of modern cloud platforms, and further strengthening our enterprise data foundation we are lowering unit costs, improving resiliency, and reducing operational risk. At the same time, a modernized data foundation unlocks new revenue potential by creating capacity for investment in growth and innovation. Finally, we are scaling AI adoption across the enterprise to improve execution, enhance productivity, and accelerate software development. AI will drive meaningful gains in developer efficiency and code modernization, freeing up capacity for higher-value work. Beyond these productivity benefits, AI is enabling new client-focused capabilities and better data insights that will increase the earnings of our franchises over time. Together, these efforts are expected to deliver approximately $1 billion of run-rate transformation benefits by 2029, with approximately 75% of this driven by expense productivity and 25% from revenue. Turning to Slide 18. We outline our capital allocation framework and how we intend to deploy capital over the medium term to support our strategic objectives, generate attractive returns for shareholders, and maintain the resilient balance sheet our clients expect. Our capital priorities remain unchanged: supporting a strong and growing common dividend, investing in the franchise to drive organic growth, and returning excess capital to shareholders through share repurchases. Consistent with these priorities, we continue to target a total payout ratio of approximately 80%. To support these objectives, our current medium-term outlook includes a CET1 ratio of approximately 11% and a Tier 1 leverage ratio of approximately 5.25% to 5.75%. Turning to our final slide, State Street is entering its next phase of growth from a position of strength. The momentum we have built in recent years has fundamentally repositioned State Street to deliver sustained growth, continued margin expansion, and stronger returns over the medium term. The scale and strength of our franchises, our distinctive portfolio of strategic growth initiatives, and the accelerating impact of our transformation agenda give us real conviction in the path ahead and in our ability to execute against it. Collectively, these drivers support our new medium-term targets of 35% pretax margin and a return on tangible common equity in the mid-20s. With that, operator, please open the line for questions.
Questions and answers
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 question. Again, it is star 5 to ask a question. And we will pause just a moment for the queue to form. Our first question will come from Alexander Blostein with Goldman Sachs. Your line is open. Please go ahead.
Hi. Good morning. Thank you for taking the question. I was hoping to start with the medium-term targets, maybe starting with the revenue question first. So helpful in the way you framed it in terms of sort of qualitatively where you are looking to lean into. I was hoping you can give perhaps just a little more granularity on the $250 million and kind of which businesses that is likely to come from. And I guess more importantly, you guys have been improving organic growth to begin with over the last couple of years. So as you think about the firm-wide organic fee growth today, where does that stand? And I guess when you layer in these incremental efficiencies or incremental initiatives, where do you see organic growth firm-wide going on the fee side?
Alexander, thanks for the question. I will go ahead and give you some context with respect to overall how we are thinking about it. Over the medium term, the way I would think through it would be positive operating leverage is the main north star that we are committing to. What we are saying here is, and as I mentioned in my remarks, look at the baseline from which we are launching this in 2026. Whether it is the first half or even our outlook for 2026 overall, we are around 32%. That is growing over the medium term to that 35% and I would say that would be consistent with positive operating leverage of 100 to 150 basis points, which is driven by organic growth across all three of those businesses that we are talking about. I would pair that with some commentary with respect to NII over the medium term. So we do see net interest income rising in that to mid-single digits area, driven by balance sheet growth in the low single-digit range and our net interest margin getting to the upper end of our 110 to 115 basis point range as you get out over the medium term. Those are the underlying engines that drive this progression. And then when you flip over to the transformation program and that $75/25 split, that billion dollars that we expect to deliver by 2029, as you asked, 25% of that is tied against revenue opportunities. I think that is a starting point. What we are trying to accomplish here is broad-based and has huge impacts on client experience and time to market and cycle times. The $250 million that we have in there is primarily related to the targeted strategic initiatives that you will see that we are mentioning here that are One State Street driven: alternatives, digital, and wealth. Among those three, probably alternatives is the biggest contributor just given its maturity profile where that initiative has been ongoing for a number of years and we are accelerating into it. So that is how I would think about the overall context for the medium-term outlook and putting revenue into the mix there.
Got it. That is helpful. Thanks. And just for a follow-up, maybe double-clicking on the $750 million of cost savings you expect to see here. Again, it feels like there is inherent operating leverage in the business, regular way as you described it initially, and then this sort of comes on top. If you round that through, obviously, that leaves you with much higher pretax margin than the 35%. So if I think about the $750 million being a gross number, maybe help us frame how much of that will ultimately get reinvested back in the business to think about what the net cost savings could be on the back of the program.
It is fungible, but I would say that the transformation program has two overall objectives. First, it allows us to grow our strategic investment capacity over this medium term in order to drive the outcomes we are talking about with respect to these One State Street initiatives as well as the broader powering of our leading franchises. That is the first part of it. The second part is helping us stay on track for the margin expansion. So without giving you a specific percentage, I think it is relatively equal parts allocated to reinvestment and margin expansion. Also, when you look at our businesses, given the footprint of our investment services business, that is the majority of the productivity saves will be generated there where much of the headcount is in the servicing side of the business. So a way to think about it across the businesses as well.
Your next question will come from Glenn Schorr with Evercore ISI. Your line is open. Please go ahead.
Hi. Thanks very much. So I definitely want to ask a question on all things digital assets, stablecoin, and tokenized deposits. But as a lead-in to that, I want to make sure I get the right perspective. I think for you guys and for the industry, the initiatives in that space are included in that incremental $250 million and it is not even the biggest piece. So the message I am hearing is you are investing a lot in the future infrastructure of the financial markets, but it is a long-term commitment because even if all $250 million was from digital assets, that would be less than 2% of State Street's revenue. So focus on the big picture first. Either way, my next question is: I noticed two announcements during the quarter, one on the Visa/Mastercard stablecoin network with over 100 businesses and you were not one of them, and also a tokenized deposit network with a bunch of banks that is more of a bank thing. My question is what is taking place in terms of modernizing payments, clearing, and settlement systems? Are we paying too much attention, because right now it is not adding up to much revenue? I apologize for smushing those two together, but I want to get the right perspective on all things digital.
Let me start and John will pick up on the specifics as they relate to numbers and the $750 million and the $250 million, which was discussed in the context of the next phase of transformation we just described. We have initiatives underway and if you think about the cost side and the margin expansion we've enjoyed over the past several years, that has been the result of our ongoing transformation program. What we are talking about here is the next phase, which is incremental, but we have existing initiatives that will also be contributing. So I want to make sure people understand the mathematics here. Second, in terms of digital specifically, we are primarily an infrastructure provider to our clients, enabling them to execute their digital strategies. Our clients are global investors, so we are focusing on traditional-to-digital rails because it will be a long time before the whole infrastructure stack is digital. We are focused on things that relate to those investors—asset managers and asset owners. Hence, for example, the focus on tokenized money market funds. Those are our client base and a large segment of them are large asset managers, so we are picking our spots and going where we know our clients want to go. John?
A few comments to add: we launched our digital asset platform recently; it is a secure, scalable platform to manage wallets and the on-ramp and off-ramp between traditional finance and the digital on-chain world. On the investment services side, we are focused on enabling client launches of tokenized money markets, and that is early in the roadmap. On the investment management side, we announced a couple of digital asset ecosystem product launches as well, including a tokenized money market fund on chain—a cash equivalent for the digital ecosystem—creating new distribution and collateral mobility. Investment management also launched a stablecoin reserves money market fund targeted to stablecoin issuers. It is table stakes for us in the space we operate in to have these capabilities. Alternatives is probably the most mature of the three initiatives we are spotlighting; digital is gaining momentum, and there is lots of activity. We are making progress.
I appreciate that. It sounds like you make a lot of progress even if it does not add up to huge numbers right now, but I take that as a good thing because it means the rest of your revenue is safer from digital disruption. If you agree with that, I'm good. Thanks.
Thank you, Glenn.
Your next question will come from Mike Mayo with Wells Fargo. Your line is open. Please go ahead.
Hi. Could you give us more confidence on why you are confident that this new phase at State Street over the next three to five years is going to succeed? I have in my plus column that you have 10 quarters in a row of positive operating leverage, better returns, better pretax margin, and organic growth that seems to pick up. I would love it if you could verify that the servicing fees picked up organic from 2% last year to 5% this year and asset management from 6% to double digits this year. But the negative column is I have heard this before—phase three for the last 15 years—and the rewiring, cloud, and tech transformation in the last decade failed to produce desired results. So why is this time different? Why should investors think this major demarcation will succeed? Thank you.
Mike, we begin with a very strong foundation. Our 10 quarters of positive operating leverage did not come out of nowhere; it came from investment in the platform and in products and revenue growth capabilities that we have now demonstrated over those quarters. You are seeing consistent organic revenue growth and a productivity-focused culture. Yes, our expenses have gone up as a result of revenue-related costs and investments, but headcount has actually gone down. We did not have that foundation earlier. Secondly, this management team is strong: over 50% of it is either new or new to its role in the last three years, and they work well together. You are seeing improved operating efficiency across the board quarter after quarter, and our first-half 2026 results reinforce this trajectory. These targets are over a cycle; we are in a constructive environment now, but we are not assuming it lasts forever. Over the cycle, these are the targets we are aiming for. They are ambitious but within our control—margin and ROTCE are things we can influence. We have conviction and intend to execute on what we laid out.
In terms of the rewiring, is there any metric we can monitor to see success, such as revenues per employee or headcount, or what does moving to an agile infrastructure mean in financial terms?
Mike, a couple of things. The $750 million is disproportionately driven by the operating model transformation, which is tangible: migrating to a product platform approach where business, technology, and operations are reorganized into cross-functional teams delivering specific business outcomes. That is a physical organizational migration that will flow through to headcount. You saw headcount down in recent years; the gross headcount is down as we invest in strategic initiatives. Keep an eye on headcount. Over time we will look for a short list of metrics to show progress—product development lifecycle times, client experience and service quality metrics, percentage of applications migrated to cloud, and a lower footprint of data centers. Migrating our investment spend because of software development efficiencies should show up as a higher percentage of our investment spend going to growth. So there will be metrics we can share tied to the organization and to the platform migration.
All right. Thank you.
Your next question will come from Kenneth Usdin with Autonomous Research. Your line is open. Please go ahead.
Good morning. I want to focus on the current outlook. John, can you give a little color on what you expect for the full year now? I guess you would assume NII kind of flattens out from here and fees probably revert a bit. FX was very strong in Q2; I could imagine some of that moderates. How do you expect these to progress from here? Anything we should be thinking about regarding seasonality or reversion from the recent results?
Start with revenue: we expect continued organic growth in servicing and management fees and that is an important anchor continuing the momentum of the first half. We are not assuming as much of a tailwind from market levels; we are keeping market levels flat from the end of 2Q through year-end in our outlook. On markets: we have seen record FX trading, and we've built in some moderation in the second half. Client volumes have been resilient, and international opportunities where spreads are wider continue to support markets, but we are not counting on that in the outlook. NII: you are right that some flattening occurs. Earlier we thought deposits would be $250–$260 billion; we came in above that in Q2 with average around $270 billion, and we are assuming that level for the year. That underpins the increase in the outlook for NII from 8–10% to 14–15% year over year with NIM staying in the 110–115 basis point range. On expenses: you will see some moderation in growth due in part to lower third-party spend, and the year-over-year base effect from 2Q 2025 results in our expense growth expectation of roughly 8%. A few comments across those line items.
Okay. Thanks, John. One clarification: the three-to-five years, what years are you referring to? When could these targets be achieved inside that range?
A couple of points: the $1 billion transformation program is explicitly tied to achieving that run rate by 2029, so that is the earlier end of the three-to-five year range. With respect to the targets overall, we like to talk medium term as three to five years. The 100 to 150 basis point positive operating leverage expectation would imply reaching the targets in the earlier end of that medium-term time frame.
Your next question will come from David Smith with Truist. Your line is open. Please go ahead.
Hi. The $1 billion of transformation is a nice goal. Are you anticipating any major upfront spend required to get there by the 2029 target? Or is it just embedded between your normal investment spend each year net of efficiencies?
On the recurring side, it is embedded in the numbers you heard. There will be some one-time costs that are predominantly severance related with respect to the headcount implications. I would frame that in the neighborhood of around $500 million to give you a sense for how that equates to gross headcount reductions. On a net basis, maybe similar to what you saw over the recent past, we would expect headcount to be down in the low single-digit range after reinvestment of that capacity into strategic initiatives and growing our franchises. We think that is a highly attractive ROI. Of that severance-related cost, the substantial majority of the $500 million would be severance related, which typically ends up with very solid ROIs and solid earn-backs as well.
Okay. And then in terms of the line-of-business targets, focusing on investment management, you are saying you're going to get about 200 basis points of enterprise margin expansion from there. But it was less than 20% of revenues last year. So thinking about the weighted contribution, it would take a big improvement in margins in investment management to get 200 for the overall company. Can you talk more about the key drivers and your confidence in achieving them?
The math is right. If you go back to 2025, investment management was around a 33% margin in 2025; in the second quarter of 2026, investment management improved to around 38%. So in many respects, about half of that 200 basis point contribution is already delivered here in the second quarter. Nothing's linear and market levels have an impact, but we are seeing incredible momentum in investment management and flexing the scale advantage they have and the innovation in product delivery. Continuing to drive ETFs, index, fixed income, and global distribution is a big driver. Their own transformation delivery as part of the overall program is also a contributor where cycle times and product release cycle times shorten and there is revenue uplift embedded in that 200 basis points. We have a lot of confidence in that contribution coming from investment management.
Your next question will come from James Mitchell with Seaport Global Securities. Your line is open. Please go ahead.
On margins and expenses again, thinking about the tech and ops transformation, do you expect any drag in the very short term on pretax margins as you invest? Or is a lot of that stepped-up investment spending already in the run rate? Thinking through 100 to 150 basis points of pretax margin improvement per year, would you view that as somewhat linear or back-ended?
It is not back-ended. The base case is we would expect to generate positive operating leverage in each year of the medium-term outlook; that is our goal. The 100 to 150 basis points is an average and we expect to make progress each year. There will be variation based on the pace of internal activity and macro factors, but 100 to 150 is a good planning range that takes us to the earlier end of the three-to-five year outlook. There is not an early-year large investment cycle that then back-ends over the medium term; the tech investments are planned and consistent with the billion-dollar program across the medium term without being back-end loaded.
That is helpful. And on the numerator side, if you have more years like this, can you get there quicker? Does that upside flow to the bottom line?
Yes. If positive operating leverage exceeds the 100 to 150 basis points, we would achieve the 35% earlier. We are looking for sustainable delivery at that level. If we consistently deliver and expect it to continue and rise, we would reassess and could adjust targets higher. But right now we are focused on achieving the targets sustainably.
Your next question will come from Ebrahim Poonawala with Bank of America Securities. Your line is open. Please go ahead.
Thank you. John, thanks for all the detail in the slide deck on the target. Nicely laid out. I have a question about AI adoption. As you approach the targets and adopt AI, how difficult is it to implement through workflows and revise them? Do you think over the next 12 to 24 months you could be AI-native enterprise-wide? Also, how much of AI-driven gains are in these targets versus potential upside beyond the targets?
I would put AI benefits into three categories. First is within our operating model, which is the lion's share of what we are delivering in the $750 million. We will be embedding agentic capabilities within our operating model redesign—migrating to agile teams where human and AI tools are integrated, which powers operating model efficiencies. Second is within the technology organization, where software developer productivity improvements are more easily ring-fenced; we expect 30% to 40% increases in developer productivity, which gets deployed into faster cycle times, more product launches, and higher innovation that drives revenue. Third is a rising-tide effect where we provide Copilot capabilities to eligible employees for knowledge retrieval, document extraction, content creation, analytics, and decision support, improving productivity enterprise-wide. You will see the savings embedded in the $750 million of expense saves, but you will also see revenue impact in the $250 million and beyond over time.
Thanks. One more on digital assets: is blockchain and digital assets a five- to ten-year build-out to become critical plumbing, or could it have meaningful impact in the next one to two years on revenue and disruption risks?
It is a good question. As with many technologies, there is a lot of promise and early delivery can underwhelm, with later delivery exceeding expectations. Blockchain technology is not new, but incorporating it into a financial ecosystem requires broad enablement and regulatory alignment across borders. There is regulatory movement beginning to align around this. What it enables—collateral transformation, tokenizing real assets to be divisible for wealth portfolios—creates real pressure and demand. It may be slower than the hype suggested, but real adoption is occurring and real work is being built under the covers. I believe over the medium to long term it will be extremely helpful.
Your next question will come from Manan Gosalia with Morgan Stanley. Your line is open. Please go ahead.
Good afternoon. John, you have spoken about balance sheet optimization and NII being central pillars of the medium-term outlook. Can you remind us what the near-term and medium-term impacts of the balance sheet optimization efforts are and what the impact is to NII?
We have moved our NIM from around 96 basis points in mid-2025 to the 110–115 range predominantly through optimization activities: remixing the funding mix toward higher deposits and lower short-term wholesale funding. That move accounts for around 15 to 20 basis points overall of NIM improvement. We have stabilized at the 110–115 level and in the medium-term outlook we expect to migrate to the high end of that range around 115 basis points as the medium term plays out. That is embedded in our outlook.
And on the capital side, you raised CET1 target a bit to around 11%. Is that conservatism, desire to keep a buffer while the environment is good, and is there upside to the 80% payout ratio?
Eighty percent is a good planning level we included in the medium-term outlook. We have attractive opportunities to put capital to work in support of strategic clients—global credit, financing, markets—so there's RWA deployment aligned with strategic goals. The CET1 level factors in managing the interplay between leverage and capital, particularly as we continue to grow deposits and manage leverage constraints. It balances deploying capital for growth with returning capital to shareholders.
Your next question will come from Brennan Hawken with BMO Capital Markets. Your line is open. Please go ahead.
Hi, Ronald, hi John. I had a couple on the ETF business. You launched a new product, QNDX, which is an interesting market that had been dominated by a few and recently opened up for new competition. What was particularly interesting was the pricing: you priced it at 10 basis points, which was narrow above Nasdaq's 8 basis point licensing charge, which suggested a new pricing strategy for SPDRs given your servicing advantage. Is this what we are starting to see and does it lead to concerns about potential pricing pressure on ETF servicing?
When we think about the history of our ETF business—SPDR and SPY—it started institutional and later we considered the wealth side. SPYM sits alongside SPY and targets wealth and buy-and-hold investors; our view was we needed to round out our product line where we were not previously active. Our positioning is based on that starting point. Because we are the leading ETF servicer and also the sponsor in some cases, we derive revenues in two places, which is a factor, but in terms of how we position the product it was about filling a gap where we were not previously in the market rather than a change in a broad pricing strategy.
That makes sense. Also, we've heard talk of revenue share programs for ETFs from distributors. Do you have any sense for the potential impact? Have you been in dialogue with wealth firms about that and what would you expect going forward?
We are in dialogue with distributors; they are long-term partners and we serve them in multiple ways. These conversations are ongoing. We will do things that make sense and will not do things that do not make sense. Our ETF franchise is growing and the fastest-growing part is the wealth side, so distribution conversations are important and ongoing.
Your next question will come from Steven Chubak with Wolfe Research. Your line is open. Please go ahead.
Good afternoon, Ronald and John. Wanted to ask on the pricing outlook. Pricing pressures have been less acute recently. However, there are questions about pricing resiliency given AI-driven windfalls and structural lower cost to serve. What are you hearing from customers about pricing in recent discussions? What assumptions on pricing underpin the 35% medium-term target, and how much of the benefit do you expect to be shared with customers over time?
I spend a lot of time with clients and I cannot recall a discussion where clients are expecting us to lower prices because of AI. Discussions focus on how it helps them: speed, cycle times, collaborating in automated ways, especially for middle-office services. The dialogue is centered on what AI enables in terms of faster delivery and deeper collaboration rather than price reductions.
We have planned organic growth in the servicing business which incorporates conversations with clients, pricing, net new business, and client activity. All these impacts are incorporated into our organic growth assumptions and the servicing business contributing 300 basis points to enterprise margin expansion. We expect lower cost to serve over the medium term, net new business, and client activity to support top-line growth. That is inclusive of pricing discussions with clients.
For a follow-up, from a sum-of-the-parts lens, best-in-class peers run stand-alone margins in the 40% plus range. How did you and the board settle on 35% given higher-margin upside implied by benchmarking? Is anything structural precluding you from getting closer to the high thirties or 40% over time?
These targets are milestones and not a final destination. We have made progress and will reset targets again when appropriate. The firm is a portfolio of businesses: investment services is service-intensive with a lower starting margin but higher improvement opportunity; investment management and markets start with higher margins and will continue to improve. The 35% reflects being ambitious but achievable over the medium-term and will be reconsidered when we have demonstrated sustainable delivery.
To add, in 2029 we were at 29% pretax margin; you are seeing 32% in the first half of 2026. The targets are ambitious and achievable; achieving sustainable delivery is key. If achieved and sustained, we would reassess whether to raise targets. That is the natural cadence you would expect.
Your next question will come from Vivek Juneja with JPMorgan. Your line is open. Please go ahead.
John, can you clarify something: in your last answer you said pricing discussions have been positive. Does that mean you are actually having discussions to raise pricing or what does that mean?
Vivek, I would clarify that our expectation of organic revenue growth in the servicing fee business over the medium term incorporates all impacts, including pricing expectations, client activity, and net new business. Those are all built into our organic growth assumptions and the servicing business contributing 300 basis points to the enterprise margin expansion. That is the takeaway.
When returns go up significantly due to AI, clients may ask why you are not sharing more. Historically you said you would push back when ROE was too low; now when ROE rises materially, are you prepared for client conversations?
We are in a different environment than five-plus years ago. Back then, mutual funds were being consolidated and there was more price compression. Today we have rapid adoption and proliferation of ETFs, new applications, growth in alternatives, and different needs from sophisticated asset managers and owners. They want value for what they spend and they are sophisticated; the dialogue is different. We work with clients to deliver technology and service to help them adapt to multiple asset classes and moves into wealth. It's a different market structure and competitive backdrop.
Your next question will come from Gerard Cassidy with RBC. Your line is open. Please go ahead.
Hi, Ronald. Throughout your conversation you keep referring to 'through the cycle' and milestones. I assume that is an economic market cycle. If it is, is 35% an average you think you can get to through the cycle or can you frame the highs and lows at all?
The 100 to 150 basis points of positive operating leverage is an average over the medium term. There will be variation based on business opportunities and the macro environment. One factor is NII: rates have an impact. A static plus or minus 50 basis points on rates would have roughly a 3 to 5 basis point impact on NIM, which gives you a sense of variability from that factor. Other factors like the operating environment will also impact fee revenues. We feel very good about the organic growth profile over the medium term, but expect some cyclical variability.
This concludes our Q&A session. 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.