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Good afternoon, and welcome to State Street Corporation's Second Quarter 2025 Earnings Conference Call and Webcast. Today's call will be hosted by Elizabeth Lynn, Head of Investor Relations at State Street. Today's discussion is being broadcasted live on State Street's website at Investors statestreet.com. This 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 housed on the State Street website. Now I would like to hand the call over to Elizabeth Lynn.
Thank you, operator. Good afternoon, and thank you all for joining us. On our call today, our CEO, Ron O'Hanley, will speak first. Then Mark Keating, our interim CFO, will take you through our second quarter 2025 earnings presentation, which is available for download on our website, investors.statestreet.com. Afterwards, we'll be happy to take questions. Before we get started, I'd like to remind you that today's presentation will include results presented on a basis that excludes or adjusts one or more items from GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our presentation. 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 Factors section in our Form 10-K. Our forward-looking statements speak only as of today, and we disclaim any obligation to update them even if our view should change. With that, let me turn it over to Ron.
Thank you, Liz, and good afternoon, everyone. Before we begin, I want to take a moment to acknowledge the devastating floods in Texas. Our thoughts are with those who have tragically lost their lives and with the people and communities who have been affected by this event. Now turning to the second quarter. In a period characterized at times by significant financial market volatility driven by geopolitical and economic uncertainty, our strong 2Q results demonstrate the powerful and diversified nature of our franchise by advancing and leveraging our deep capabilities in technology and investment services, markets and investment management. We continued to strategically position State Street as our clients' essential partner and executed on our purpose to help create better outcomes for the world's investors and the people they serve. Disciplined execution of this strategic approach is delivering positive results, including accelerating financial performance and strong business momentum.
For example, on a year-over-year basis, our 2Q results marked the fourth consecutive quarter of positive fee operating leverage and the sixth consecutive quarter of positive total operating leverage, excluding notable items. New business was strong as we generated a record quarter for sales and investment services, surpassed $5 trillion in AUM at State Street Investment Management, and generated record FX trading volumes in 2Q. This positive momentum reflects the strong strategic operating and technology foundation we have built over the past several years to support the long-term growth of our businesses. As we work to build on this progress, we remain focused on disciplined execution against our strategy, delivering consistent growth for our shareholders, and maintaining operational excellence in the service of our clients. Turning to Slide 2 of our investor presentation. I will cover our second quarter highlights before Mark takes you through the quarter in more detail.
Beginning with our financial performance. Reported earnings per share were $2.17 as compared to $2.15 in the year ago period. Excluding notable items, which Mark will speak to, fee and total revenue increased 12% and 9% year-over-year, respectively. We delivered positive fee and total operating leverage, increased pretax margin to nearly 30%, and achieved a 19% return on tangible common equity, while EPS increased 18% year-over-year, all excluding notable items. Turning to our business momentum. Within Investment Services, we delivered a very strong sales performance this quarter securing over $1 trillion in new AUC/A asset servicing wins and generated $145 million of related new servicing fee revenue wins, including 2 new State Street Alpha mandates. With this continued good sales performance, we remain confident in our ability to meet our full year servicing fee wins target of $350 million to $400 million for a second consecutive year.
The second quarter marked an important milestone for our asset management business, which we rebranded State Street Investment Management. This new name reflects our commitment to investing in our relationships, innovation, and in the future. Among other benefits, this new brand name reinforces our One State Street approach that aims to leverage collaboration across our firm, expand product offerings, and deepen relationships with our clients. This moment for our investment management business came as period-end AUM exceeded $5 trillion for the first time. Quarterly net inflows were over $80 billion, and we continued to gain market share in the strategically important U.S. low-cost ETF market segment. The second quarter also offered further evidence of the strength and depth of our ETF franchise as our U.S. ETFs led the industry in trading volume, surpassing $4.6 trillion in total volume for the quarter, ranking #1 in equity, #1 in commodities, and among the top 3 in fixed income.
State Street markets is seeing the results of its efforts to deepen client relationships and in Q2, clearly demonstrated its ability to support clients through volatile periods with deep liquidity and trading expertise, while also providing important diversification to our revenue profile. Amid a constructive environment for our markets business, we saw significant year-over-year increases in both FX trading and security finance revenues driven by higher client volumes. Our FX trading business recorded its best quarter since 2020 and security finance revenues rose to the highest level since 2019. Turning to our balance sheet. Our strong financial position enabled over $500 million in capital return in the second quarter and over $800 million year-to-date. Our financial strength was further underscored by the results of the Federal Reserve's annual stress test in June, subsequent to which we were pleased to announce our intention to increase State Street's quarterly per share common stock dividend by 11% to $0.84 beginning in the third quarter, subject to approval by our Board of Directors.
As we look ahead, we remain committed to returning capital to our shareholders, subject to market conditions and other factors. Turning to our operational efficiency. We have a well-established track record of expense discipline. This continues to be supported by a proven ability to generate productivity savings to fund investments in our business, which in turn is driving revenue growth and operating leverage. For example, over the last 3 years, we have generated over $1 billion of expense savings, largely from productivity initiatives, and we anticipate that number will increase to over $1.5 billion by year-end as we continue to progress well against our $500 million expense savings target in 2025. Importantly, as we look further ahead, the next generation of our operating model transformation remains our priority and a key opportunity to add even more value for clients and shareholders.
The charge we took in the second quarter illustrates this opportunity as we drive further operational efficiency and unlock productivity gains over time, supported by AI and continued platform scaling. To conclude, our first half results build meaningfully on 2024. The second quarter included a number of strategic and platform milestones for State Street, offering tangible proof points that our strategy is delivering, reflected in the continuing improvement in our financial performance and the strong momentum we're seeing across our businesses. These results underscore the strength of our franchise and the disciplined execution of our strategy by our teams. As we look ahead, we have strong conviction in our strategy and in our ability to serve our clients well, underpinned by our distinctive value proposition, financial strength, and the next generation of our technology and operational transformation. With that, let me hand the call over to Mark, who will take you through the quarter in more detail.
Thank you, Ron, and good afternoon, everyone. Picking up on Slide 3. Before turning to our second quarter financial results, let me briefly walk you through the notable items we recognized this quarter. Notable items totaled $138 million pretax or $0.36 per share, primarily driven by a $100 million repositioning charge associated with our ongoing operating model transformation. This action relates to the severance of approximately 900 employees and, as we noted in June, is expected to drive expense savings mostly in 2026 with a payback period of roughly 4 to 5 quarters. We also recognized roughly $40 million of notable items related to a rescoping of an alpha client contract along with a few smaller items as detailed on the slide. Turning to Slide 4. Excluding notable items, second quarter EPS grew a robust 18% year-over-year to $2.53 a share. Total revenue increased 9% and fee revenue increased 12% year-over-year, each excluding notable items, reflecting strong business momentum across the business.
Expenses increased 6% year-over-year, excluding notable items. Approximately half of the year-over-year increase was driven by a combination of higher performance and revenue-related costs associated with the more constructive revenue environment in the second quarter and, to a lesser extent, the unfavorable impact of currency translation. The remaining increase primarily reflects continued investments in the franchise, including technology and infrastructure. This performance enabled us to deliver meaningful fee and total operating leverage, 526 basis points and 241 basis points, respectively, excluding notable items. Accordingly, our pretax margin expanded to nearly 30%, while ROTCE was approximately 19% excluding notable items. Turning now to Slide 5. AUC/A reached a record $49 trillion, up 11% year-over-year, driven by higher period end market levels and client flows. AUM also reached a new record in the second quarter, increasing 17% year-over-year to over $5 trillion, reflecting higher period end market levels and positive net inflows.
Key market indicators reflected the dynamic operating environment in the second quarter, with higher period end market levels and elevated FX volatility across both developed and emerging markets. Against this backdrop, our markets business performed well, supported by record quarterly FX volumes as we help clients navigate a shifting market landscape, which I'll speak to in more detail shortly. Turning to Slide 6. Servicing fees increased 5% year-over-year, supported by higher average market levels, net new business, improved client activity, and the favorable impact of currency translation. We were encouraged by the strong sales momentum in our Investment Services business this quarter, with $145 million of servicing fee revenue wins. These wins were well distributed across regions with key new mandates in Europe and North America and are closely aligned with our strategic priorities, particularly in core back office solutions and private markets.
Installations progressed steadily and as expected during the quarter. Onboarding our $441 million of to-be-installed servicing fee revenue, the highest on record, remains a key priority as we aim to drive consistent, sustainable servicing fee growth. In addition, we reported 2 new Alpha mandates representing $380 billion of our AUC/A wins this quarter. Our interoperable front-to-back Alpha platform remains a key enabler in deepening and expanding client relationships. Moving to Slide 7. Management fees increased 10% year-over-year, primarily reflecting higher average market levels and the benefit of prior period net inflows. For the quarter, net inflows totaled $82 billion, driven by solid performance across ETFs and institutional. In ETFs, we saw healthy inflows across the product set, including U.S. low-cost, gold, SPY, and U.S. fixed income. Our U.S. low-cost offering achieved continued market share gains in the quarter, reflecting the strength of our strategic positioning in this segment.
As Ron noted, the market volatility in the second quarter further highlighted the deep liquidity of State Street Investment Management's ETF franchise, which led the industry in U.S. ETF trading volumes. In our institutional business, we delivered a record $68 billion of quarterly net inflows driven by continued momentum in retirement, including our strategically important U.S. defined contribution business. Overall, we were pleased with the strong performance of our investment management business in the second quarter, which generated a pretax margin of approximately 33%. Turning now to Slide 8. FX trading revenue increased 27% year-over-year, excluding notable items. This strong performance was driven by record client volumes with solid activity across our trading venues, reflecting heightened FX volatility in the quarter. Securities finance revenues increased 17% year-over-year, with strong balanced growth across both agency lending and prime services.
Within our prime services business, fee revenue increased 29% year-over-year, supported by higher balances and continued momentum in client engagement. Moving to Slide 9. Software and processing fees increased 19% year-over-year in the second quarter, excluding notable items. Front office software and data revenue increased 27% compared to the prior year quarter, excluding notable items. This strong performance was primarily driven by higher on-premises renewals, largely associated with CRD wealth clients. In addition, software-enabled and professional services revenues increased 10% year-over-year, excluding notable items, reflecting continued momentum in SaaS client conversions and implementations. We are pleased with our ongoing success in transitioning clients to our cloud-based SaaS platform with annual recurring revenue increasing by approximately 10% year-over-year to $379 million in the second quarter.
Moving to Slide 10. Net interest income of $729 million was down 1% year-over-year, primarily due to the impact of lower average short-end rates and changes in deposit mix. These headwinds were partially offset by continued loan growth and securities portfolio repricing. On a sequential basis, NII increased 2% supported by growth in non-U.S. deposit balances, securities portfolio repricing, and loan growth, partially offset by the impact of lower average short-end rates. As detailed on the right of the slide, the average balance sheet size expanded relative to 1Q driven by a 7% increase in average deposit balances. The sequential increase in average balances was partly a reflection of the more uncertain macro backdrop that we observed early in the quarter, which moderated through May and June. We remain committed to supporting our clients with our strong, highly liquid balance sheet. Looking ahead, while we expect deposit balances to remain somewhat elevated relative to our expectations coming into the year, we do anticipate that balances will continue to moderate over the coming months and quarters subject to market conditions.
Turning to Slide 11. Expenses increased 6% year-over-year, excluding notable items, as I mentioned earlier. Compensation-related costs were up 7% year-over-year, excluding notable items, mainly reflecting higher performance-based costs and the impact of currency translation, while total headcount was down slightly. Information systems and communications expense increased 11% year-over-year, excluding notable items, as we continue to invest in technology and infrastructure to modernize our platforms while enhancing data delivery and user experience. At the same time, we continue to execute on our productivity and optimization savings initiatives, which generated over $150 million in year-over-year savings during the quarter. Year-to-date, these efforts have delivered approximately $250 million of savings towards our $500 million full year target. Our ability to consistently generate productivity and optimization savings reflects the intense work of recent years and is a key enabler of strategic investments fueling technology modernization, supporting revenue growth, and helping us drive 6 consecutive quarters of positive operating leverage, excluding notable items.
We expect the repositioning actions taken in the second quarter to build on this momentum and support the continued transformation of our operating model in the quarters and years ahead. Moving to Slide 12. Our capital and liquidity levels remain strong, enabling us to continue supporting our clients as we look ahead. As of quarter end, our standardized CET1 ratio of 10.7% was down approximately 30 basis points from the prior quarter. Risk-weighted assets increased approximately $8 billion from the prior quarter, reflecting growth in our lending and securities finance businesses as well as higher volumes and volatility in our FX trading business. The LCR for State Street Bank was a robust 136% in the quarter. Capital return increased to $517 million during the quarter, consisting of $300 million of common share repurchases and $217 million in declared common stock dividends for a total payout ratio of 82%.
As Ron noted, following our strong performance in this year's Federal Reserve stress test, we also announced our intention to increase our first quarter quarterly common dividend by 11% in 3Q, subject to Board approval. Looking ahead to the second half of the year, we continue to expect a progressive cadence of common share repurchases, targeting a total payout ratio of approximately 80% for 2025. In summary, we are encouraged by our second quarter and first half results, which highlight our ability to execute on our strategy, driving sustained business momentum while delivering positive fee and total operating leverage, excluding notable items. With that, let me turn to our improved full year outlook, which as a reminder, excludes notable items and remains subject to significant variability given the current economic and geopolitical environment. Over the first half of 2025, we have demonstrated our ability to drive sustainable growth across our core businesses.
Given this strong performance, plus the current more constructive market environment and the anticipated impact of currency translation, we now expect 2025 total fee revenue growth in the 5% to 7% range, which is an improvement to our prior 3% to 5% full year outlook. We expect full year NII to be roughly flat to last year's record performance, with the potential for some variability driven by global monetary policy and changes in deposit mix and levels, which are difficult to predict. With our improved revenue expectations, full year expense growth is now expected to be roughly 3% to 4%, up from our prior full year outlook of 2% to 3%, reflecting higher revenue-related costs as well as expectations of a negative impact from currency translation. Importantly, we continue to expect to generate both positive fee and total operating leverage this year. And with that, operator, we can now open the call for questions.
分析師問答
Our first question will come from Ken Usdin with Autonomous.
I just wanted to just ask on kind of like fees and fee operating leverage. Just kind of walking through the implied fee update. And what drives that? Is it mostly just the market's backdrop? Is it what we see in terms of the yet to convert? And anything in terms of like how the timing of these great new wins and still left to convert will come through?
Yes, Ken, it's Ron. Why don't I start that. As we've noted, our pace of sales continues to be at an accelerated level. We said we were going to do in servicing fees $350 million to $400 million. We're on track to do that. That's what we did last year. That has led to a fairly sizable, in fact, a record level of fees to be installed, roughly $440 million, about half of that is going to install this year, and yet we're adding to that at about the same pace. So just on sales alone, there's a bit of a flywheel element to it. We've talked about what's occurred in the asset management business that continues to grow fees at a double-digit rate some of that market, but there's been positive organic revenue growth throughout these whole periods. And then finally, in markets, we'd invested heavily in client relationships that really do pay off when you get times of elevated volatility. So the organic elements in here are the primary driver of what we're talking about assisted by some constructive markets.
Okay. Great. And can you talk about just the new ones you're putting on and put it in context with the client rescoping that occurred, like is that now kind of done in the past issue or is there anything else that we could see with regards to that type of thing going forward?
We don't anticipate anything like that going forward. As we noted, we had 2 new Alpha wins this quarter and 3 Alpha installs. In terms of the nature of the back of our servicing fee revenue wins, about half of that are back office related, which that's a combination of pure back-office sales plus Alpha, which now only come with back office sales. We will not do something alpha-related without some kind of back office element to it because, as you know, back office drives recurring fees, but also gives us the right to other revenue sources like deposits like FX, like securities finance and that. So in terms of that one client, it remains a very important client to us and a very important partner to us. And basically, they changed one element of it. Instead of going to a single platform, they're going to be a multi-platform in their front office. We have built Alpha to be interoperable. So whether it's Charles River or some other provider or Charles River plus another provider as it will be in this case, we've got the ability to interoperate in that way, and we'll be providing all the other services that we intended to.
More importantly, this was a client that worked with us right at the very beginning, the development side of what we were doing, so going back to the 2019 time frame. And all that development IP still remains with us, which is important because it's being extended to other clients.
Ken, it's Mark. Maybe I'll just add to that just to make sure. This was contained to a software client contract rescoping, so it had no impact on the servicing fee revenue to be installed, did not have an impact on our assets to be installed that were very contained, as Ron said, to one particular aspect of a software agreement, which we renegotiated and took the appropriate actions on our that we've talked about here.
Our next question comes from Glenn Schorr at Evercore.
Maybe we could step back and ask just a big picture question of NII that feels a little different for you guys. And you've been consistent in talking about something in the range of flat year-on-year after good '24. But feels like the NIM has moved lower more so than others and balances, your thought process on moderating is more so. Is there something maybe related to your client base that's a little bit different? I appreciate the full package of operating leverage and better margins and all that. I just want to focus on the NII for a second.
Yes. Thanks, Glenn, it's Mark. Let me take you through this kind of 2 part of there. One was kind of our overall NII guide. And then secondly, there's, I think, a specific question on NIM, which I can get at as well. So first, I'd say our guide, as you mentioned, is generally consistent with our original outlook of flat year-over-year, and I said roughly flat because there's still some amount of variability of the factors that we always talk about in terms of rates and deposit mix and levels. I think now that we're halfway through the year, you expect that we'd be able to start to narrow, possibly narrow the outcome that we're seeing here. But again, we feel good about being able to continue to deliver on our guide of roughly flat standing here today. If you look at the first half of 2025, NII has been roughly flat to slightly down versus again the record year we had in 2024. First half was down about 0.6% versus the first half of last year.
So we're tracking well to our guide, given some puts and takes that I can get into in a little more detail. So again, holding NII flat to a record year after 6% growth last year, it means we're delivering on our guide and executing well in terms of what we've laid out for you. And we understand how important NII is, obviously. But if we unpack the NII guide with a little more detail, and I'll frame it in the same way that we've been doing it since January and then again in April, using kind of the 4 buckets of drivers and describing what the impact is to us as a firm in terms of tailwinds and headwinds. So the first one would be deposit levels. And obviously, you saw those go up this quarter. So interest-bearing deposits have certainly provided upside versus our expectations in what we talked about in January and then again in April. While noninterest-bearing deposits have actually largely played out as expected, notwithstanding an early pop in the second quarter.
We did have a near-term benefit in April during the peak of market volatility, uncertainty. However, in May and June, and then again, as we sit here in mid-July, we have seen some normalization in deposit balances since the quarterly high point in April. I'd also point out the majority of the spike in assets and deposits that we saw happened in lower spread buckets like market rates and exception rates. And so they did carry a more limited benefit for us. So mix is important. So while deposits are up about 7% sequentially, our noninterest-bearing balances where we have the widest liability spread that was down sequentially roughly $1 billion. So we think deposits will remain somewhat elevated, but we do expect to see some leveling off over the coming months, and we'll obviously continue to track that closely. In terms of other impacts, again, to us as a firm, our loan growth we've talked about that's also played out as expected.
It's been a tailwind year-over-year, and I can talk about that a little bit more in depth. The investment portfolio reinvestment. We talked about $4 billion a quarter at 100 to 150 basis points in terms of benefit there, given where rates are, we're seeing it more at the lower end, around 100 basis points, which brings us then to the major bucket for us, which is short-term rates. And as we've discussed previously, we are an asset-sensitive bank. We've seen rates come down faster than expected. If you look at the U.S. treasury curve, the 2-, 3-, and 5-year rates are down 50 to 60 basis points over the first 6 months of the year on a spot basis also non-U.S. central banks. While the ECB and the Bank of England have largely been in line with expectations, albeit a little more aggressive in the case of Bank of England in terms of timing, other central banks have actually been relatively more aggressive in the lowering of their rates such as the Reserve Bank of Australia and Canada.
I've talked previously about a cut at the ECB or Bank of England being worth about $5 million to $10 million per cut per quarter for 25 basis points. And while Australia and Canada may not be that large to us when you start to look across several of the central banks, it does start to add up as a headwind. So hopefully, that helps and that we're putting all this together, we're kind of standing back from it. We have some positives, like short-term pop in interest rates and interest-bearing deposits, some negatives like the pacing of cuts. But we see it as being relatively balanced, which brings us back to a guide of roughly flat to our record year of NII in 2024. So again, we understand how important NII is. We've been pleased with our ability to deliver on our guidance. This is 20% of the revenue of the company.
That was awesome. I really appreciate all that. Ron, I got 1 quick one for you. I can't resist. You guys have been great acquirers in the past and integrators. You almost got BBH done, but through no fault of your own that one fell through. I'm curious if you share any thought process with us on what you thought when you saw the news, when we saw the news that maybe BK and Northern were doing the dance? I'm just curious what crossed your mind and how we should think about that.
I'm not going to comment on market rumors regarding ourselves or others, but our perspective on mergers and acquisitions remains unchanged. We have strong confidence in our franchise's ability for organic growth. However, we always regard M&A as an important aspect of our strategy, albeit with a high standard. It needs to be demonstrated that it is worthwhile for shareholders to trade off a return on capital for an investment that will yield some return. Recently, our focus has been on building capabilities. If you consider some of the smaller investments we've made over the past couple of years, like the technology platform in India, Ethic, and our investment in Envestnet, these efforts are all aimed at enhancing our capabilities and moving us forward. We will continually seek opportunities to scale, and you have seen us pursue those in the past. At this moment, we are pleased with our current position and will keep concentrating on serving our clients effectively and enhancing our capabilities. If a suitable opportunity arises, we will assess it.
Our next question will come from Jim Mitchell with Seaport Global.
Maybe just talk a little bit about the asset management business, record net inflows in the institutional channel and long-term assets. That's a pretty big change from what we've seen in recent years. So can you just talk to, is there anything kind of lumpy in there that may be not to get too excited about? Or do you feel like there's a real turn in sort of the organic growth in that space? And how do we think about the fee rates in the long-term institutional AUM space?
Sure. For the second quarter, we experienced a mix of growth. We noticed consistent organic growth in the institutional channel, particularly in defined contribution, not just in the U.S. but internationally as well. This growth has been driven by innovative products, including our unique income protection product within a target date fund. We’re also forming various partnerships to enhance innovation in target date funds globally. Additionally, in the second quarter, we secured a significant new mandate from an existing client in the Asia Pacific, which contributed to record quarterly inflows for our institutional business. On a structural note, our investment in defined contribution is crucial. We maintain strong ties with investment consultants and continually innovate our product offerings, combining our expertise with partners where necessary. Therefore, we are quite optimistic about that segment.
Okay. That's helpful. Now, regarding regulation, it seems that some of your larger competitors are benefiting from the reduction in the SLR. You already had some exemptions, but you still face constraints due to the Tier 1 leverage ratio. In your discussions with regulators, do you believe there is any recognition of the Tier 1 leverage constraint? Also, do you think it could potentially be reduced in the future? What are your thoughts on this?
Yes, Jim, you've described the situation accurately. We have received some relief earlier. Currently, Tier 1 leverage is our main constraint. I believe regulators recognize this issue, but any action may not happen immediately and could take until the end of the year, especially given other priorities like GSIB and stress tests. We are in a period where, 15, 16, 17 years after the financial crisis and subsequent changes, there is finally a significant review of this in the U.S. However, none of us expect or are requesting a major rollback of regulations. What we are observing is a reasonable assessment by regulators, which I believe will lead to improvements in both regulation and the supervisory environment. Overall, it's a positive time for large GSIBs.
Our next question will come from Alex Blostein with Goldman Sachs.
Ron, I want to go back to the sales momentum you highlighted in the institutional servicing business. And again, I appreciate the disclosure you guys put out there a couple of quarters ago, both on the fee backlog and the few wins that's obviously relevant. In the last several quarters, maybe a year or so, the redemptions have been fairly elevated. Obviously, part of that is BlackRock. But are you, I guess, aware of anything notable on the redemption side that could sort of offset some of the strong wins you're having? And maybe a little bit more color on the sources of these wins and how investors should think about sustainability of this new business within servicing, potentially turning kind of the growth algo around in that part of the business?
Alex, let me begin by saying that we've been consistent over the past two to three years in recognizing the need to make changes on the servicing side. At the same time, we have been heavily investing in our operating model, which enhances service quality. This improvement in service quality leads to two key outcomes: it increases retention rates and strengthens our relationships with existing clients while also enabling us to attract new clients. Everything is unfolding as we anticipated. We don't notice any significant increase in loss rates and, in fact, we're pleased with our current retention rates. In terms of client types, Alpha is a crucial platform for us, contributing to fee wins across various areas including front office, middle office, and back office. However, we are only interested in engagements that also involve the back office, as those are our priority. We're also observing a growing interest in Alpha within the private sector, reflecting a broader trend of private markets shifting from in-sourcing to outsourcing. Additionally, our global presence has proven beneficial, as we've achieved several wins outside the U.S. this quarter, highlighting the strength of our global franchise.
And it's Mark. Maybe I'll just jump in to offer a couple of maybe proof points and some context on that. To kind of talk through how this has been building, this is not a kind of just recently, we've started looking at posting these types of sales results. I think I've talked about this before. Back in 2019 and 2020, we were doing $140 million, $160 million in servicing fee sales, and then we started to take that up to $250 million, $260 million in '21 and '22. And that's when we started talking to all of you about setting a more aggressive target for that of the $350 million to $400 million. And again, that came from understanding our business, and we've talked you through this before, the kind of rubric we have around fee compression and deinstalled business each year. We knew that number needed to be much higher. So then we did $300 million in '23, and we did $380 million last year. If I put it in context, we just talked about $145 million for the second quarter, and it was a very good quarter, and we've talked about how it can be lumpy and all that, but it was a very good quarter.
You go back and put that in context. That's more in the second quarter than we did in all of 2020. So to me, that's a real change. That didn't just happen. We changed our organization, our incentives. We focused on service excellence, like Ron talked about, and we invested in products and features and functionality. So we expect the performance to stay in that range, and we know we need to target that going forward. And with proper execution, that's going to really power the business forward.
Got you. Great. That's very helpful. Mark, I wanted to follow up with you on your answer to Glenn's question around NII and sort of how you guys are thinking about it on a forward basis. So obviously, no 2026 guidance just yet. But as you sort of pointed to being asset-sensitive bank, the forward curve is what it is. So help us maybe think about what are the things you guys could do and what are you working on to perhaps mitigate the effects of lower interest rates as you look out beyond this year. And importantly, is the interplay between NII and operating leverage, you guys have been focused correctly on both positive fee operating leverage and positive total operating leverage. Is that kind of total operating leverage dynamic still possible if NII sort of peaks and starts to go down from here?
Yes, thanks, Alex. I don’t want to discuss anything regarding 2026 at this point. We are assessing various aspects such as our client deposit pricing, balance sheet strategy, and investment portfolio. There are several factors we are considering to understand our direction for NII as we approach 2026. However, it is still too early to engage in that conversation.
Our next question will come from Mike May with Wells Fargo.
I just wanted clarification, just with all the discussion here. So did you benefit from heightened volatility and how you see that going down and NII is at a peak and now you see that going down? I guess, are you overearning the way you look at things or not?
Mike, it's Mark. I can begin with that. Regarding the volatility, let me discuss our foreign exchange and markets business. As we mentioned, we believe this business performed exceptionally well in the second quarter. We did experience some increased FX volatility, but we also benefited from our strategy of expanding in Continental Europe, which has been a major focus for us. We enhanced our product range, added capabilities, particularly in derivatives, and strengthened our engagement with both existing and new clients in the private and hedge fund sectors. The private markets business, which we've been referencing, grew by 19% year-over-year. This growth brings in new clients and opportunities for our markets business. This success has driven FX trading up 18% sequentially and 27% year-over-year, excluding notable items. As we look to the second half of the year, we anticipate ongoing political and economic uncertainties will keep the investment climate challenging.
The recent volatility stemmed from multiple factors, including geopolitics, national economic conditions, and differing policies from central banks. This divergence among countries is reflected in the FX markets. While we don't expect a repeat of the second quarter, we do foresee that volatility is likely to persist. We'll need to observe how this develops going forward. I hope this provides you with more insight into the market situation.
Mike, it's Ron. I'd add 2 things to that. The heightened volatility in markets was really an April event, real spike in volatility, but it came back down this as well as anybody. So I think after April, the benefit of our deepened client relationships were as important as anything here.
On the other hand, I get the cyclical high point here that you come down for that volatility. On the other hand, it seems like some of the core businesses are doing better, like Charles River quarter-over-quarter, some kind of growth rate you've been uptiering the sales force? Are you still upgrading? It seems like you have some core business momentum that you didn't have a few years ago? Am I looking at the right data, do you have anything to substantiate that?
Yes. I mean, you are. I'll just reiterate what Mark mentioned earlier about the $145 million in servicing sales in 2020, which matches the $145 million of servicing fee sales in the second quarter of this year. I believe that paints a positive picture. Additionally, I want to highlight our guidance. We aim to be very clear with you regarding our guidance at the start of the year. We initially projected a 3% to 5% growth, and now we are updating that to 5% to 7%, which reflects the strengthened capabilities of our franchise.
Our next question will come from Beth Graseck with Morgan Stanley.
I had a question on an announcement that was made on July 1 with the University of California on building a super app for individuals. And it was interesting, I wanted to understand the thought process behind investing in this. And is this a one-off? Or are you anticipating broadening this out to other participants, partners? And is there any way this would feed into other parts of State Street or is it a goodwill venture?
Yes. The University of California is a long-time partner of ours, and this initiative aligns with our strategic commitment to the wealth business within State Street Investment Management. Wealth currently represents a little over $1 trillion of our total assets, around $1.2 trillion, and is growing rapidly through the ETF channel. We are dedicated to the wealth services business and believe in the ongoing democratization of wealth. In our discussions with the University of California, we found them to be an interesting partner due to their extensive network of stakeholders, which includes 350,000 students, faculty, employees, and alumni. This presents a unique platform to experiment with new types of offerings. While it is somewhat of an experiment for both of us, our goal is to create something that first benefits the University of California and can potentially be applied elsewhere. We view this as an opportunity to scale and develop innovative offerings for the wealth market, in line with the concept of democratizing investing and possibly extending those solutions to other areas.
Our next question will come from Ebrahim Poonawala with Bank of America.
I have a couple of follow-up questions. First, regarding capital, I apologize if this has already been addressed, but I believe you mentioned an 80% payout for the full year. Can you clarify what we are managing from a capital perspective? It seems like you have a lot of flexibility in this area. What prevents you from increasing buybacks beyond the 80%?
Yes, it's Mark. Let me address two points. First, I'll discuss our capital return, and then I'll touch on CET1, which is the ratio we are focusing on. You’re correct; we previously mentioned an 80% payout. We also noted our plan to return capital progressively throughout the year. You saw this from Q1 to Q2, with a payout of $517 million, representing an 82% payout compared to $320 million in Q1. We anticipate continuing this trend through Q3 and into Q4, aiming for further increases as we work towards our overall payout target of 80%, depending on market conditions and other factors, of course. That's our current commitment. Regarding CET1, we've discussed this previously. Given the current environment, we are diligently managing towards the higher end of our 10% to 11% CET1 target range. You can expect us to stay within that range, as our clients value our financial stability and soundness, appreciating our commitment to maintaining healthy capital levels. We are also aware of the sensitivity around our RWA stack, which can fluctuate significantly at quarter-end due to market volatility, as illustrated by our 10.7% this quarter. This is consistent with what we've shared in recent quarters.
Thanks, Mark. And just one quick. I think you talked about deposit balances elevated, but maybe drifting lower in the back half. Just give us a sense of when you think about noninterest-bearing or overall deposit balances, what gets them growing again? Is there a trough that we should look at from a cycle standpoint or just how you're thinking about it?
Yes, I’d like to mention a couple of points. First, regarding overall levels, April was particularly volatile, leading to a spike in quarterly figures. Following that, we observed a decline in deposit levels in May and again in June. As we reach mid-July, our deposit levels are approaching our expectations set back in April, near the higher end of the 230 to 240 range. While we haven’t fully returned to that high end yet, we are getting closer. Secondly, concerning noninterest-bearing deposits, there was a decline of $1 billion from the previous quarter. We anticipate this will continue to decline modestly, possibly reaching the low 20s, which fits with our overall deposit outlook. In response to your question about increasing deposits, the most effective strategy for us is to sell and implement back-office services. This includes custody services, which not only attract deposits but also generate foreign exchange trading revenue and securities finance revenue. Currently, we have $444 billion in revenue yet to be installed, with about 60% of that linked to back-office services like custody. This is encouraging for our ability to generate deposits from custody clients. If we maintain momentum on our servicing fee sales targets, we expect to see positive results.
Our next question will come from Brian Bedell with Deutsche Bank.
Just one housekeeping one quickly and then a longer-term one. The housekeeping is just your assumptions on market returns for the second half that underpin the 5% to 7% guide.
Yes, sure. Let me take the opportunity to maybe take you quickly through kind of the macro points that are underpinning the guide? I guess I will just start with the equity market. So entering the year, right, we expected 5% point-to-point, which implied average market levels up 8% for the year. Obviously, as we sit here today, we're tracking a bit better than the assumptions we had coming into the year. So that's constructive in our current guide. That said, we've seen considerable volatility over the past quarter. So we'll continue to monitor developments there and see how the averages go up from here. So that should cover the equity market appreciation side.
Okay. Great. And then longer-term one for Ron. On the concept of tokenization of equities and ETPs and other assets, how are you thinking about that longer term? And I guess just your view and whether you think that will evolve more slowly over time? Or do you think there's a stronger movement and maybe some of the pros and cons of that? And what does State Street doing to be a participant in any kind of trend?
Yes, Brian. We consider tokenization in two ways: first, as a bank, and second, as a significant service provider to other asset managers. We believe that tokenization is developing more slowly than expected over the past few years. However, with the current administration and the emergence of regulatory frameworks globally, we anticipate that the pace will start to pick up. The potential for tokenization is extensive; it's not limited to just tokenizing deposits or money market funds, but these funds can also be utilized differently than initially thought. For instance, they might serve as collateral more effectively in certain situations. As regulatory frameworks continue to evolve, we expect this process to gain momentum. A key challenge for regulators, particularly in the banking sector, is determining how core deposits should be defined and understanding the role of banks in transmitting monetary policy.
Any factor that leads to more deposits exiting the banking system is a concern; just look at the growth of money market funds, which seemed like a temporary trend a few years ago but now has $6 trillion outside the banking system. There are uncertainties regarding how regulators will respond to these developments. Nevertheless, the range of tokenization possibilities extends to real assets, allowing us to transform paper-heavy, legally intensive assets into more liquid ones. We believe this will begin to accelerate, though perhaps not to the extent that some optimists expect. It is essential for us to be involved in this space, primarily as a service provider to these markets and secondarily as a bank.
Our next question will come from Gerard Cassidy with RBC Capital Markets.
Can you discuss how sensitive your revenues are to market fluctuations? In your 10-K, you mention that a 10% increase in global equity valuations typically results in about a 3% rise in service fee revenues. Given your service fee revenue growth of 12% this quarter, excluding notable items, how much of that growth can be attributed to improving market conditions?
Gerard, it's Mark. I would say that 10% of our revenue comes from growth in servicing fees, which are increasing by 5% year-over-year. The total growth, including software, trading, and asset management, stands at 12%. The positive impact from market conditions year-over-year has been beneficial for us and has remained fairly consistent. Although growth can fluctuate quarter-to-quarter due to billing cycles, we've seen a stable 10% growth overall, with servicing fees up 3% and asset management contributing about 5%.
I see a broader question regarding the rebranding of State Street investment management and how it reinforces the one State Street strategy. It emphasizes collaboration between different product offerings and strengthening relationships with clients. How can we, as outsiders, measure that success as you foster these deeper relationships?
That's a great question, Gerard. We should consider whether there's additional information we can provide to assist with that. Conceptually, when looking at our client base, we primarily cater to global institutional investors. This includes various subsegments such as asset owners, pension funds, sovereign wealth funds, and insurance companies. We support these clients through investment services, asset management, and market services. A significant portion of our clientele consists of asset managers, where we focus on providing market services rather than investment management. The idea of one State Street revolves around delivering comprehensive services across our firm. Given our size and the relatively small number of large clients we have, it's crucial for us to address their needs and strategic goals at a high level. This involves aligning our relationship management efforts accordingly. Over the years, we've implemented many changes to ensure that, especially for our largest and global clients, our relationship managers consider the entire State Street offering. Your point is valuable, and we'll explore how to better showcase the results we're seeing and how to disclose those effectively.
There are no further questions. I will turn the call back to management for closing remarks.
Well, thank you all for joining us this afternoon.