STT

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'll 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, Ron O'Hanley, and our CFO, John 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'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 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. Our 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 Ron.

Thank you, Liz. Good morning, everyone, and thank you for joining us. Today, we'll focus on two key topics. First, we'll review our strong second quarter performance, the momentum we continue to build across the franchise, and our improving outlook for 2026. We'll 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 three.

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 $365, up from $217 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 reinforce 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're building across the business. In addition to our strong 2Q 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 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 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, Ninety One, a State Street Alpha client, entered into a strategic partnership with State Street Investment Management, paving the way for a suite of active co-branded ETFs. This is a clear example of how we bring the value of our combined firm to clients for our 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 Trump 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're 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 tests. 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 growth per share growth we've 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 for the balance of the year and over the medium term, supported by solid financial and strategic momentum. With that, I'll turn it over to John to walk through the quarter in more detail.

Thank you, Ron, and good morning, everyone. Starting on slide four, 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 Servicing, 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 pre-tax margin expanding 470 basis points year-over-year to 34%, and ROTCE increasing over six percentage points to approximately 26%. Turning to slide five, 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. AUC/A 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 six, 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 Trump 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 seven, 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 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 eight. 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 nine. 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 continued 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%-13%, up from our prior outlook of 7%-9%, reflecting continued organic growth across servicing and management fees, as well as healthy client activity in markets. We expect NII growth of 14%-15%, up from our prior outlook of 8%-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%-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 pre-tax 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'll turn it back over to Ron 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, 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. We operate in more than 100 markets worldwide. We are the fourth-largest asset manager and the third-largest ETF manager globally.

In our markets franchise, we are the number one provider of 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.

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. With that 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 and where we're 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, over the past two years through the end of 2025, pre-tax 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 the first half of this year. Year to date pre-tax margin improved to approximately 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. Our continued momentum and next phase of growth will be driven by three key strategic pillars, which are outlined on 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 that 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. Third, our next phase of technology and 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, a 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 pre-tax 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, Ron. Turning to slide 16. The pre-tax 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 the client deposit growth and 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-enabled 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 improved 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 both geographic expansion and product innovation. This includes scaling our financing, trading, and execution 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 re-engineering 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're 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-facing capabilities and better data insights that will increase the earnings power 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%-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% pre-tax margin, and a return on tangible common equity in the mid-20s.

With that, operator, please open the line for questions.

At this time, we will open the floor for questions. If you would like to ask a question, please press star five on your telephone keypad. You may remove yourself at any time by pressing star five again. Please note you'll be allowed one question and one related follow-up question. Again, that is star five to ask a question. We'll pause just a moment for the queue to form. Our first question will come from Alex 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. Helpful in the way you framed it in terms of sort of qualitatively where you're looking to lean into, but I was hoping you can give perhaps just a little more granularity on the $250 million and kind of which businesses that's likely to come from. I guess more importantly, you guys have been improving organic growth to begin with over the last couple of years. As you think about the firm-wide organic fee growth today, where does that stand? 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?

Thanks for the question, Alex. This is John. I'll go ahead and give you some context with respect to overall how we're thinking about it. Over the medium term, the way I would just think through it would be positive operating leverage is the main sort of north star that we're committing to. What we're saying here is, as I mentioned in my remarks, look at the baseline from which we're launching this in 2026, whether it's One State Street or even our outlook for 2026 overall, we're around 32%. That's growing over the medium term to that 35%, and I'd say that that would be consistent with positive operating leverage of 100-150 basis points, which is driven by organic growth across all three of those businesses that we're talking about. I would pair that with some commentary with respect to NII over the medium term.

We do see net interest income rising in that low 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 range as you get out over the medium term. Those are the underlying engine that drives this progression. When you flip over to the transformation program and that 75-25 split, that $1 billion that we expect to deliver by 2029, as you asked, 25% of that is decked against revenue opportunities. I think that's a starting point, given what we're trying to accomplish here is so 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'll see that we're mentioning here that are One State Street-driven. That would be in the alternative space and in digital and in wealth. Among those three, probably alternatives is the biggest contributor just given its maturity profile where we've gotten. That initiative has been ongoing for a number of years, and we're accelerating into it. That's how I would think about overall the context for the medium-term outlook and putting revenue into the mix there.

Got it. That's helpful. Thanks. Just for a follow-up, maybe double-clicking on the $750 of, I guess, cost savings you expect to see here. Again, it feels like there's inherent operating leverage in the business regular way as you described it initially, then this sort of comes on top. If you round that through, obviously that leaves you with much higher pre-tax margin than the 35%. If I think about the $750 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 kind of efficiency on the net cost savings could be on the back of the program.

Yeah. It's fungible, right? I would say that the transformation program has two overall objectives. Maybe more than two, but two overall financial objectives. It has the broader objective in the revenue space, which we've already covered. When it comes to just the $750, it's doing double duty. First, it's allowing us to grow our strategic investment capacity over this medium term in order to drive the outcomes that we're talking about with respect to these One State Street initiatives, as well as the broader powering our leading franchises. That's the first part of it. Then the second part of it is helping us stay on track for the margin expansion. I would, without giving you a specific percentage, I think it's relatively equal parts allocated to reinvestment and margin expansion, is I think the best way to think about it.

We also mentioned that when you look at our businesses, just given the footprint of our Investment Services business, that's the majority of the productivity saves get generated by where all that headcount is over in the servicing side of the business. That's a way to think about it across the businesses as well.

Yep, understood. Thanks very much.

Your next question will come from Glenn Schorr with Evercore ISI. Your line is open. Please go ahead.

Hi. Thanks very much. I definitely want to ask a question on all things digital assets, stablecoin, and tokenized deposits. The lead into that, I just want to make sure I get the right perspective, and I think this is for you guys and for the industry, is the initiatives, and you have many in that space, are included in that incremental $250 million, and it's not even the biggest piece. The message I'm hearing is for you guys and the industry is we're investing a lot in the future infrastructure of the financial markets, but it's a long-term commitment because even if the all $250 was from digital assets, that would be less than 2% of State Street's revenue. Focus on the big picture first.

Either way, my next question is, I noticed there was two announcements during the quarter, one on the Visa, Mastercard stablecoin network with over 100 businesses, and you weren't one of them, and also tokenized deposit network with a bunch of banks, and that's more of a bank thing. My question is what is taking place in terms of as we're modernizing all the payments and clearing and settlement systems, and are we paying too much attention because right now it's not adding up to much money. I apologize, I smushed those two together, but I want to get the right perspective on all things digital.

Yeah. Glenn, maybe I'll start and John will pick up on the specifics as it relates to the numbers. As you think about the $750 and the $250, again, that was in the context of the go forward next phase of transformation that we just described. We've got initiatives underway, and if you think about just on the cost side, if you think about the margin expansion that we've enjoyed over the past several years, I mean, that's been the result of our ongoing transformation program. What we're talking about here in the $750 and the $250 is the next phase, which is incremental, but we've got existing initiatives that also will be contributing. I just want to make sure that people understand the mathematics here, number one.

Number two, in terms of your specific question on digital, the way we think about this is we're primarily an infrastructure provider to our clients, enabling them to execute their digital strategies. Who are our clients? Our clients are global investors, right? That's why we're focusing on the, if you think about it, the traditional to digital back to traditional kind of rails, because it'll be a long time before the whole infrastructure stack is digital. Secondly, we're focused on things that relate to those investors, asset managers or asset owners. Hence, for example, the focus on tokenized money market funds. Who are our client base? Well, a large segment of them are large asset managers. We're picking our spots, and going to where we know our clients want to go is the way to think about it. John?

Yeah, just a few comments to add to that. I'd say that, as you know, we launched our digital asset platform recently. It's a secure, scalable platform. I think we're trying to create the capabilities to manage wallets and really manage the on-ramp and off-ramp between traditional finance and into the digital on-chain world. A few comments about some things that we've also been able to do is in the investment services side of the business, we're focused on enabling client launches of tokenized money markets, that's early in the roadmap, and we're excited about that. I think on the other side of the house with respect to investment management, we also announced a couple of digital asset ecosystem product launches as well. You think about this across the One State Street lens.

State Street Investment Management did launch a tokenized money market fund on-chain, basically cash equivalent for the digital ecosystem, creating new distribution, et cetera. Broadly, asset managers love this with respect to the distribution aspects as well as collateral mobility. Investment Management also launched a stablecoin reserves money market fund as well, targeted to stablecoin issuers. I think it's going to be table stakes for us in the space that we're in to have these capabilities. As we mentioned, alternatives is probably the most mature of the three that we're spotlighting here today. Digital is gaining momentum, lots of activity as I articulated here, in the here and now as well, that we're making progress on.

I appreciate that. I mean, it sounds like you make a lot of progress. It doesn't add up to huge numbers right now, that actually I take as a good thing because it means the other $15, $16 billion of your revenues is that much safer from the digital invasion. If you agree with that, I'm good and done. Thanks.

Thank you.

Thanks, Glenn.

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

Hi. Could you guys give us more confidence on or why you're confident that this new phase at State Street over the next three to five years is going to succeed? I guess I have in my plus column, I recognize that you have 10 quarters in a row of positive operating leverage, better returns, better pre-tax margin, and the organic growth seems to pick up. I'd love it if you could verify that. Looks like the servicing fees have picked up organic 2% last year to 5% this year, asset management 6% to double digits this year. That would be in the plus column. I'd say the negative column is, I've heard this before at State Street for the last 15 years, and this certainly predates you, John, and it predates you, Ron.

The whole cloud, the tech, the rewiring, as you said, John, was the story last decade, and it failed to produce the results that were desired. Really, why is this time different? Why should investors think that this major kind of demarcation, new phase of State Street should succeed? Thank you.

Yeah, Mike, it's Ron. I'll start with that. We begin with a very strong foundation. If you look at our track record of execution, we've got, as you point out, the 10 quarters of positive operating leverage. I mean, that didn't come out of nowhere. That came out of investment in the platform, but also investment in products and the revenue growth capabilities that we've now demonstrated over those 10 quarters. What you're seeing in this foundation is consistent organic revenue growth and a very productivity-focused culture, right? John noted in the results that, yes, our expenses have gone up, revenue related and reflecting the revenue related cost plus investments in these capabilities, but our headcount's actually gone down. We didn't have that kind of foundation in the history that you're referring to. Secondly, we put a lot of credence in this team.

The current management team is a strong one. Over 50% of that team is either new or new to its role in the last three years. They work very well together, and you're seeing it in terms of this strengthening each of the franchises, but also the real results coming out of the integrated One State Street approach. You're seeing out of this team improved operating efficiency, literally across the board, quarter after quarter, year-after-year. Our first half 2026 results kind of reinforce this trajectory, right? We had the prior three years that we pointed to, and you're seeing that now play out again in the first half here. Taking it all together, we look at these targets, and these are targets over a cycle. I mean, we're in a very constructive environment now.

We're not assuming that that's going to last forever, but when we look over the cycle, these are the targets that we're aiming for. They're ambitious, but we're going to hit them. We've selected margin and ROTCE because they're within our control, and they're things that are important to you as investors. We bring it all together. We've got a lot of conviction. We've got a lot of confidence. We intend to execute what we laid out there.

I guess in terms of the rewiring part, I mean, it all sounds good on paper. It may or may not play out the way you expect it. Is there any metric that you or we on the outside can monitor to see that success, like revenues per employee or a number of employees? Just the idea of going to a more agile infrastructure, kind of what that means in financial terms.

Yeah, Mike, it's John. I guess a couple of things. One is starting with the overall number of the 750. It is disproportionately being driven by this operating model transformation, which is pretty tangible. I mean, what we're talking about is basically migrating to a product platform approach where our business technology and ops teams are reorganized into cross-functional integrated teams that deliver specific business outcomes for clients. That's a physical organizational migration that's very tangible to see. What we're going to be doing is taking out the unneeded interfaces that currently exist that slow down and create some inefficiencies between those groups today. That's pretty tangible, and that'll flow through to headcount. I think what you saw over the last couple of years is that our headcount is down. The growth headcount is down by more than what the net is.

The reason for that is that we've been investing in driving strategic initiatives along the way, and that theme will continue. I think you should keep an eye on headcount and watch that area. We'll also, over time, look for a short list of metrics that will help support what we're talking about here in terms of product development, release cycle times, and client experience and service quality metrics, et cetera, which we expect to improve. In the platform space, migrating to more applications in the cloud and reducing the footprint of our data centers also lend themselves to metrics that I think we can share. Also migrating our overall investment spend because of the efficiency that we should get in software development life cycle and in the product life cycle overall.

You should see the percentage of our grow, of our investment spend rise over time as well. I think there's a handful of metrics that we can share in combination with the fact that we are actually going to reorganize the company along these lines, and that'll be very tangible. That'll be something that we can demonstrate over this medium term.

All right. Thank you.

Your next question will come from Ken Usdin with Autonomous Research. Your line is open. Please go ahead.

Thanks. Good morning. Actually, if you don't mind, to focus on the current outlook. John, just maybe give a little color, just looking at kind of what you're expecting for the full year now. I guess you would assume that NII kind of flattens out from here, and fees probably revert a little bit. Given how strong FX was in the second quarter, I could imagine some of that would be there. Can you just distill how you expect some of those to progress from here, and anything we should just be thinking about with regards to either seasonality or things that revert from the recent results? Thanks.

Yeah, sure. I think maybe starting with fee revenue, I think we expect continued organic growth in the servicing fee and management fee space, and I think that's an important anchor point. Continuing the momentum that you're seeing in the first half, that continues into the second half. We're not assuming, however, as much of a tailwind from market levels. I mean, as well as markets. I'll get back to markets in a second. Market levels, we're keeping it flat to the end of the second quarter, so we'll see how that plays out. Most importantly, organic growth continues into 2H. To your point, we're setting records in FX trading services here quarter after quarter it seems. We do have built in some moderation into the second half. You can be of two minds there. I think we've seen client volumes be extremely resilient.

We've seen opportunities internationally where spreads are wider and growth is a little stronger that continue to support our markets business. We're excited about that, but we're not counting on that in continuing in this outlook for the revenue side of things in the markets business. I think it's going to be a strong second half for markets, but moderating a bit from the record in 2Q is what we're assuming in this outlook. When it comes to NII, that's about right. I think you're seeing some flattening out there. I'd say earlier we had a sense that deposits would be in the $250 billion-$260 billion range. We came in above that in the second quarter. Average was around $270 billion, and I think we're going to assume that is going to be the outlook for the whole year.

We're raising that in terms of balance sheet contribution coming from NII, that's underpinning this increase in the outlook from 8%-10% to 14%-15% year-over-year. With the net interest margin kind of staying in that range of 110-115 that we mentioned last quarter. Those are the thoughts from my standpoint on the revenue side. On expenses, I think the point there is that we're going to see some moderation in the growth in part due to some lower costs on the third-party spend side in the numerator. Then there's also a year-over-year denominator impact from 2H 2025 that takes our expenses up to 8% from the prior 5%-6%, including revenue related. Just a few comments across each one of those line items.

Okay. Thanks, John. Just one clarification, apologize if I missed it in the deck somewhere, can you just make sure we understand the 3-5 years, just what years we're talking about there? I think some questions people were just asking about possibility of achieving it inside, when you can get to these targets inside that range. Thanks.

Yeah, sure. two points there. One is on the billion-dollar transformation program, that is explicitly tied to achieving that by 2029. That's sort of earlier than the 3-5, I would say. That's by 2029. That's more in the three-year range, early end of it. With respect to the targets overall, I think we like to talk about the medium term meaning 3-5. That 100-150 basis point positive operating leverage expectation would imply that we would get there in the early end of that medium-term timeframe.

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

Hi. Good morning. 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?

Yeah, I think on the recurring side of things, that's all embedded in the numbers that you heard. I think there will be some one-time costs that are predominantly severance related with respect to the headcount implications. I'd probably frame that in the neighborhood of around $500 million or so would give you a sense for how that would equate to headcount reductions gross. Then 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 digits range on a net basis after reinvestment of that capacity into strategic initiatives and growing our franchises. That's the way to think about it, and we think that's a highly attractive ROI on that severance cost.

There's a little contract termination in there too, almost the substantial majority of that $500 million, I would say, is severance related, which typically ends up with very solid ROIs and solid earn backs as well.

Okay. Then in terms of the lines of business targets, just focusing on investment management, you're saying you're going to get about 200 basis points of enterprise-wide margin expansion from there, but it was less than 20% of revenues last year. Just thinking about the weighted contribution, it would take a pretty big improvement in margins, specifically in investment management to get 200 to the overall company. Can you just talk a little bit more about the key drivers there and your confidence in achieving them?

Yeah, I mean, the math there is that if you go back to 2029, investment management was around 33% margin. In second quarter, investment management has already improved that to 38. I think that's probably about halfway home from a mathematical standpoint in order to deliver that to a 200 basis points top of the house. It seems large from 25%, but about 50% of that's already delivered here in the second quarter. Nothing's linear, the market levels can have an impact on that over time. We're just seeing incredible momentum in the investment management space and just flexing the scale advantage that they have and the innovation in terms of the products that's being delivered. We've got a lot of confidence in this 200 basis point top of house contribution coming from investment management.

I think the specific areas that we're talking about is continuing to drive our leading franchise as it stands with ETFs, index, and fixed income and just our global distribution expanding. That's a big driver. Then their own transformation delivery as part of the overall transformation program is also a large contributor, where cycle times and product release cycle times all shorten, and there's revenue uplift that's embedded in that 200 as well. Those are some of the ways I think about the credibility of that 200.

All right. Thank you.

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

Hey, good morning. Just maybe on the margins and expenses again, I guess if we think about the tech and ops transformation, do you expect any drag, I guess, in the very short term on pre-tax margins as you invest? Or is a lot of that stepped up investment spending kind of in the run rate? Just trying to think through 100 basis points-150 basis points of pre-tax margin improvement per year. Would you view that as somewhat linear or back-ended?

Yeah. It's not back-ended. I would say that the base case is that we would expect to generate positive operating leverage in each year of the medium-term outlook. That's our goal, and that's what we're trying to accomplish to make progress along the way. It's not back-end loaded, but what I'm giving you is an average. There will be some variation in that inevitably based on both the pace of internal activity and execution as well as external macro factors. I think 100 basis points -150 basis points is a good planning range that takes it to the earlier end of that 3 year-5 year outlook. There's not an early years large investment cycle that is then back-end unveiled over the medium term. The tech investments are planned and consistent with the $1 billion program along the way across the medium term without it being back-end loaded.

Right. Okay. That's helpful. Then on the numerator side, obviously this year has been a great year, and you've gotten 500 basis points of operating leverage. You talked about expectations for the rest of the year from assumptions, but how are you thinking about the assumptions over the medium term for the revenue backdrop? If we have more years like this, can you get there even quicker? Does that flow to the bottom line, the upside?

Yeah. I think, as I mentioned, the 100 basis points-150 basis points assumes, and we expect to deliver organic fee growth over this time frame. I also mentioned that NII would come in low to mid-single digits when we think about how that will contribute over the time frame. To the extent that positive operating leverage exceeds the 100-150, we would achieve the 35% earlier, that's for sure. I would hasten to add that we are going to be looking for a sustainable level at the 35 and at these targets, where we're delivering it not only in real time for a sufficiently long multiple quarter period, but also have an expectation that it will continue to stabilize and grow from there.

That's the timing for when we would reassess whether those targets have been achieved, consider whether they should be adjusted higher.

Okay. No, that's helpful. Appreciate it.

Your next question will come from Ebrahim Poonawala with Bank of America Securities, Merrill Lynch. Your line is open. Please go ahead.

Thank you. First of all, John, thanks for all the detail in the slide deck on the target. Nicely laid out. I had a question. I think it's an interesting point in time where you're going through when you talked about rewiring the business, and kind of when we think about AI adoption within financial services. Just talk to us as you've approached the targets, as you're thinking about adopting AI, how difficult is it to sort of implement that through workflows and rewire that? Do you think over the next 12-24 months you'd have a franchise or an enterprise that's fully, I guess, I don't know, AI native? If you don't mind talking through that.

I guess tied to that, how much of AI-driven gains are in these targets as opposed to you could be an even more profitable bank if AI delivers to its promise on productivity? Thanks.

Yeah, sure. I'll make a few comments about this. I'd put the AI benefits in maybe three categories. The first one would be within our operating model, which is the lion's share of what we're really delivering here in terms of the 750, and which depends upon the tech simplification and AI adoption. We are going to be embedding agentic capabilities within our operating model redesign. We are migrating to agile ways of working, and within any given cross-functional team. If we would have done this, call it five years ago, that would have been composed of all humans, of course. Now it's going to be a hybrid of human agentic team that actually staffs these integrated teams. I would describe the savings that will be coming from the operating model transformation as embedded with agentic capabilities.

I'm not sure you can fully unpack how much is separately driven by the agentic aspects versus there are a lot of other things going on where we're re-engineering, taking out interfaces from business processes. At the same time, the rewiring is basically creating these human agentic hybrid teams. It'll all happen together. I'd put that one category, which is agentic is helping to power the operating model efficiencies that we're talking about. I'd say that's the first one. The second one is within the technology organization itself, where it's much more able to be ring-fenced, if you will. When we look at software developer productivity, and it's very explicit, and we're indicating that it's our expectation that you'll see equipping software developers with these tools that we would expect to see a 30%-40% increase in productivity.

That likely gets deployed in faster cycle times and more product launch and higher innovation, which drives revenue. We're excited about that, and that's the second overall category. I think the third one is really a kind of a rising tide lifts all boats story where we're going to be, and have delivered agentic capabilities from a standardized standpoint on a copilot platform to all eligible employees. It's basically allowing them to actively use these AI tools and create higher value work. Knowledge retrieval, data document extraction, content creation, all of those things. Analytics and decision support, all of that is improving the productivity of our colleagues across the platform. Those are the three ways that I think about it. You're going to see the savings expressed and embedded in that $750 with respect to expense saves, definitely.

You'll also see it driving the expectation of the $250 on revenue and beyond over time.

Got it. Thanks for walking through. That was helpful. Just a separate question following up on Glenn's on digital assets. There seems to be a lot of hype around that. Not that the technology is not real, but just talk to us when you think about blockchain and digital assets kind of playing a critical role in the plumbing of the markets. Do you think of that as a 5 year-10 year build-out, or do you think over the next year or two, this is going to have meaningful impact on how you think about revenue growth and including disruption risks to certain line items? Just your thought process around that. Thank you.

Yeah. Ebrahim, it's Ron. It's a really good question. I think what's playing out is like a lot of technologies, there's an awful lot of promise. The early delivery, I think, underwhelms and is disappointing. Then the later delivery actually is greater than what anybody anticipated. I suspect that's how this will play out. If you think about some of this blockchain technology, it's not new at all. It's been around for a while. Part of it is you're taking new technology and putting it into an ecosystem. I'm not talking about just State Street's ecosystem. You're talking about a financial ecosystem. There's a lot of enablement that's occurred over the past couple of years in things like the [GENIUS Act] and whatever's going to come out of the CLARITY Act. A regulatory movement that's starting to align around this.

Given some of these things, the regulatory movement has to align across borders. If you think about what it enables, just think about collateral loans and the ability to transform money market funds into collateral eligible. There'll be so much pressure to do that. If you think about in real assets, the growth in real assets and the ability to use blockchain to actually tokenize some of these things, enable it to be broken up and put into smaller portfolios, wealth and retail portfolios. I think market pressures will accelerate this. I believe that it's not surprisingly slower than what the hype might have suggested. If you look at what's going on under the covers, there's real adoption going on. There's real stuff being built out. I think you will see this promise over the medium to long term.

Extremely helpful. Thank you.

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

Hey, good afternoon. John, you've spoken about the balance sheet optimization, and the NII, your ability as being central pillars of the medium-term outlook. Can you just remind us on what the near-term and medium-term impacts of the balance sheet optimization efforts are and what the impact is to NII?

I would say it's all embedded in that outlook. With respect to I think in mid 2025, our net interest margin was around 96 basis points, I think. We've been able to raise that predominantly through optimization activities. Not exclusively, but a big part of it was optimization activities to remix the funding side of our balance sheet into higher deposits as a percentage of overall funding and lower short-term wholesale funding. That net interest margin has risen from around that 96 level to a 110-115 range that we're talking about today. You do the math on that's around 15-20 basis points overall of net interest margin lift. I think there's some environmental factors and business execution that has been driving that, which is great.

There's a reasonably large piece of that was restructuring the balance sheet over the last several quarters to stabilize it at this 110-115 level. As I mentioned earlier, we're expecting to try to see continued tailwinds there on net interest margin. What's assumed in the medium-term outlook is that we'll migrate to the high end of that 110-115 and be around the 115 range as the medium term plays out.

Got it. Maybe on the capital side, it seems like you raised the CET1 target a little bit from 10%-11%, to 11%. Can you speak to what's driving that? Is it just conservatism or is it a desire to keep some sort of capital buffer right now while the environment is good? Is there any upside to that 80% payout ratio?

I think 80% is a good planning level. That's what we've got included and assumed in our medium-term outlook. I'll start with that and come back to the ratio itself. We do have very attractive opportunities to put capital to work in support of our strategic clients. Whether it's in our global credit finance business, supporting our investment services clients, or in the markets business who are supporting investment services clients as well as asset owners, and increasingly thinking about wealth managers over time. There's RWA there that we think about aligning with our strategic goals over the medium term and also being attractive marginal deployment, just a growth mindset there. I think it balances reasonably well our opportunities in terms of putting balance sheet to work with our desire to continue to have an attractive return of capital for shareholders.

That's what's going on there. I think what you're seeing with respect to the CET1 ratio is a couple things. One is-

We're leverage constrained. If we're increasingly able to continue to grow deposits, which is our expectation, not only here in 2020, we've demonstrated that in the first half. We're committing to that, maintaining those levels, and on an average basis in 2026, that creates more of a leverage constraint. We'll have to be managing the interplay between leverage capital and CET1. That's probably the thing to think about when you see that 11%.

Got it. Thank you.

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

Hi, Ron. Hi, John. Thanks for taking my questions. I had a couple on the ETF business. Recently, you launched a new product, QNDX, which is a rather interesting market, had been dominated by the Qs and recently opened up for new competition. What was particularly interesting to me was the pricing of the product. You priced it at 10 basis points, which was a pretty narrow spread above Nasdaq's eight, m basis point licensing charge, and suggested to me that maybe this might be a new pricing strategy for SPDRs, given your inherent advantage of having your own servicer and effectively being able to price more attractively than a lot of your competition. Is this what we're starting to see here, and does it lead to any concerns around potential pricing pressure on ETF servicing? Thanks.

Yeah, Brennan. Unlike if you think about the history of us in ETFs, if you think about SPY and the SPDR franchise, which started out as an institutional franchise, and later on, we thought about, "Okay, what are we going to do for the wealth in the asset holder world?" If you will. That's what led to the launch of SPYM to sit alongside SPY. We didn't have that equivalent institutional product. Our view was, when we went into this, that we needed to round out our product line. We just didn't have it. It's a good strategy for the wealth and buy-and-hold investors. We thought about it. Positioning that way is really how we thought about it, and it's really nothing more than that.

Obviously, because we are the leading ETF servicer, when we're both the servicer and the sponsor, we're in effect deriving revenues from two different places. Sure, that's a factor. In terms of how we position the product, it really has to do with our starting point, which was not being in that market at all. When Nasdaq, in effect, opened it up to others, that's how we thought about the positioning.

Got it. That makes sense. Thanks, Ron. Also, we've heard a noise from wealth management firms talking about rolling out revenue share programs for ETFs. Do you have any sense for that potential impact? Have you been in dialogue with any of those wealth management firms, and what would you expect on that front going forward? I know the ETF business is a little more institution-oriented, but the wealth side is still relevant.

Yeah. As I think you know, our ETF franchise is growing, and the fastest-growing part of that is the wealth side of it. We clearly are in dialogue with all these distributors. We work with all of them. There's long-term partnerships here with them. In many cases, not only are they our distributor, but we serve them in other ways, and they serve us in other ways. Virtually all these distributors are also important partners. We talk to them. We'll do things that make sense, and we won't do things that won't make sense.

Super clear. Thanks.

Your next question will come from Steven Chubak with Wolfe Research. Your line is open. Please go ahead.

Hi. Good afternoon, Ron and John, and thanks for taking my questions. Wanted to ask on the pricing outlook. Pricing pressures have been less acute in recent years. At the same time, there are more investors that are questioning pricing resiliency going forward, just given the significant windfall you and your peers are expecting to realize from AI deployment and just the structurally lower cost to serve. Was hoping you could speak to what you're hearing from customers as you engage in more recent discussions on pricing, and what are some of the assumptions on pricing that are underpinning the 35% medium-term target. How much of that benefit do you expect will be shared with customers over time?

Yeah. I'll start on that. I'm just reflecting on your question, and I spend a lot of time with clients, and I can't think of one. We always talk about AI, and I can't think of one that's talked about, and we're really looking forward to lowering prices. Right? They think of it more, and the discussions are more around, first, State Street, how is it going to help you serve us? We talked there about speed- kind of cycle times and those kinds of things. We then talk about how we can actually think about AI across our firms, particularly in those cases where we're not just the back office, but we're providing middle office services.

Most of the dialogue is around what does this enable us to do in terms of either getting things faster to them or how we might work more intensively and in an automated way together.

Yeah. I might just add on to that. I think what we've got planned over the medium term is organic growth in the servicing business. Within that, there are multiple drivers, and that incorporates conversations with clients with respect to pricing and all of that. They all end up being positive. We are going to lower cost to serve over the medium term. There is net new business. There is client activity and turnover that we equally benefit from. I think all of that would be included in and inclusive of our organic growth on the top line. When you look at the contribution we expect from the servicing business of 300 basis points to the overall enterprise, that drops to the bottom line as well from a pre-tax margin standpoint.

No, that's great color. For my follow-up, wanted to ask on the medium-term target, but maybe looking at it from a some of the parts lens, if you will. You noted the 35% margin target is ambitious. If I look across each of the core segments, best-in-class peers are running with standalone margins somewhere around 40%+. Just wanted to better understand how you and the board settled on 35%, just given some of the higher margin upside that might be implied when benchmarking to best-in-class peers. Is there anything structural that's precluding you from getting somewhere closer to high 30%s to maybe 40% type margin over time, even beyond the medium term?

Yeah. Firstly, I think it's important to put these targets into context. It's not a destination, it's a milestone, right? If you think about the progress that we've made to date and the fact that we're talking about what we're going to do through a cycle, we feel like over the timeframe that we've talked about, three to four to five years, that this is a reasonable number, and we'll reset them again. Number one. Number two, that margin is composed, I'm not sure with the number you're citing, kind of which segment that you're alluding to there. If you think about it, obviously embedded in this are the three businesses. You've got a services kind of service intensive business like the investment services, which will have a lower margin but a higher opportunity for improvement, just given this next generation of transformation that we're putting in.

You've got the investment management and the markets business, which starts with high margins and will continue to improve. There's a portfolio of businesses here.

Yeah, I think I would just add on to that, just that we're looking at in 2029, we were at 29% pre-tax margin, and we are delivering 32% in the first half of 2026. That's 300 basis points. What you're seeing here today, given the outlook for 32%, also implied by 2026, another 300 basis points of sustainable pre-tax margin. We want to have ambitious and achievable targets, and that's some of the thinking that went into this. You heard from Ron that all of these are milestones. When and if we've been able to demonstrate sustainability, not only from a demonstrated delivery of that level, but an expectation that would continue and rise over time, we would reconsider them. I think that's a pretty natural cadence that you would expect from us as we're delivering these targets.

That's great color. Really appreciate all the detail in the remarks as well as your slides.

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

Thanks. John, I wanted to clarify a couple of things. One from your last answer. You said pricing discussions have been positive. Does that mean you're actually having discussions for being able to raise pricing, or what does that positive mean?

Yeah, I'm not sure we said that, Vivek. We'll have to go and reflect on that one, Vivek. What I said was that we have an expectation of organic revenue growth in the servicing business over the medium term that incorporates all impacts with respect to client activity, net new business, and all pricing expectations are all built into that, and that incorporates organic growth, and that drops to the bottom line because servicing contributes 300 basis points over the medium term. I think that's what you should take away from that.

What do you mean by pricing expectation? Are you expecting pricing to go up, stay static? Given that you've never had this kind of operating margin or this level of return on tangible common equity. I understand that AI is in the early stages. People are trying to figure out how to use it. Once it gets set in and the returns are much higher, wouldn't your clients come back to you? This is something that you all have talked about over the years, when the ROE came down, that you went back to clients saying you weren't earning an adequate return. Wouldn't the flip side happen when the return goes up a lot and your clients look at you and say, "Hey, why are you sharing that with us?

Vivek, I just think we're in a very different environment than we saw if you go back five-plus years ago, where there was a lot more price compression in the market. Think about the environment we were in. It was largely a mutual fund-driven environment that was at some level, particularly in the retail space, it was a time when mutual funds were being rapidly consolidated. Platforms were basically kicking mutual funds off the platform, trying to get down from the old supermarkets to a curated selection. That's not what we're in now, right? You've got this rapid adoption and proliferation of ETFs and applications in areas that nobody would've even contemplated five years ago, number one.

Number two, if you think about the firms themselves, particularly the segment that we operate in, which tends to be the larger multi-discipline kind of asset managers and the most sophisticated asset owners, right? The kinds of asset classes that they're competing in, the needs that they have are driving a couple things. One, more traditional servicing, but now it's alternatives and things like that. Two, it's working with them on their own operations, and how do we deliver technology and service to them so they can actually adapt to not only these multiple kinds of assets, but the movement from institutional to wealth. Obviously, these clients are sophisticated, and they want to get value for what they're spending. It's just a very different environment than the one you're referencing.

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

Hi, Ron. Hi, John. Throughout your conversation on the call today, you keep on referring to through the cycle or these milestones that you're planning on reaching. I'm assuming that's an economic market cycle. If it is this an average that you think you can get to during through the cycle, or can you frame out the highs and lows at all?

I think maybe a couple of thoughts there, Gerard. I'd say that just going back to the 100 basis points-150 basis points of positive operating leverage is an average over the medium term. It does imply the earlier end of the medium term. We're just saying that often these things don't happen on a linear straight line. They're just based on what may occur in terms of business opportunities as well as the macro environment could have an impact on exactly how this gets achieved over the medium term. The average we're talking about is that 100 basis points-150 basis points. I think one of the larger contributors, not just with respect to the business delivery from an organic growth standpoint, maybe the way to frame it could be in the NII space where that's a reasonably important contributor to this over time.

You could think about the rate environment having an impact on net interest margin. Framing that for you may be helpful and responsive to your inquiry. If we think about rates, we've got the base case here with respect to forward rates. We do a little better if rates are higher. Given that we're asset sensitive and maybe a little lower before management optimization or actions, on a static basis, a plus or minus 50 basis points on rates would have along the lines of a three to five basis point impact up or down with respect to net interest margin. That can give you a sense for some of the variability from one factor, which is where rates would play out.

Other factors, as I already mentioned, in terms of the operating environment, et cetera, would also play into that in terms of the impact on fee revenues. Nevertheless, we're feeling very good about the organic growth profile over the medium term.

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.