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Good morning, and welcome to State Street Corporation's first quarter 2026 earnings conference call and webcast. Today's call will be hosted by Elizabeth Lynn, Head of Investor Relations at State Street.

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 whole or in part without the expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street website. Now I'd like to hand the call over to Elizabeth Lynn.

Good morning, and thank you all for joining us. On our call today, our CEO, Ron O'Hanley, will speak first, then John Woods, our CFO, will take you through our first quarter 2026 earnings presentation, which is available for download in the investor relations section of our website, investors.statestreet.com.

Afterward, we'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 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 change. With that, let me turn it over to Ron.

Thank you, Liz. Good morning, everyone, and thank you for joining us. I'll begin with a few broader observations before John walks you through our financial results in more detail. Reflecting on the first quarter operating environment for a moment, several factors shaped investor sentiment in Q1, including the Iran war, divided views on the long-term impacts of artificial intelligence, and rising concerns on credit quality in certain parts of the financial system.

Against this geopolitical and macroeconomic backdrop, we remain firmly focused on serving as an essential long-term partner to our clients and helping to deliver better outcomes for the world's investors and the people they serve.

We continue to execute effectively on our strategy, supported by our distinctive capabilities, deep operational strengths, and a conservatively positioned balance sheet. That strategic positioning allowed us to deliver strong growth underpinned by continued financial and strategic progress during the first quarter.

Our results in the first quarter also underscore the inherent strength and diversification of our business model, which allows us to successfully navigate times of uncertainty and heightened market volatility as we saw in Q1, with both FX trading and NII contributing meaningfully to our year-over-year financial performance.

The scale, capabilities, and leading market positions of our core businesses, working together as One State Street, provide balance across varying market environments, reinforce the value of our platform for clients, and accrete value for our shareholders. Slide 2 of our investor presentation outlines our first quarter highlights, excluding notable items, which John will address shortly.

We had a strong start to 2026, with broad-based positive year-over-year revenue performance across the franchise. Reported earnings per share increased 22%, while excluding notable items, EPS grew a very strong 39% year-over-year, supported by record quarterly fee revenue, NII, and total revenue.

Importantly, substantial positive operating leverage in the first quarter drove another quarter of year-over-year pre-tax margin expansion. Quarter after quarter, the proof points continue to demonstrate that our strategy is delivering consistent, durable improvements in financial performance, with Q1 marking our ninth consecutive quarter of year-over-year positive operating leverage excluding notable items.

Stepping back from the quarter for a moment, I want to highlight some of the many growth opportunities we are realizing and see ahead at State Street. Through disciplined business investments and focused execution against a clear set of strategic priorities, we believe we are well positioned to continue to accelerate growth and deliver substantial and sustainable returns for our shareholders.

We are drawing on deep, broad-based, technology-driven innovation and delivering digital platforms, compelling AI tools and agentics, and client solutions. Together, these capabilities help our clients succeed in a constantly evolving market while strategically pivoting State Street to faster-growing segments of the industry.

In digital, we are focused on building the market infrastructure clients need to bridge seamlessly between traditional and digital finance. Following the recent launch of our digital asset platform, we are executing against a clear and comprehensive product roadmap that includes tokenization of assets, funds and cash for institutional investors.

These capabilities are designed to drive greater efficiency, enhance liquidity, and support new avenues of growth for markets, our clients, and for State Street. We are well advanced with clients to support their launch of tokenized fund strategies this year.

Furthermore, State Street is deeply engaged in a number of digital asset-related industry initiatives, including DTCC's tokenization efforts, as well as Finality's work to create an ecosystem of central bank-connected blockchain-based payment systems.

These initiatives are key to the development of digital markets and consistent with our track record as a critical market infrastructure provider and standard setter. Across alternatives, including private markets and hedge funds, we continue to see compelling long-term growth potential as the segment matures, with clients leveraging State Street to bring innovative solutions to markets.

Our leadership positions across both investment servicing and investment management position us well to capture opportunities as we broaden access and simplify operations for clients and our clients' clients.

In wealth services, we are investing in leveraging Charles River's capabilities alongside our strategic partnership with Apex Fintech Solutions to build a differentiated, fully digital, and globally scalable wealth custody and clearing solution. This positions us to serve wealth advisors and self-directed wealth platforms and unlock a new avenue for growth that leverages our strength across investment servicing and investment management.

Finally, at State Street Investment Management, our strong track record of innovation, differentiated solutions, and scaled franchises in areas such as ETFs, cash, and retirement, to name just a few, create multiple avenues for growth.

An illustration of our progress is the way we provide barbelled investment exposure at scale to serve distinct client needs. At one end, SPLG, our low-cost U.S. S&P 500 ETF, is gaining strong traction in retail and wealth channels.

It ranked as the number one asset-gathering ETF globally in the first quarter, with $27 billion of inflows in that fund alone. At the other end, SPY continues to anchor institutional usage as the market's liquidity benchmark, with nearly $4 trillion of notional value traded in the quarter, representing roughly 17% of total U.S.-listed ETF volume.

Together, this underscores the strength, breadth, and flexibility of our platform across client segments and our abilities to successfully extend from our leading position in SPY to other high-growth ETF segments.

Our scaled franchises within investment management also create a competitive advantage and will enable us to capitalize on several important global trends, including the shift from savings to investment, the move globally towards funded retirement systems, the expansion of digital assets, and the continued democratization of investing.

For example, in digital, we are preparing to launch the State Street Galaxy Onchain Liquidity Sweep Fund, a tokenized private liquidity fund designed to support 24/7 on-chain liquidity for institutional investors. Together, these strategic initiatives underscore the broad range of opportunities ahead as we focus on driving near- and long-term growth, enhancing client capabilities, and strengthening our platform.

At the same time, the next phase of our operating model transformation will strengthen our ability to deliver sustainable growth and long-term shareholder value. We are scaling AI-enabled capabilities, embedding more agile ways of working across the organization, and continuing to modernize our technology with a continued emphasis on operational excellence, consistent execution of our strategy, and delivering for our clients.

We are strengthening and improving our core end-to-end capabilities and technology through the deployment of our agentic platform and AI foundry to scale and accelerate AI in high-leverage areas, while also advancing capabilities in areas such as State Street Alpha and Charles River Development.

These actions position us to operate more effectively, partner more deeply with clients, and help drive the next phase of industry evolution. To conclude, we are pleased with our strong start to 2026, while recognizing that our potential is even greater.

We see broad-based strength across the franchise, and our first quarter results reinforce that our strategy is translating into consistent and durable improvements in financial performance. At the same time, we continue to transform across the platform and accelerate the deployment of AI agents, which holds significant opportunity for State Street and our clients, given the investment operational and technology intensity of what we do.

In July, we will provide a detailed update on our strategic growth and transformation initiatives and how these position us to drive stronger performance over the medium term. We are encouraged by our progress, mindful of the environment, and confident in our ability to continue delivering as we move through the year. With that, I'll turn it over to John to walk you through the first quarter in more detail.

Thank you, Ron, and good morning, everyone. We had an excellent start to 2026 with broad-based year-over-year growth across the franchise, driving record quarterly revenues and over 600 basis points of positive operating leverage in the quarter, excluding notable items.

These results reflect disciplined execution alongside ongoing investment across our portfolio of strategic growth areas. Now, let me dive into the details of the quarter, excluding notable items, starting on slide three. In the first quarter, total revenue increased 16% year-over-year to a record $3.8 billion.

Fee revenue of $3 billion increased 15% year-over-year, driven by strong performance across investment management, investment services, and markets. Net interest income of $835 million increased 17% year-over-year, primarily reflecting continued net interest margin expansion.

Expenses of $2.7 billion increased 9% year-over-year, driven by higher revenue, strategic investments, and the impact of currency translation, which was a headwind to expenses but a benefit to revenues. Taken together, this performance drove a significant improvement in profitability with 400 basis points of pre-tax margin expansion and a roughly four percentage point increase in ROTCE to 20%.

Before moving on, let me briefly touch on notable items recognized in the quarter. Notable items totaled $130 million pre-tax in the first quarter, or $0.35 per share after tax, reflecting repositioning charges and the re-scoping of a middle office client contract.

Turning to slide four, servicing fees in the quarter increased 11% year-over-year to $1.4 billion, reflecting higher average market levels, the benefit of currency translation, and continued organic growth supported by net client asset activity, flows, and new business.

AUCA ended the quarter at a record $54.5 trillion, up 17% year-over-year, primarily reflecting higher period and market levels, positive client flows, and net new business. First quarter servicing fee sales were $56 million. These were well-distributed across regions and aligned with our strategic focus areas, particularly back office services and alternatives clients. .

Looking ahead, we continue to target $350 million-$400 million of sales in 2026. The pipeline remains healthy, with broad geographic and customer segment representation, including APAC, EMEA, emerging markets, and alternatives.

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

Assets under management increased 20% year-over-year to $5.6 trillion, reflecting higher period and market levels and continued client inflows. Net inflows totaled $49 billion for the quarter, led by strength across index strategies and solutions, including ETFs in fixed income, as well as our cash franchise.

Within ETFs, net inflows were $25 billion, driven by strong flows and market share gains in our U.S. low-cost suite. As Ron noted, SPLG, our low-cost S&P 500 ETF, was the largest asset-gathering ETF globally during the quarter.

We also continued to advance product innovation and strategic partnerships, launching 57 new products and solutions during the quarter that are creating new avenues for growth. As a signpost of that progress, our State Street Bridgewater All Weather ETF surpassed $1 billion in assets under management during the quarter.

We were also pleased to see our investment-grade public and private credit ETF, developed in partnership with Apollo Global Management, reached a new high watermark during Q1 with AUM of over $800 million. Turning to slide 6. Markets remains one of the key pillars of our One State Street strategy.

It plays a key role in linking our investment services and investment management platforms, strengthening the connectivity across the firm, and enabling more cohesive client-led solutions.

FX trading revenue increased 29% year-over-year to $435 million in the first quarter, reflecting a strong 25% increase in client trading volumes, which reached a new record level as we supported clients amid a dynamic market environment. Securities finance revenue increased 2% year-over-year, supported by growth in client lending balances. Moving on to slide 7.

Software services revenue increased 7% year-over-year in the first quarter, driven primarily by higher professional services and software and data revenues, reflecting continued SaaS go-lives and platform adoption across our client base. Software business momentum is also reflected in our annual recurring revenue, which increased 12% year-over-year, and our revenue backlog, which increased 11%.

Turning now to slide 8. First quarter net interest income of $835 million increased 17% year-over-year, primarily reflecting a 16 basis point expansion in net interest margin to 116 basis points and average interest-earning asset growth of 1%.

The year-over-year increase in NIM reflected improvements in funding mix, continued benefits from investment portfolio repricing, and runoff from terminated hedges, partially offset by lower average market rates. Growth in interest-earning assets was driven primarily by higher client deposits, partially offset by a reduction in short-term wholesale funding.

Turning to slide nine. Expenses were up 9% year-over-year in the first quarter, excluding notable items. Currency translation accounted for approximately two percentage points of the increase.

Of the remaining seven percentage points, approximately five percentage points reflected higher revenue-related costs, with a remaining balance of two percentage points driven by continued strategic investments and run-the-bank expenses net of productivity savings.

Moving now to capital and liquidity on slide 10. Our capital levels remain strong, enabling disciplined capital deployment aligned with our strategic priorities. At quarter end, our standardized CET1 ratio was 10.6%, down approximately 100 basis points from the prior quarter.

The decrease primarily reflects higher risk-weighted assets associated with a normalization of RWA in our markets business from episodically low levels in the prior quarter, along with the impact of U.S. dollar appreciation in March and, to a lesser extent, equity market appreciation on the final day of the quarter.

Turning to capital return. In the first quarter, we repurchased $400 million in common shares and declared $233 million in common stock dividends, resulting in total capital return of $633 million, equivalent to a payout ratio of 90%.

Before moving on, I call your attention to a new slide 13 in the appendix on our NDFI loan portfolio. This lending remains disciplined and client-focused, primarily supporting investment services clients. In addition, this is a highly collateralized and diversified portfolio that has performed resiliently across cycles and continues to support durable client relationships.

Let's turn to our full-year outlook, which as a reminder, excludes notable items. We continue to assume that global equity markets are flat this year on a point-to-point basis from the end of 2025, while remaining mindful of the potential for variability in the operating environment.

Against this backdrop, we now expect fee revenue growth in the 7%-9% range, an increase from our previous outlook of 4%-6%, reflecting a stronger than expected Q1, along with continued organic growth and solid momentum across the franchise. Turning to net interest income.

Following our strong first quarter performance, we now expect NII growth in the 8%-10% range, representing an improvement from our previous outlook for low double-digit growth. We currently expect expenses to increase by 5%-6%, up from our prior 3%-4% outlook, primarily reflecting higher revenue-related costs.

Finally, we continue to expect an effective tax rate of approximately 22% for the full year and a total payout ratio of roughly 80%, subject to board approval and other factors. With that operator, we can now open the call 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's star five to ask a question. We'll pause for just a moment. Our first question will come from Glenn Schorr with Evercore. Your line is open. Please go ahead.

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

Yeah. Thanks for the question, Glenn. I would say that we're very pleased to see our net interest margin progress, and as mentioned, much of that is coming on the funding mix side of the balance sheet.

As we see growth in the deposit levels, which surged in the first quarter, we are continuing the plans from the last couple of quarters of reducing our short-term wholesale funding. That's higher cost, and we just find that to be an appropriate rotation to higher quality funding on the funding mix side.

Interest earning assets will be less of the story. 1Q was driven almost entirely by net interest margin. I think that's a similar story for our guide for 2026. That range that you articulated, or that we talked about earlier is almost entirely driven by net interest margin as well. Interest earning assets are really going to be something we keep an eye on, but not really what's going to drive the net interest income in 2026.

Operator, we can take the next question.

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

Hi. Good morning. Thank you for the question. I was hoping we could spend a minute on the goals you guys are trying to achieve from this next chapter of State Street's transformation. I know you alluded to the fact that you'll provide a lot more detail in July, but since you kind of cracked that door open, I was hoping you can give us the kind of overarching goals you're trying to achieve.

Is that faster revenue growth? Is it better profitability or both? I believe your last kind of official medium-term pre-tax margin target is somewhere in the low 30s%. Is the goal to effectively get that into a higher range over time or any other way you can give us some high level framework would be helpful.

Yeah, I'll start off here. I think, as you may have heard me comment on this in prior sessions. I think that we had a goal to get to 30% pre-tax margin, which we've delivered on at the end of 2025. Again, here in early 2026, you're seeing us meet that threshold. The guide that we delivered today actually would, if you play that through, implies in the neighborhood of 31% pre-tax margin.

We think we're moving the platform forward from a profitability standpoint. I think the second big driver will be growth, right? What you'll probably hear from us in July is an updated view about what we think this platform can deliver over the medium term from a profitability standpoint. We feel like there are extremely attractive opportunities to grow profitability metrics, pre-tax margin, and other metrics.

We also believe that we have very unique opportunities to grow this platform overall from a revenue standpoint. I think you'll see some commentary on both of those things. I think the building blocks of all of that will be the increasing business execution discipline that is emblematic of what you're seeing in organic growth across our fee line items.

We'll talk about that in terms of what that can deliver for us. I think the other two big categories I'd highlight is we also have a distinctive portfolio of strategic initiatives that would provide some unique, outsized ability to derive benefits into the platform over the medium term. Then lastly, transformation. Within transformation, there are several pillars of that we'll talk through.

We'll talk through our ongoing operating model transformation, kind of embedding agile ways of working across the entire enterprise and really solidifying a product platform approach to delivering our services to our clients.

A second pillar will be the ongoing modernization of our technology infrastructure, which we're excited about. Lastly, all things AI, where we've continued to make investments and make progress. We'll wrap all of those building blocks together in what we believe they will contribute over the medium term in our commentary that you'll hear from us about in July.

That sounds great. Looking forward to that. For my follow-up, I wanted to ask you guys a question around ETFs, both in terms of the growth and expense perspective. Obviously, there's been an increased focus on distribution platform fees that may come online towards the end of the year.

Schwab obviously the one discussing that. Any early thoughts on the implications that might have on both sort of ETF growth for State Street and the incremental expenses that you might be willing to incur on the back of that, if you were to say, on the Schwab platform?

Yeah. Alex, it's Ron. We're very familiar with what some of the platforms are doing. Most of these platforms are close partners. In terms of our long-term strategy and our long-term performance, we're not concerned about this.

If you've been following what we've done in ETFs, we have continued to broaden that platform, moving from where we started as an institutional provider to not only maintaining that institutional leadership, but growing both in terms of client segments in the low-cost wealth channel, but also in channels outside the U.S. You'll see pockets of the kinds of things that you're talking about, but we don't see it as any kind of a substantial risk or headwind to our overall ETF business.

Okay. Thanks so much.

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

Hi. Thanks. Good morning. This quarter, you obviously showed the ability to put up meaningful operating leverage and also have a higher cost growth rate to even deliver that. I'm just wondering, were you able to pull forward some spending, or was it mostly revenue-related costs?

As you look forward to the new 5%-6% cost guidance, I'm just wondering how you're balancing the expected efficiencies that you're getting, and then how much FX translation you're still including in the full year guide after the hurt that it was in the first quarter. Thanks a lot.

Yeah. Maybe just a couple of comments about that. I think what you saw in the first quarter, there was about 2% or so impact from a currency perspective. When you take that 9%, you're really starting with 7% ex-currency. That 7% is predominantly revenue related.

Five percentage points of that would be revenue related, which leaves you a net 2%. Within that 2%, we've got run the bank costs and our strategic investments. Those are in the neighborhood of, if you break that out, call it 6% of spend, running the bank and really finding ways to invest in exciting initiatives that we're feeling good about.

We fund a lot of that through productivity. That's the net 4% of productivity that we delivered in the first quarter. We're going to continue to monitor our productivity trajectory, and the same storyline holds with the 5%-6%, the incremental growth.

That you're seeing majority of that is revenue related, and then there'll be other costs that we'll consider continuing to fund strategic investments and kind of partially offset by productivity. I think the storyline for 1Q holds for the full year as well when you apply it to the 5%-6% range.

Okay. Thanks, John. As a follow-up, just with the strong NII and then the strong FX trading, can you just help us understand, do you expect that to run rate or do you expect a natural just kind of coming off a little bit given the types of volatility and the environment that we saw in the first quarter? Thanks, John.

Yeah. Sure thing. I'd say I'll start with FX. We've had a strong quarter in FX trading. I think two things have to come together to basically deliver on something like that. First, you have to have the franchise in place, to be able to take advantage of these opportunities when they arise and be there for your clients.

The first quarter was one of those times. I'd say that the investments in client acquisition, product extensions, and geographic expansion in the markets business has served us well in 1Q.

You put that and you combine that with some elevated volatility, I would call it good volatility, where liquidity is still good. There's a lot of turnover given volatility. Those combine together to deliver our first quarter. Very strategic and opportunistic and feel good about that.

I would say that those conditions for the rest of the year, when you think about our fee guide of 7%-9%, those conditions we think moderate gradually throughout the year, and that's built into the 7%-9%. We're not depending upon those highly favorable conditions in the first quarter being maintained for the rest of the year in order to deliver the 7%-9%.

That's how I would just kind of articulate the FX trading side of things. When it comes to net interest income, the original guide was up low single digits, so now it's in an 8%-10% range. We're seeing some very solid tailwinds there. We originally had a view that maybe our net interest margin would be somewhere in the 100-110 basis point range.

I think you could look for 2026, you could see a net interest margin in the 110-115 basis points range, which comes off slightly from the first quarter, where we're at 116. That'll give you a sense of the trajectory. I think net interest margin is the main driver in the story of this. With funding mix being one of the larger tailwinds, as I mentioned a little earlier.

Overall deposits will be up, basically helping that funding mix. I think we said before, maybe $250 billion of deposits. Probably going to be in the range of $250 billion-$260 billion as we play out the rest of the year.

We'll look to maybe pay down some higher cost debt with that and continue to optimize the funding mix to drive that net interest margin. All of those building blocks are incorporated into the NII guide of 8%-10%.

Ken, it's Ron. I just wanted to underscore a point that John made on FX, which is that we've been talking to you for years now about the investments we've made in terms of expanding client volumes to really make sure that we were serving as much of our investment servicing clients as possible.

We've done that through a variety of ways. Some of it has been expanding geographic capabilities. Most of it has actually been expanding the ways in which we can meet our clients technologically and how they can trade with us.

We did that at a time when there wasn't a lot of volatility in the market, preparing for the moment when volatility and normal volatility would return. For us, what we're seeing the benefits of are those past and ongoing investments into really meeting our clients where they are in as many ways as they want to trade with us.

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

Hey, good morning. Maybe just a follow-up on the deposits, up nicely with a big mix shift to NIB deposits, which I think was a particular benefit quarter over quarter. On the NII side. Can you kind of talk through what deposits maybe have looked like since April 1? How any further optimization around pricing can affect deposit growth from here, and how you're thinking about the mix in your guide? Thanks.

Sure. Yeah, I think I mentioned the level of deposits I'd anchor to that $250-$260 range.

Right.

When it comes to mix, we originally talked about around 10% of non-interest-bearing. I think that's still a good anchor maybe over time. I think in 2026 it appears that we've got a higher non-interest-bearing opportunity. Maybe it's just a little bit higher than that 10%, slightly.

Those are the two points I'd make with respect to that. When it comes to deposit drivers. I mean, there are external drivers, internal drivers. The internal drivers that we control are continuing to grow our platform and just serving our clients and growing AUCA, which was another record this quarter. That's really where we're sourcing those deposits, number one. Number two, just given certain client segment growth.

The alternatives segment growth with this segment which is growing faster than maybe the non-alternative segment is, also happens to be pound for pound, brings more deposits with a more attractive mix generally to the platform. We're seeing some of that as the tailwind, as the alternatives strategic initiative continues to pay dividends.

The external things to keep an eye on. Deposits tend to rise when money supply is growing, GDP is growing, when rates are kind of stable on hold to falling. Also, given our business, if volatility levels and risk off tends to rise, we tend to grow deposits.

Broadly, our NII line ends up being a little bit of an offset to other line items similar to what happens in the markets business when and if you see periods of higher volatility like you saw in the first quarter.

Any thoughts on the April 1 from here, what you've seen so far?

Yeah. I would say, I'd probably put it in moderating from here. We had extremely positive conditions in the first quarter. Still very solid trends. I'd stick with the 250-260, maybe slightly better than our 10% non-interest-bearing guide, as I mentioned earlier. April trends are good in the NII space and in the deposit space.

Okay, great. Maybe just a follow-up on the wealth management business. Across regions, EMEA was the largest contributor to net flows in the first quarter, I think $29 billion. That's obviously quite good progress. What vehicles and asset classes? Was it lumpy? Do you think that momentum in Europe can continue?

Yeah, I think if you want to talk about net asset flows in general, as we mentioned earlier, from an asset class standpoint, it's fixed income was a very strong quarter and led the way followed by multi-asset. Then you did hear how well our low-cost suite did this quarter as well more broadly and ETFs in general. Those would be the ones, but possibly fixed income one of the bigger drivers.

Okay, thanks.

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

Hi. One short-term question, one long-term question. The short-term question, I think you said revenue backlogs are up 11%. If that's correct, can you size that a little bit more in terms of the level of backlogs versus history and where that's coming from? The long-term question, Ron, just back to AI.

You guys seem clearly engaged in AI. You're looking to scale AI. Some people out there are saying they're going to remodel their entire business model around AI. You have a few banks saying that.

You have some others actually giving. Only one bank quantifies expected AI benefits. You have some saying the business models will be destroyed due to the AI scare trade, and then some other banks will say, "Hey, it's really kind of overrated, but we'll go along with it." That's the long-term question. First, the short-term question about the revenue backlogs. Thank you.

Yeah. Thanks for the questions, Mike. That 11% was with respect to the software services line alone, and that is correct. Uninstalled revenue up 11%. Multi-year revenue growth in this space has been around that level.

That continues that expectation of around 10% low double-digit growth that we expect over the medium term. As we continue to invest in the business, we may have opportunities to do better than that. The ARR grew 12% as well. That's the background on that question. Then I'll turn it over to you. You had a follow-up, Ron, related to AI.

Yeah, Mike. I mean, we're very positive on AI, and a lot of that has to do with the nature of our business, which you understand well. It's investment, operational, and technology intensive. Where are we on this? I would say it certainly is comprehensively embedded across the enterprise.

We've got broad access and accelerating adoption. Virtually every employee, where it makes sense, has access to the tools, and usage is continuing to scale rapidly. A lot of repeat behavior indicating that the tools are becoming part of the distributed daily workflows. Secondly, in terms of development and technology development, systems development, we're fully enabled there, and there we're already realizing productivity gains.

It's giving us the ability to actually do more faster and get to those projects that we would have liked to have gotten to but wouldn't have made the cut before this kind of productivity gain. Again, all of our developers have access to these AI-assisted development tools, and we really are seeing an acceleration both of new technology development but also technology modernization.

Thirdly, it's what you do with it after that. We have built a centralized AI hub, which has a very deep use case pipeline that's beginning to scale and will scale over the back half of 2026. This platform supports over 200 AI use cases now, with 70 of those already live. As they mature, we expect tangible business impact to begin emerging in the back half of 2026, and then accelerating going forward.

Which then leads to the kind of fourth piece of all this, which is agentic service delivery. I talked a little bit about that in my prepared remarks. Again, given the operational intensity of what we do, the opportunities are just manifest for us. We have agent-enabled service delivery that will become online in July.

We'll at the same time put forth what we're calling the AI foundry to be able to do this and repeat this. The longer-term question that you're asking is, do you think it destroys the business model? We don't see that.

Now, at the same time, we also see that these are widely available tools. There's nothing proprietary here. So it is how you actually deploy them. John talked about in his remarks how you actually turn that not just into operational improvement, but create real agility in the way the organization operates.

What does that mean, right? Many of these businesses have grown up kind of organized the way they are going back years and years. A lot of that won't make sense any longer. We're already seeing that change in our organization in terms of how we think about those things.

The real power of exploitation, first is deploying the technology, but second is recognizing what it means for how you square off against clients and how you actually organize the work internally. For us, we see this as an opportunity, more opportunities than risks. I just can't.

Just the three words. I'm sorry.

Go ahead. No, you go ahead, Mike.

No, the three words, "annual business impact." Is it bigger than a breadbox? You said starting late this year or next year. Again, only one bank has given any numbers, financial numbers around this. So maybe my expectations are low for the answer, but could you dimension this in any way?

Yeah. I'll go ahead and articulate the framing around that, Mike. I think it's going to start scaling in the second half of 2026, and we're going to dimension what the impact's going to be over the medium term. It will be very meaningful, and it'll be a very important pillar of how we're going to drive value and financial bottom-line impact as well as expanding resources to continue to invest in our strategic roadmap.

It'll do double duty, and we'll be very transparent about that medium-term expectation. As we get into later in the year when we start looking at run rate benefits as we're exiting 2026 into 2027, we'll come back around and articulate what that near-term benefit will be.

Okay. We'll get this on the second quarter earnings call.

Yes

You'll have a conference in Boston with lobsters like you did a few decades ago or something in between that.

Earnings call. I wasn't around for the lobsters, but it sounds interesting. No, it'll be on the earnings call.

All right. Thank you.

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

I missed the lobsters too, John, so if you're feeling bad about it. Maybe, Ron, I wanted to follow up, like you spent some time in your prepared remarks just around tokenization, your digital asset platform. If you don't mind, talk to us.

Should we think about all of this as mostly retaining the customer activity that you already have, but it's just moving from analog to digital to take sort of a comp? Or are there new revenue opportunities that you think that will surface as a result of tokenization and moving on chains?

Yeah. Ebrahim, I would say it's both. Obviously given the nature of our client base and our market share with the most sophisticated clients, you'd expect they expect from us, and you'd expect us to be delivering the best that the market has to offer to them. If you think about some of the use cases, they're already very real in terms of the tokenization of assets.

That's in the end net new opportunity for us. We've talked to you before and in other venues about tokenized money market funds. That's a real use case, and it's beneficial to the market. It's beneficial to liquidity, and will result in more revenues for us. The whole on-ramp, off-ramp bridge from, quote, traditional finance to digital finance is also a real opportunity.

The way to think about what's going on here is there's lots of new railroads being manufactured and being laid. There's not yet the interchange to those. That's a very real thing. When you think about everything that, whether it's the stable coin providers are doing or some of the other digital platforms, again, the volumes are growing fast, but, again, off a very small base. Part of the reason for that is the on-ramps and off-ramps really are underdeveloped at this point. Being part of that on-ramp, off-ramp, and providing that infrastructure is a second source of new revenues. We see it as both going forward.

Got it. Maybe just sticking with that, Ron, are there opportunities, is this all built in-house in terms of when you think about tapping into this? Or are there very targeted digital asset platforms or capabilities as this infrastructure's built out that you would look at and where M&A would make sense? Or does it not quite exist given just how new all of this is?

Yeah. Ebrahim, as you know, we always think about that. We always think about the make versus buy decision. Even on the make decision, M&A is one, but partnerships are another. We've got this product that we've referred to that's with Galaxy. I mean, that's a partnership with Galaxy. We'll continue to explore that.

We're very tied into the emerging fintech platforms, not only here in the U.S., but in other hotspots of fintech development. There's hotspots in Europe, there's hotspots in India. We're very tied into those. We'll continue to explore the M&A. We also have a lot of confidence in our own organic capabilities and our ability to build this out. It'll be all of the above.

Got it. Thank you.

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

Good morning. Thanks for taking my question. John, you gave some really clear color on deposit trends and how those feed into the NIIs, so thanks for that. I was curious about expectations around the euro and GBP deposits.

Those betas, specifically the forward curve there has gone hawkish with 2 hikes in the outlook. Are those hikes included in your updated outlook? The betas on those currencies were low during the recent rate cuts, so therefore, can you tell us about your expectations for betas when those rates are moving up? Thanks.

Yeah, sure. A couple of thoughts related to that. In the guide we have an assumption of one hike in, and we've got the Bank of England and the Fed on hold, but we've got the ECB in for one hike.

We acknowledge that currently it appears that there could be more than one. Just from a sensitivity standpoint, it's not a huge driver on a quarterly basis. I think we've communicated previously around $5 million a quarter. You can basically build that in from a sensitivity standpoint. The other question that you wanted to talk about?

Just whether you expect the betas to remain low as they were during the cuts.

Yeah. I'd say that the betas in the and really it's U.S. dollar and euro, but the betas for U.S. dollar pretty much is in the range of symmetrically in terms of the up, in terms of the tightening cycle and the easing cycle.

They've been relatively symmetric. In terms of the betas for the euro, probably a similar expectation. They're lower than the U.S., maybe in the 50% range versus the 75%-80% that you'd see in the U.S., but relatively symmetrical on the up and down.

Got it. That makes a lot of sense. Then for my follow-up, Ron, you spoke to not expecting much from ETF into your ETF business from some of these changes that the wealth management firms are working on, which makes a lot of sense. I know active ETFs aren't big for you, but there's a little confusion I think around the space, and given your strong position in the ETF oligopoly, I'm curious your perspective.

It seems as though there's sort of a higher rate being discussed on the active ETF side, which makes sense. There's better expense ratios or higher fee rates in those products versus the passive. Is that sense what I'm hearing from my channel checks in wealth? Is that right? Does that speak to why you'd think that the impact would be pretty de minimis or manageable for your ETF business with SPDRs? Thanks.

There's a lot in that question, Brennan. The active ETFs are absolutely growing, and we're the beneficiary of that in our servicing business. I think one of the reasons why they're growing, in addition to the vehicle, in many cases, simply being a better vehicle, and also aligned with the way distribution has gone, either within the traditional wire houses where you want to have a control over how the portfolios are put together or with the rise of the independents.

The buyer's fee comparison is less about the active ETF versus the passive ETF and much more around the active mutual fund versus the active ETF. I think that's also helped with the value proposition there.

We see, and because of our platform, we can realize opportunity in ETF growth literally around the world. Right? John talked a little bit about the growth that we've seen in Europe. We were early on there, both as a sponsor and as a servicer.

It was slow growth at the beginning, but you're seeing a much bigger take-up. We actually think that the real growth is yet to come in Europe. Why do I say that? Because the distribution in Europe is still largely bank-based, yet there's a lot of platforms and alternatives to banks that are going after them.

They will employ and deploy ETFs as the tool. Again, will help us both on the sponsorship side and the servicing side. You look even in places like the Middle East and the funds business in places like the UAE and Saudi.

I just came back from Saudi earlier this week. It's my second trip to the Gulf this year. You're just seeing those countries skipping over the old mutual funds and UCITS and going right to ETFs and building modern platforms around ETFs.

All of this we see as real tailwind there. If you're a distributor like a Schwab, obviously you want to get paid for this, and they're going to do what they need to do to be appropriately compensated.

At the same time, every distribution platform is going to have to look at what are other distributors doing. There's emerging a lot of these tech-forward, tech-driven distribution platforms that are going to provide competition to them. It's a vibrant sector. There's a lot of growth in it. We think we're just very well-positioned, both as a sponsor and servicer.

Great. Thanks for taking my question.

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

Thanks. Good morning. On the capital front, you've been running more at the high end of the 10%-11% CET1 range for most of the last year, but you were in the middle of the range this quarter.

Are you now more comfortable running into the range, or is this just a transitory move down given the elevated balance sheet at the end of March? If you could give any early impressions on potential impact of the new RWA and G-SIB surcharge rules proposed last month, and also clarify if the 80% payout ratio target is that on a GAAP or adjusted earnings basis? Thank you.

Sure. Yeah. I'll take those one at a time here. Our operating range is 10%-11%, and we've articulated recently that we've been operating at the upper end of that range. That hasn't changed.

You can see some variability on quarter ends where we report on any given day, just given what could happen and it just so happened that March 31st was an exceptionally active day, and there were some larger movements on that day that maybe drove this to the level of 10.6%.

If you were to look at the averages for the fourth quarter and the first quarter, average CET1 was in the upper end of 10%-11%, and that's how we're continuing to operate. Nothing new to communicate there. I think the second one that you asked about was related to Basel III.

Yep.

Yeah, and I think, so we're pretty constructive on the proposed approach. I think it's delivering on the expectation that there would be a more targeted view of credit risk RWA, and I think that's played through, and it's our expectation that we'll see a benefit in the credit risk RWA side of things that is expected to exceed the additional RWA that we'll have to provide on the operational risk front.

We'll have to frame this and think about magnitudes as we continue to study it and determine what the finalization of these rules will be, which will happen over time. Generally, reasonably constructive on the proposal, and it's going to be a net benefit, it appears, for us. Then lastly, as it relates to the 80%, that's on a GAAP basis in terms of the payout.

All right. Thank you.

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

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

Yeah. When you think about all the other categories, this is in essence who we serve. These are our clients. Non-depository financial institutions broadly are an important part of how we support that customer segment.

These are investment services clients by and large. As part of the broad suite of services we provide them, we support them from a balance sheet standpoint. This is highly strategic lending for us when you see NDFIs. Each of these categories are extremely well-positioned from a risk return, credit risk profile standpoint.

We've never had losses in subscription finance or in the AAA CLO book. That's really the large majority of the NDFI book is in that space. We wanted to make it clear that, just how high quality these categories are. We're down to $1.6 billion in the actual BDC lending.

I would kind of highlight that the points made on the slide with respect to that these are senior secured with substantial subordination on them. 80% subordination sitting behind the positions that we have in the BDC space that's diversified with ongoing structural protections.

This will be a growth area for us. You could see low to mid-single digit growth and commensurate with our continued penetration of this customer segment, which is really attractive for us. I think we're feeling very good about the profile here.

Great. On the private market, private credit servicing business you've made several investments there over the past few years. Do any of the pressures that we're seeing here on the private credit side impact that business?

Yeah, there's some impacts. I think that to the extent that you have elevated redemption requests that can have a marginal impact. It's pretty limited, however. Frankly, the round trip is a net positive for us. When you think about elevated redemption requests that may come in in the private space that could have a small impact on servicing fees.

It actually results in higher deposits. There's a balancing force here with respect to, in the near term, net very stable in terms of revenues and fees, and just don't see a huge impact year to year in the first quarter, which we think is more of a temporary flow related issue rather than a broad systemic issue.

Yeah, I think it's also important to remember that all this attention on these products and redemptions is really around a very small piece of the private credit market. It's around those that are put into funds and available on a semi-liquid basis to investors. The vast majority of private credit is not in those kinds of structures, and there's no reason to believe that private credit won't continue to grow.

It's unlikely that you're going to see significant expansion of bank balance sheets in Europe or Asia. So yet the appetite for credit will continue to grow. You even think about bank intensive kinds of markets, again, like the GCC. If you look at those banks, highly profitable banks, but they don't have a lot of places for bank balance sheets to grow.

If you think about the capital needs of that region that were already there today or before March first, and what those capital needs are going to be going forward, that's just yet another pocket that will need to be fulfilled by private credit in some form.

I do think what you will see is a careful examination of these vehicles, and what actually goes in them. How do you manage expectations of retail and affluent investors appropriately? Again, that's a relatively small segment of the marketplace.

Maybe an extension to that too, just to tie it back to that $1.6 billion that you're seeing on our slide. Ron's point about those that are in that sort of non-public semi-liquid space, it's less than half of that $1.6 billion.

The overall BDCs are 4% of loans, so less than half of those. Around the 2% or less are in the space that's getting a lot of the headlines, and then it's well less than 1% of total assets just to kind of wrap it all back together with the point you heard from Ron.

Got it. Appreciate all the details. Thank you.

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

Thanks. A couple of questions. Firstly You had a scoping charge of $41 million. This was the second one in the last 12 months. Can you give us some color? Is it the same client? Is it the same type of issue? It doesn't seem like it, but I just want to not make assumptions. What's driving these, and why have we seen twice in the last 12 months?

Yeah. Vivek, it's Ron. These are idiosyncratic. It's not the same client, and it's not for the same reason. In this case, it's an existing Alpha client, and it will remain an Alpha client. It was one part of their insourced to outsourced journey. We served them in our middle-office business. They had intended, and we were working with them to help outsource more of that, and we mutually agreed that this was not the time for them to continue that outsourcing journey. It's within the middle office, and it's an insource versus outsource decision that the client has made.

It's not the same kind of underlying drivers that drove the decisions in both of the client scoping changes?

No.

Okay. Different topic. Ron, you made a comment about the Schwab charging a fee for their distribution platform. I want to clarify your response. Will you absorb it, or will you pass it on? What's the plan with that?

Yeah. We don't have a concrete plan yet because we haven't seen what the final is here. We'll figure out what we'll do once we see what it is, and once we know that, we'll come back to you.

Okay. Lastly, if you'll indulge me for one. This is John Woods. Just a little detail. The charge-off jump you saw this quarter, what type of loan? Any color on that?

Yeah. This would be a COVID commercial loan. Just kind of coming out of some high-margining contracts that a name was able to execute back in, call it the 2021 period. When those rolled off, they had some pressure and went into non-accrual, and we took the opportunity to exit the name.

We had it substantially reserved for, so it's not really a big P&L impact. We decided to crystallize it and move on from the name in the first quarter, and that's what drove the charge-off. Nothing that really extends into the other portfolios, and it didn't have anything to do with NDFI or anything else.

Okay, thanks.

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

Hi. Good morning. This is actually Sharon Leung filling in for Steven today. Really appreciate the color on the drivers of the expense growth, including the 4% from net productivity saves. Just wanted to ask, given the headcount was down 2% year-over-year, how much did that contribute to the overall efficiency savings? Looking ahead, do you see the potential for further headcount optimization from here?

Yeah. Headcount will clearly be something that we'll think about. I would say there are puts and takes there. We're growing businesses, and we're investing in businesses, and really what we're doing is thinking about how these gross productivity levers that we're engaging in by getting much more automation and by re-engineering processes, and by zero-basing those processes.

We're finding ways to reduce reliance on as many kind of headcount as we've had before. We're using that net-net as ability to go higher in other areas. Round trip, there will be kind of an expectation of continuing contributions from headcount. There are puts and takes as we're continuing to invest in other places. It's a meaningful portion of the productivity at 4%.

Great. Thank you so much.

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

Good afternoon, gentlemen. John, can you talk to us? You've had obviously some real strong positive operating leverage. You identified ninth consecutive quarter, excluding the notable items, of course.

How much of the positive operating leverage, and I guess this plays into your pre-tax margin comments as well. How much of it is structural, meaning your scalable platform that you guys have built, the mix shift versus cyclical tailwinds like the FX volatility or rising market levels?

Yeah. Sure. It's a good question. I would tell you that across the board, we've had organic growth in the quarter, and that's been really something that will be durable. It's multi-year investments in business execution and a sales culture that is starting to pay dividends. We're seeing organic growth across all of our line items.

As I mentioned earlier, all the investments that we've made in geographic expansion and product capabilities in the markets business, which from a distance you might say is purely environmental. It's really not. It's also environmental, but it's not only environmental.

There are long-term client relationships and platforms that we've built that our clients find very attractive, and the connectivity between markets and our investment services clients and investment management clients are very strong.

Therefore, I do think we have a durable opportunity to drive positive operating leverage that's attractive, that will reflect itself in pre-tax margin improvements over time. Certainly, environmental factors can help that, but even without environmental factors, we believe we have a very attractive opportunity to grow pre-tax margin through positive operating leverage, given all that organic commentary I just made.

Great. Thank you, John. Ron, obviously, you and I have been around for a fair bit, and the custody banks' scale has always been so important to success. With all the investing in AI today, can you share with us, do you think it's even a greater challenge for smaller players to compete against companies like your own and the money center banks in New York or your big competitor down there?

Just can you frame that out, or it's always been the same, it's just maybe it's more of a dynamic because everybody talks about AI, but how important is it to really have scale to successfully compete in this business?