State Street Lifts 2026 Fee and NII Guidance as Margin Hits 35%, Leaving Medium-Term Targets Within Sight Years Early
Third-quarter earnings call, October 14, 2026: EPS of $3.69, up 33%, with a buyback ramp to roughly $700 million in the fourth quarter
State Street reported third-quarter earnings per share of $3.69, up 33% year-over-year, on revenue of $4 billion, up 13%. The more important development is what the quarter implies about the durability of the margin. Pretax margin reached 35% and return on tangible common equity 25%, both already at or near the medium-term targets management laid out in July for a three-to-five-year horizon. CFO John Woods said the raised full-year guidance implies a pretax margin of about 33%, compared with the roughly 32% implied in July, and argued that the firm has "continued to raise the bar on the implied baseline heading into the medium-term outlook." Management stopped short of promising more. Woods said the company wants to deliver the targets on a full-year basis and make sure they feel sustainable before considering raising them.
Guidance raised, but a fourth-quarter NII setup that disappointed some
State Street raised its full-year fee revenue growth outlook to 13% to 14% from 12% to 13%, and net interest income growth to 15% to 16% from 14% to 15%. Expenses are expected to rise 8% to 8.5%, which supports more than 500 basis points of positive operating leverage for the year. This was the 11th consecutive quarter of positive year-over-year operating leverage excluding notable items. The guidance assumes flat equity markets and rates in line with forward curves.
Evercore ISI's Glenn Schorr noted that the NII guide implies a fourth quarter slightly below Street expectations, which is not what one would expect from an asset-sensitive bank in a higher-rate environment with a growing balance sheet. Woods did not dispute the math. He said NII has grown sequentially in every quarter this year and should do so again, but that the outcome "probably implies that we would likely deliver NII towards the upper end of that range." In other words, the raise is real but the cushion is thin. Third-quarter NII was $864 million, up 21%, with net interest margin up 16 basis points to 112 basis points.
What drives the margin, and how much rates actually help
Woods gave an unusually granular breakdown of margin drivers. Of the 16 basis point year-over-year expansion, about 5 basis points came from turnover of the securities portfolio, and about 5 basis points from the runoff of terminated hedges. The reinvestment effect should add roughly 1 basis point or a little more per quarter on a run-rate basis, while terminated hedges contribute about 1 basis point sequentially into the fourth quarter. Management is targeting a margin range of 1.10% to 1.15%, up from the mid-90s a year ago, and expects the margin to drift toward the top of that range over the medium term. Combined with deposit-driven balance sheet growth, that supports a low-to-mid-single-digit medium-term NII growth outlook.
The sensitivity to further rate hikes, which the forward curve currently implies, is more modest than the bullish framing might suggest. Most of the asset sensitivity sits outside the U.S. A 25 basis point move in euro rates is worth about 1 basis point of firmwide margin, and a Fed move only about 0.5 basis point. Non-interest-bearing deposits held at roughly 10% of the mix, though they slipped slightly in the quarter after an early-year surge, and management said it will watch deposit betas closely as rates rise. Fourth-quarter average deposits are expected at $275 billion to $280 billion, leaving the full-year average at or marginally below the $270 billion previously discussed.
Fee revenue: strong core, a soft other-fee line, and a servicing sales gap
Fee revenue rose 11%, or 12% excluding roughly $30 million of market-related gains on strategic investments in the year-ago quarter. The miss relative to some expectations came from the other fee line, which was hit by mark-to-market adjustments late in September that management had not anticipated earlier in the month. Woods said absent those marks, fee growth would have been about 12%, in line with internal expectations. CEO Ron O'Hanley described the line as small and volatile, and pointed to core servicing, management and markets fees as the real indicators. Management expects all three to grow in the fourth quarter and the other fee line to stabilize.
Servicing fees were about $1.5 billion, up 10%, of which roughly 7% was organic, and assets under custody and administration reached a record $59.2 trillion. Woods corrected himself during the call to make that distinction clear. The weaker spot is new business. Servicing fee sales were $68 million in the quarter and a little over $200 million year-to-date, which Goldman Sachs' Alex Blostein noted is below the $350 million-plus pace discussed previously. Management sidestepped the shortfall, guiding to a fourth quarter of north of $100 million and a fourth consecutive year of sales above $300 million, which is a lower bar than the earlier framing. O'Hanley conceded that some large deals may slip into the first quarter. Management argued that retention, pricing and client growth are also major contributors, and that ex-market servicing fee growth in the mid-single digits is a reasonable medium-term expectation. The majority of third-quarter wins were traditional back-office mandates.
Investment Management and Markets
Management fees rose 20% to $797 million, with about 8% organic growth, and assets under management reached a record $6.3 trillion. Net inflows were $7 billion, the sixth straight quarter of positive organic growth, though the total was dampened by client cash redeployment. Long-term net inflows were $69 billion after $79 billion in the second quarter. ETF assets reached $2.3 trillion, and the firm partnered with UC Investments on an Endowment Strategy ETF with a $2.5 billion seed, the largest U.S.-listed ETF launch on record.
FX trading services revenue rose 17% year-over-year to $427 million, but fell 14% from the second quarter, which Wells Fargo's Mike Mayo called surprising. Management attributed the sequential decline to normalization after record volatility in parts of Asia Pacific in the second quarter. O'Hanley urged investors to focus on client volumes, which hit a record, up more than 30% year-over-year. Securities finance revenue rose 9% to $151 million, led by Agency Lending and Prime Services. Software services revenue rose 5% to $175 million, with annual recurring revenue up 8% to $442 million and new bookings of $14 million, a modest figure.
Wealth re-entry gets its first validation
State Street's push back into wealth services drew a pointed question from Schorr, who noted the firm had previously exited RIA custody and that competition is intense. O'Hanley framed the move around the shift of investing toward customization and proliferating distribution channels, using technology via a partnership with Apex Fintech Solutions. The first win came from one of the largest RIAs in the U.S., which was already a user of Charles River's front-office wealth platform. That makes it a useful proof point for cross-selling, though a single mandate is early evidence. O'Hanley said the firm sees the opportunity "not just in the U.S., but in other wealth markets."
Digital assets: no revenue cannibalization expected
State Street remains on track to launch a tokenized fund servicing capability by year-end, subject to regulatory approval, with its own investment management arm as an early adopter. The State Street Galaxy Onchain Liquidity Sweep Fund is now available on the Stellar network. Asked by Bank of America's Ebrahim Poonawala whether tokenization could cannibalize traditional servicing revenue, O'Hanley said traditional and digital finance will coexist for a long period and that State Street's role is to provide the on-ramp and off-ramp between them. He added that the firm is "certainly not planning on, or as a base scenario, seeing any kind of medium-term revenue loss," while acknowledging that market structure, including the Clarity Act and regulatory treatment of atomic settlement and liquidity, remains unresolved.
Alternatives and Latin America
Alternative servicing fees grew at a double-digit rate. State Street cited work with Apollo on daily pricing for private credit strategies. The firm also announced an initial agreement to acquire Santander CACEIS's Latin American securities services business, expected to close in 2027 pending regulatory approval, creating a platform across Brazil, Mexico and Colombia. No financial terms were disclosed on the call.
Capital return ramps, though payout is still below peers' typical pace
The standardized CET1 ratio rose to 11% on lower risk-weighted assets, and the Tier 1 leverage ratio rose to 5.5% following a preferred issuance. State Street returned $651 million in the quarter, including $400 million of buybacks, a total payout ratio of about 63%. Management guided to a full-year payout approaching 80%, which Woods said implies fourth-quarter buybacks of about $700 million, plus or minus. That is a sharp step-up. The firm also noted that rates rose 75 to 100 basis points during the third quarter without damaging capital. The rule of thumb is that an unmitigated 25 basis point rise costs about 10 basis points of CET1 through AOCI, with a roughly one-year AFS duration. Woods defended the lower payout relative to organic needs by arguing that capital deployed to clients generates returns above what buybacks would, and cited subscription finance, AAA CLOs and fund finance as growth areas tied to servicing relationships.
Expenses and loans
Expenses rose 8% to $2.6 billion, with about 5 percentage points tied to revenue and performance-related costs and about 3 points to strategic investment and regional expansion. Productivity savings largely offset underlying run-the-bank inflation. Woods said the 3% to 4% range is a good run-rate for underlying growth and that investment capacity should expand as transformation and AI-enabled productivity ramp. Loans were roughly flat as the firm runs off lower-relationship books, a process Woods expects to largely finish by early 2027, at which point loan growth should resume. On regulatory matters, Woods does not expect the anticipated liquidity rule proposal to materially change balance sheet management.