State Street exec touts Charles River success in transition to outsourced trading hub

Last modified November 5, 2020. Published November 5, 2020.
In this photo, new buildings form part of the skyline in Boston's Seaport district. (AP Photo/Steven Senne)

In this photo, new buildings form part of the skyline in Boston's Seaport district. (AP Photo/Steven Senne)

Two years from its acquisition of financial services provider Systems, -based State Street is relying on the platform for new client growth after a disappointing third quarter amid the continued COVID-19 pandemic.

State Street CFO Eric Aboaf touted the purchase on Thursday during a speech at the annual BancAnalysts Association of Boston Conference, speaking about it in the context of the investment bank's recent third-quarter financial results. 

The Boston-based bank has been reconsidering its operating model and pivoting from primarily fund servicing to an enterprise outsource provider for trading operations. And this year, State Street has expanded the capabilities of its Alpha platform for investment professionals by integrating it with the Charles River system. 

Alpha consolidates operations onto one platform to eliminate redundant systems. Charles River specializes in front, middle and back software as a service capabilities, and was acquired by State Street in July 2018 for approximately $200 million. 

Charles River offers portfolio decision support, order management, trading, compliance, post-trade settlement, data provisioning and more. 

Aboaf said that the Charles River system has improved functionality on Alpha for clients and transformed the "ease of doing business" across the back office, middle office and front office, which have traditionally been difficult areas. 

"Clients have found over time that they've grown and expanded and built out their own asset manager offerings, around the world and across product elements," Aboaf said.

Prior to the State Street acquisition, investment firms were using Charles River to manage more than $25 trillion in assets. The operations tech from Charles River has been the "bread and butter" driving core growth for State Street, according to Aboaf.

Considered a "front-to-back" offering, the combination of Charles River and Alpha now generates bigger, more complex deals, which Aboaf said is more beneficial to State Street and to the clients.

"On top of that, what we're also seeing is that it's appealing not only to our existing clients but to our new clients," he said.

State Street has earned a profit of about $190 million from Charles River since its acquisition, nearly making up for its approximately $200 million purchase price. Aboaf said State Street has "comfortably" reached its benchmarks since bringing Charles River on.

"Two years in, the revenue growth is starting to come through, and I think growth acceleration, which is what we're looking for," the executive said.

State Street’s expenses dropped in the third quarter, down 4% year-over-year to $2.1 billion. Its total revenue decreased 4% to $2.8 billion, however, due to a 26% decline in net interest income and a 28% decline in securities finance revenue.

It earned a profit of $555 million in the third quarter, which was a 5% drop compared to the same period a year ago. But State Street saw a 2% jump in fee revenue, reaching $2.3 billion. Software and processing fees were up 21% to $172 million.

State Street, along with all other U.S. banks, was barred from initiating share repurchases through the end of the 2020. On Thursday, Aboaf said that assuming the economy stays consistent, the bank is in a stable place and ready to resume share buybacks.

"We'd like to do that as soon as possible," he said. "We'd certainly like to get our capital back to the shareholders and to get that process going."

--Additional reporting by Patrick Hoff