DBRS Comments on State Street’s 1Q11 Earnings; Sr. at AA (low) Unchanged; Trend Stable

DBRS Inc. (DBRS) has today commented that the ratings for State Street Corporation (STT or the Company), including its Issuer & Senior Debt rating of AA (low), remain unchanged, following the release of its 1Q11 financial results. The trend on its ratings remains at Stable. On an operating basis, the Company reported net income available to common shareholders of $439 million for the quarter, up modestly from $435 million in 4Q10, but up materially from $365 million in 1Q10.

In DBRS’s view, STT’s results are indicative of the strength in its core business fundamentals. Results benefited from recent acquisitions, new business wins and higher equity market valuations that have increased assets under custody and administration (AUC/A) and assets under management (AUM) leading to higher fee revenues. Positively, STT’s new business pipeline remains strong, which should help bolster future revenue growth. Besides contributing to revenue growth, DBRS notes that recent acquisitions have broadened STT’s product capabilities enabling the Company to offer a more comprehensive product set to its clients. Moreover, the Company now has better access to key non-U.S. markets and is better positioned to leverage its extensive global distribution network.

In the first quarter, total revenue climbed 2.1% on a linked quarter-basis to $2.3 billion, benefiting from a $56 million, or 3.2%, increase in total fee revenue, partially offset by a $4 million, or 1%, decline in net interest revenue. Net interest revenue declined primarily due to lower yields on fixed-rate assets following the repositioning of the investment portfolio in 4Q10, as well as fewer days in the quarter, partially offset by lower funding costs. NIM was 1.66%, up 1 bps from the prior quarter (excluding discount accretion). Asset Servicing benefited from higher average equity valuations and new business wins, increasing 2.9% sequentially and 22.3% from 1Q10 to $1.1 billion in servicing fees. Asset Management revenue increased 6.8% from 4Q10 to $236 million due to favorable average month-end equity valuations and the impact of the acquisition of the Bank of Ireland’s asset management business in January 2011. Compared to a year ago, investment management fees grew 11.8%. Meanwhile, trading services revenue declined 2.6% sequentially but grew 24.8% y-o-y to $302 million. Specifically, foreign exchange revenue declined 6% compared to 4Q10, primarily due to lower volatility, offset partially by higher volumes. Overall, y-o-y growth in core revenue was driven by the three recent acquisitions, the growth in new business, and improved equity markets. AUC/A grew 5.1% sequentially to $22.6 trillion, while AUM grew 5.5% to $2.1 trillion.

Expenses increased $59 million, or 3.6%, to $1.68 billion in 1Q11. However, the sequential quarter increase primarily reflected seasonality of certain expenses including higher payroll taxes. Meanwhile, other expenses also contributed to expense growth increasing $21 million, or 10.0%, to $231 million, primarily due to the impact of $40 million of insurance recoveries in the prior quarter. Positively, the favorable geographic mix of earnings helped reduce the effective tax rate to 28%, down from 29.5% in the prior quarter.

State Street’s $103.9 billion investment securities portfolio grew $9 billion from the prior quarter. The recent portfolio repositioning has helped de-risk and redeploy some of the securities into more highly-rated securities, resulting in an aggregate net unrealized after-tax loss position of $352 million, but this is a $152 million improvement from a loss position of $504 million in 4Q10. The result was attributable to an improvement in spreads, partially offset by higher rates. DBRS notes that 90% of the securities in the investment portfolio were rated AA-rated or above at March 31, 2011.

Capital levels remain strong and the Company should be able to meet Basel III capital requirements as currently proposed, especially following the recent securities repositioning. All regulatory ratios remain significantly above the “well-capitalized” threshold and the tangible common equity ratio was a strong 7.4%.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments, and Rating Bank Preferred Shares and Equivalent Hybrids, all of which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: William Schwartz
Approver: Roger Lister
Initial Rating Date: 11 November 2005
Most Recent Rating Update: 11 March 2011

For additional information on this rating, please refer to the linking document below.