DBRS Comments on State Street Corporation’s 4Q12 Earnings - Sr. at AA (low)

DBRS, Inc. (DBRS) has today commented on the 4Q12 earnings of State Street Corporation (State Street or the Company). DBRS rates the Company’s Issuer & Senior Debt at AA (low) with a Stable trend.

State Street reported net income available to common shareholders of $468 million for the fourth quarter, down from $654 million in 3Q12, but up from $371 million in 4Q11. On an operating basis, State Street reported net income available to common shareholders of $521 million for the quarter, up from $473 million in 3Q12 and from $454 million in 4Q11. Highlights of the quarter include positive operating leverage, solid net new business wins, and foreign exchange trading outperformance relative to the other trust banks. In addition to its Business Operations and Information Technology Transformation program (Program) that continues to track well, the Company reported pre-tax acquisition and restructuring costs of $139 million in the fourth quarter primarily reflecting an additional reduction of headcount by approximately 630 positions worldwide.

During the quarter, State Street won an additional $649 billion of new asset servicing mandates including 94 new alternative servicing mandates. Meanwhile, State Street Global Advisors added $24 billion of net inflows excluding net cash outflows in the cash collateral pools. Moreover, management indicated that the business pipelines remain strong and broad-based. Overall, State Street’s assets under custody and administration increased 4.0% to $24.4 trillion, while assets under management increased 1.2% to $2.1 trillion. Equity markets were higher, but clients remain risk adverse. Positively, early indications in January point to increased risk appetite among clients.

On an operating basis, revenues increased 3.2% sequentially to $2.46 billion, as higher fee income more than offset a modest decline in net interest revenue. Benefitting from the Goldman Sachs Administration Services acquisition, higher equity markets and net new business wins, servicing fees increased 4.5% to $1.2 billion. Positively, the Company reported growth in foreign exchange trading, distinguishing itself from its trust bank peers. Nonetheless, securities finance revenues declined by 18.7% to $74 million reflecting tighter spreads and lower volumes. Meanwhile, net interest revenues (FTE) declined by 1.8% to $600 million reflecting net interest margin pressure, which declined 8 basis points during the quarter to 1.36%.

Operating expenses increased 3.0% to $1.7 billion. DBRS notes that compensation and employee benefits were basically stable and represented just 37.2% of 4Q12 adjusted revenues. For the year, employee compensation to adjusted revenues was 39.4%, which was very close to the Company’s stated goal for the year of 39.2%. State Street noted that this ratio should be even lower next year, as the Company continues to execute on its Program initiative ($220 million of pre-tax savings targeted in 2013).

The $120 billion securities portfolio is composed of mostly high quality securities that were in an unrealized gain position of $698 million at year-end. 89% of the portfolio is comprised of either AA of AAA securities and the duration is relatively short at 1.7 years. The Company purchased $11.0 billion of securities during the quarter at an average yield of 1.75%.

During the quarter, State Street repurchased $480 million of common stock and management noted that the Company’s most recent capital plan submitted to the Federal Reserve prioritized the return of capital to shareholders through share repurchases and dividends. Nonetheless, DBRS views State Street’s capital position as strong with a TCE ratio of 7.2% and an estimated tier 1 common ratio under Basel III of 10.8%.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]