DBRS Comments on State Street Corporation’s 1Q13 Earnings - Sr. at AA (low)

DBRS, Inc. (DBRS) has today commented on the 1Q13 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 $455 million for the first quarter, down from $468 million in 4Q12, but up from $417 million in 1Q12. On an operating basis, State Street reported net income available to common shareholders of $443 million for the quarter, down from $521 million in 4Q12, but up from $410 million in 1Q12.

Higher equity markets, stronger foreign exchange trading, and solid expense control (excluding seasonality related to equity incentive compensation for retirement-eligible employees and payroll taxes of $118 million) resulted in positive operating leverage of 145 basis points sequentially. For the quarter, State Street won $223 billion in asset servicing mandates and had $5 billion in net inflows in SSgA, the Company’s asset management business. The Company noted that pipelines remain strong and well-diversified.

During the quarter, assets under custody increased 4.4% to $18.6 trillion, while assets under management increased 4.3% to $2.2 trillion. While investors’ risk appetite increased early in the first quarter, management noted that risk appetite moderated towards the end of the quarter, albeit still at a higher level seen in prior years. Unlike the other trust banks, State Street’s deposit balances increased during the quarter, which contributed to the five basis point sequential quarter decline in the net interest margin to 1.31%.

Operating revenue increased modestly during the quarter to $2.47 billion, as broad-based growth in fee revenues offset lower net interest revenue. Core total asset servicing and asset management fees were up slightly sequentially benefitting from higher equity markets, net new business wins, and higher transaction volumes, which more than offset weaker performance fees within asset management. Positively, market-driven revenues increased during the quarter. Specifically, foreign-exchange trading revenue increased 24% to $146 million reflecting higher volumes and volatility. Meanwhile, securities finance revenue increased over 5% to $78 million driven by slightly higher volumes. However, net interest revenues decreased by 3.8% to $577 million, as average earning asset growth was more than offset by margin pressure and two fewer days in the quarter.

Operating expenses increased 5.7% to $1.8 billion during the quarter. However, excluding the aforementioned seasonal compensation expenses incurred in 1Q13, expenses would have declined by 1.2%. DBRS notes that the Company continues to execute well on its Business Operations and Information Technology Transformation program with State Street on track to deliver total incremental pre-tax savings in 2013 of approximately $220 million and a total of $575 million to $675 million by the end of 2015.

The $116.4 billion investment portfolio’s unrealized after-tax mark-to-market gain increased by $119 million to $817 million. Approximately 88% of the portfolio is rated AA or higher and the duration remained stable at a relatively conservative 1.7 years, although this is above the 1.5 years targeted by State Street. The Company noted that it purchased $4.5 billion of securities during the quarter with an average yield of 1.05%.

Following the Federal Reserve’s non-objection to State Street’s capital plan, the Company announced a $2.1 billion share repurchase plan and a $0.02 increase in its dividend to $0.26 per share. DBRS notes that among CCAR participants, State Street’s capital plan returns the most capital to shareholders, yet capital remains strong. The Company estimated its pro forma tier 1 common ratio under the most recent NPRs was 10.6% at quarter-end.

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

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