DBRS: State Street Delivers Solid New Business Momentum in 4Q13; Pos. Op. Leverage for FY13

Summary:

• Positive operating leverage of 171 bps in 2013.
• State Street well positioned for 2014 with solid new business wins and improving expense control discipline.
• DBRS rates State Street Corporation Issuer & Senior Debt at AA (low) with a Stable trend.

DBRS, Inc. (DBRS) considers State Street Corporation’s (State Street or the Company) 4Q13 results as solid even with litigation charges and weaker trading service revenues. Indeed, strong new business, higher equity market valuations, and improving expense discipline resulted in 171 bps of positive operating leverage in 2013. The ratings remain supported by strong capital, ample liquidity, and high quality assets.

Operating net income available to shareholders declined 4.3% sequentially to $514 million primarily reflecting weaker trading services revenues particularly in foreign-exchange trading and higher expenses. Net interest revenue increased sequentially, although the improvement was primarily from a one-time recovery of a previously impaired municipal security. Management noted that until short-term rates increase, net interest revenue will likely remain under pressure. Overall, State Street reported negative operating leverage sequentially, as expense growth outpaced revenue growth.

During the quarter, the Company won new asset servicing mandates of $392 billion, while attracting $5 billion of net new assets under management (AUM). Management noted that the pipeline remains strong and well diversified. Overall, State Street’s assets under custody (AUC) reached a record $20.4 trillion, while AUM was also a record at $2.3 trillion.

Savings from State Street’s Business Operations and Information Technology Transformation program have been vital to improving the Company’s pre-tax profit margin despite higher regulatory and compliance costs. Given the Company’s successful track record to date on execution, DBRS believes the 2014 target of an additional $130 million of incremental savings is achievable.

The balance sheet remains comprised of high quality assets. The Company has started adding leveraged loans, but the total amount remains immaterial to the overall balance sheet. DBRS notes that regulatory capital metrics remained relatively stable, and that the Company remains well positioned to meet evolving regulatory requirements.

DBRS rates State Street Corporation Issuer & Senior Debt at AA (low) with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]