DBRS: State Street’s 4Q Operating Earnings Relatively Stable; FX Reserve Increased

Summary:
• Operating net income available to common shareholders was relatively stable sequentially at $582 million with relatively broad-based revenue growth offset by higher expenses.
• Numerous one-time charges muted reported earnings including an additional accrual related to certain indirect FX matters, as well as severance, acquisition costs and restructuring charges.
• DBRS rates State Street Corporation Issuer & Senior Debt at AA (low) with a Stable trend.

DBRS, Inc. (DBRS) views State Street Corporation’s (State Street or the Company) 4Q14 results as sound with revenue growth mostly offset by higher expenses. Indeed, market-driven revenues, net interest revenue, and processing and other fees all trended higher sequentially, although core servicing and management fees were down modestly. However, operating expenses increased 4% outpacing revenue growth. Nonetheless, State Street did manage to report one basis point of operating leverage for the year, if securities gains are included. Of note, the Company did complete its Business Operations and Information Technology Transformation program achieving pre-tax savings at the high end of their target range.

Positively, State Street reported its fourth consecutive quarter of higher new asset servicing mandates at $400 billion, although total assets under custody and administration declined modestly during the quarter. Importantly, the pipelines remain deep and diverse. Meanwhile, assets under management increased approximately 1% to $2.4 trillion and included $7 billion of net inflows.

State Street added another $50 million to its legal accrual associated with certain indirect foreign exchange matters. Management noted that the accrual will not address all of the Company’s material legal exposure related to foreign exchange, so more charges are likely forthcoming.

For 2015, State Street is projecting operating fee revenue growth of between 4% and 7%, but net interest revenue would likely be pressured, as would the ability to generate positive operating leverage absent rising rates. Management noted that while the stronger dollar would negatively impact fees, it does have a mostly offsetting positive impact on expenses.

State Street issued another $750 million of preferred shares during the quarter bringing its overall total to approximately $2 billion. The Company mentioned it may issue another $750 million in 2015, as well some long term debt.

The balance sheet remains strong and is supportive of the ratings. State Street is already in compliance with the fully phased in liquidity coverage requirement. Also on a fully phased in basis, the supplementary leverage ratio was approximately 5.2% at the holding company and 4.8% at the bank. While these ratios trended downward during the quarter, the Company remains comfortable fully complying when the metric becomes effective in 2018.

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