DBRS: State Street’s 1Q Benefits from Strong FX Trading; FX Reserves Increased Again

Summary:
• Operating net income available to common shareholders of $491 million increased 13% year-over-year (YoY), but was down sequentially reflecting an incremental $137 million of seasonal expenses.
• Foreign exchange trading was a particular bright spot, but the Company added another $150 million to increase legal reserves related to indirect FX matters.
• 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) 1Q15 results as solid. Highlights of the quarter include strong foreign exchange trading results and good momentum within State Street’s core businesses. However, operating revenues were down sequentially and 1Q included an incremental $137 million in expenses related to seasonal deferred incentive compensation expense for retirement-eligible employees and payroll. Moreover, the balance sheet remains a source of strength with robust liquidity and sound capital.

Assets under custody and administration were up modestly during the quarter reflecting continued new business wins and higher markets. Importantly, the pipeline remains deep and diverse. Meanwhile, assets under management were down modestly driven by seasonality within its S&P 500 ETF.

Operating revenues were down 2% despite strong foreign exchange trading result, as a stronger dollar hurt servicing fees, lower earnings from joint ventures and lower revenue associated with tax advantaged investments. Additionally, net interest revenue was down as well reflecting two fewer days in the quarter and 4Q’s one-time accelerated loan prepayment. DBRS notes that a stronger U.S. dollar hurt revenue growth ($97 million decline), but the impact was mostly offset by a benefit to expenses ($77 million), which were higher both QoQ and YoY. Overall, State Street generated approximately 200 basis points of positive operating leverage YoY.

For the third consecutive quarter, State Street added to its legal accrual associated with certain indirect foreign exchange matters, including $150 million this quarter. In aggregate, State Street has added $335 million the past three quarters. Settlement talks remain fluid.

The balance sheet remains strong with robust liquidity, healthy asset quality, and very sound capital. Already fully compliant with the Liquidity Coverage Ratio, State Street’s fully phased-in supplementary leverage ratio was down modestly during the quarter, but management remains confident that they can fully comply with the ratio when it becomes fully effective on January 1, 2018. State Street also noted that it has begun a comprehensive program to reduce excess deposits (estimated at $54 billion), including increasing the rates charged on Euro deposits and expects total deposits to decline in 2015.

Lastly, the Federal Reserve did not object to State Street’s 2015 Capital Plan, which calls for the repurchase of up to $1.8 billion of common stock and a proposed 13% increase in the dividend that the Board will decide on in May.

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

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