DBRS Confirms State Street Corporation’s Senior Debt at AA (low); Trend Stable

DBRS, Inc. (DBRS) has today confirmed all ratings of State Street Corporation (State Street or the Company), and its related bank subsidiary, including its Issuer & Senior Debt rating of AA (low). The trend for all ratings is Stable. The rating action follows a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

State Street’s ratings reflect its leading global market positions within custody and investment management, a business model that generates significant recurring fee-based revenues, and a strong, low risk, and highly liquid balance sheet. The ratings also consider the low interest rate environment that is pressuring revenues and the evolving regulatory and compliance burdens facing trust banks that are elevating expenses, both of which are constraining profitability. The Company has recently entered into a written agreement with the Federal Reserve regarding concerns over BSA/AML, as well as receiving a Wells Notice from the SEC.

The Stable trend reflects DBRS’s view that State Street is comfortably placed within its rating category. Given the already high rating level, there is limited upside in the rating. Conversely, sustained negative operating leverage, missteps in managing operational and/or reputational risk, or the inability to consistently win new business could have negative rating implications.

Operating results have been sound, especially considering the low interest rate environment and increasing regulatory burden. Specifically, on an operating basis, State Street reported $2.2 billion of net income available to common shareholders in 2014, a 6% increase. Including securities gains, State Street was able to achieve one basis point of positive operating leverage despite lower net interest revenue. Positively, the Company continues to win new business and the pipelines remain deep and diverse. Overall, State Street won servicing commitments of $1.1 trillion and net new assets to be managed of approximately $28 billion in 2014.

Most recently, 1Q15 results were bolstered by strong foreign exchange trading with operating net income available to common shareholders of $491 million, a 13% year-over-year (YoY) increase. Meanwhile, new 1Q15 servicing mandates totalled $214 billion, but the Company experienced net outflows of $38 billion primarily from seasonal outflows from its S&P 500 ETF. Overall, assets under custody and administration reached $28.5 trillion, while assets under management totalled $2.4 trillion.

Despite recent issues that includes building foreign exchange litigation-related reserves, entering into a written agreement with the Federal Reserve, and receiving a Wells Notice, DBRS views State Street’s overall risk profile as very strong. DBRS does not expect any issues for the Company complying with the written agreement, and potential penalties associated with legacy foreign exchange trading issues, as well as the recent Wells Notice, to be easily absorbable through State Street’s considerable core earnings ability. Managing regulatory and operational risks that have the ability to negatively impact State Street’s reputation remains a key focus of senior management.

At March 31, 2015, the $112 billion investment portfolio was comprised of mostly high quality securities with approximately 91% of the securities rated AA (low) or higher and was in an unrealized gain position. Approximately 55% of these securities were floating rate in nature and the overall portfolio had a duration of 1.9 years, both identical to the prior year. DBRS notes that State Street is already fully compliant with the Liquidity Coverage Ratio. While the Company continues to grow its leveraged loan portfolio, at $2.7 billion, the portfolio only comprises approximately 1% of total assets.

Capital remains strong and DBRS continues to view State Street as well positioned to meet evolving regulatory demands. The binding constraint on State Street is the supplementary leverage ratio (SLR), which was 4.9% of a fully phased-in basis at March 31, 2015. Management continues to be confident that they can fully comply with the ratio when it is fully phased in on January 1, 2018. State Street also initiated 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, which if successful, would bolster the SLR.

Reflective of its lower risk balance sheet, the Company remains a top performer in the Federal Reserve’s Comprehensive Capital Analysis and Review. As such, the Federal Reserve did not object to State Street’s 2015 Capital Plan, which includes the repurchase of up to $1.8 billion of common stock and a 13% increase in the dividend.

State Street Corporation, a diversified financial services corporation headquartered in Boston, Massachusetts, reported $279.5 billion in consolidated assets as of March 31, 2015.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015), and DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015).

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Rating Committee Chair: Roger Lister
Initial Rating Date: 11 November 2005
Most Recent Rating Update: 10 July 2014

For additional information on this rating, please refer to the linking document under Related Research.