DBRS: State Street’s 3Q Operating Income Down QoQ and YoY; Successfully Reduced Deposits In The Qtr

Summary:
• Operating net income available to common shareholders of $480 million for the quarter, down from $569 million for 2Q15, and down from $581 million for 3Q14.
• Lower sequential operating net income, primarily reflected lower levels of securities finance revenue, servicing fees, and net interest revenue, partially offset by higher levels of processing fees & other income, and higher foreign exchange trading fees.
• 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) 3Q15 results as sound, and reflective of the difficult business environment including lower global equity valuations, and the low interest rate environment. To counter the difficult business environment, the Company announced the next phase of its transformation program to create cost efficiencies and further digitize its client interfaces. When complete, the Company estimates the multi-year plan will result in approximately $500 million in annualized savings. The plan follows on the heels of the recently completed Business Operations and Information Technology transformation program, which resulted in approximately $625 million in savings. Furthermore, and in the near term, State Street plans to reduce its staff levels.

During 3Q15, assets under custody and administration declined by 4.8%, due to lower equity markets. In the quarter, the company had $141 billion in new servicing commitments. Importantly, management once again characterized the pipeline as deep and diverse. Meanwhile, assets under management decreased 7.2%, due to lower equity markets, and in part, to net outflows of $29 billion, mostly related to institutional mandates.

Operating revenues were down 3.1% quarter-over-quarter (QoQ) primarily reflecting lower levels of securities finance revenues, servicing fees, and net interest revenues. Lower securities finance revenue mostly reflected 2Q15 seasonality, while the decline in servicing fees was driven by lower global equity markets. Overall, management anticipates that the operating environment will remain challenging due to a number of factors including the significant decline in global equity valuations. As such, the Company anticipates that operating fee revenue growth for the full year will be lower than previously communicated. Finally, operating expenses were slightly down sequentially, reflecting lower compensation and employee benefits expense.

Positively, the Company was successful in reducing client deposit levels during the quarter. Specifically, deposits declined by $44 billion in 3Q15, and drove an improved capital profile including a fully phased-in holding company supplementary leverage ratio of 5.4% at September 30, 2015, up from 5.1% at June 30, 2015.

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