DBRS Morningstar Confirms State Street Corporation at AA; Trend Stable

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of State Street Corporation (State Street or the Company), including the Company’s Long-Term Issuer Rating of AA. At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, State Street Bank and Trust Company (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is AA (high), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
State Street’s ratings and Stable trend reflect the Company’s track record of stable, predictable and favorable results, as well as its low risk, strong balance sheet. State Street typically performs well in times of stress, as evidenced by its 9M20 results, and even benefits from a deposit flight to quality, augmenting an already very liquid balance sheet. Consistent with all trust banks, the ratings also consider the operational and reputational risks associated with the important role State Street plays in the global financial markets that are growing increasingly complex. Fee pressures within the Company’s businesses and lower interest rates are also taken into consideration. Furthermore, the unprecedented economic disruption caused by the Coronavirus Disease (COVID-19) pandemic and related extraordinary support measures implemented to mitigate the fallout have been factored into our ratings assessment. We will continue to monitor this developing situation and its impact on State Street’s overall credit profile.

RATING DRIVERS
Given State Street’s very high rating level, a ratings upgrade is unlikely. Conversely, sustained negative operating leverage, missteps in managing operational and/or reputational risk that negatively impacts franchise strength, or the inability to consistently win new business would result in a ratings downgrade.

RATING RATIONALE
We view State Street’s franchise as very strong. State Street is one of the world's leading providers of financial services to institutional investors including investment servicing, investment management and investment research and trading. Overall, we view these businesses as defensible and sustainable, considering their significant barriers to entry and that many of the related activities are critical to the functioning of financial markets, regardless of the business cycle stage.

Despite the challenging operating environment, State Street generated a solid 10.6% return on equity in 9M20, up from 9.5% in the prior year period. Total revenues were up 1% versus 9M19 driven by higher asset servicing fees and higher foreign exchange trading revenue, partially offset by lower net interest revenue. Meanwhile, 9M20 total expenses decreased 3% compared to the year-ago period, reflecting lower compensation and ongoing expense initiatives. Assets under custody and/or administration (AUC/A) grew 11% from a year ago to $36.6 trillion primarily due to higher market values, net new business growth and client flows. Similarly, assets under management (AUM) increased 7% to $3.15 trillion, benefiting from higher market values and net inflows from ETFs, partially offset by institutional net outflows.

We view State Street’s risk profile as very strong, considering that its balance sheet is less risky than most financial institutions, but recognize the significant operational and reputational risks the Company faces given its important role in global financial markets. Credit risk remains very low, as the Company’s loan portfolio represents just 10% of total assets and is still the smallest of the trust banks. While State Street does have a riskier $4.3 billion leveraged loan portfolio, we view the risk as modest, as this portfolio comprises only 1.6% of total assets.

We consider the Company’s funding profile to be very strong, as deposits generated by the asset servicing and corporate trust operations provide a substantial and stable source of funds. In 3Q20, total average deposits were up 20% from a year ago, which we view as a flight to quality given the current environment. On the asset side, State Street had $201 billion of cash and securities, representing 74% of total assets, with 91% of the securities portfolio rated at least AA (low) at September 30, 2020. Consistent since inception, the Company remained a top performer in the Federal Reserve’s 2020 stress testing exercise, reflecting its lower risk balance sheet. At the end of 3Q20, State Street’s CET1 ratio was a solid 12.4%, up 110 basis points from a year ago, primarily due to earnings retention.

State Street Corporation, a diversified financial services corporation headquartered in Boston, Massachusetts, reported $272 billion in consolidated assets as of September 30, 2020.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades for State Street are as follows: Franchise Strength – Very Strong; Earnings Power – Very Strong/Strong; Risk Profile – Very Strong/Strong; Funding & Liquidity – Very Strong; Capitalization – Very Strong/Strong.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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