DBRS Morningstar Confirms State Street Corporation at AA; Trend Stable

DBRS, Inc. (DBRS Morningstar) confirmed the credit 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 credit ratings of its primary banking subsidiary, State Street Bank and Trust Company (the Bank). The trend for all credit 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 CREDIT RATING CONSIDERATIONS

The credit ratings and Stable trend reflect State Street’s powerful global franchise, with dominant or top-tier positions in highly defensible businesses that generate a considerable amount of stable and recurring fee-based revenues. The Company’s track record of stable, predictable and favorable results, as well as its low risk, strong balance sheet are also taken into consideration.

Consistent with all trust banks, the credit ratings consider the operational and reputational risks associated with the important role State Street plays in the increasingly complex global financial markets. Fee pressures within State Street’s businesses due to the impact of rising interest rates on the Company’s income and securities portfolio valuations are also taken into consideration.

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

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
State Street is the second largest custodian globally. In addition, State Street is the fourth-largest global asset manager and provider of exchange-traded funds (ETFs). 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.

Earnings Combined Building Block (BB) Assessment: Strong/Good
State Street reported a 9.9% return on equity in 9M23, down from 10.9% in the prior year period. Total revenue was essentially flat versus 9M22, with strong growth in net interest revenue offsetting lower fee revenues. Meanwhile, noninterest expenses increased 3% compared to the prior year period primarily due to salary increases and higher headcount. Assets under custody and/or administration (AUC/A) grew 12% from a year ago to $40.0 trillion on higher market levels and net new business. Similarly, assets under management (AUM) increased 13% to $3.7 trillion, benefiting from higher market levels.

Risk Combined Building Block (BB) Assessment: Very Strong/Strong
We view State Street’s risk profile as very strong, considering that its balance sheet is generally 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 12% of total assets and is still the smallest of the trust banks.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong
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. As expected, deposits have continued to decline, reflecting the impact of higher interest rates and migration into higher-yielding alternatives. Meanwhile, the Company had $184 billion of cash and securities at the end of 3Q23, representing nearly two-thirds of total assets, with approximately 96% of the securities portfolio rated at least AA (low).

Capitalization Combined Building Block (BB) Assessment: Strong
State Street has consistently been a top performer in the Federal Reserve’s stress testing exercise, reflecting its lower risk balance sheet. At the end of 3Q23, State Street’s CET1 ratio was 11.0%, well above its internal target and regulatory minimum. The Company has boosted its share buybacks, following the announcement of its decision to end efforts to acquire BBH Investor Services Inc. Over the past year, State Street repurchased approximately 12% of shares outstanding.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/425155/state-street-corporation-intrinsic-assessment-framework.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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 22, 2023): https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (July 4, 2023): https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The primary sources of information used for this credit rating include Morningstar Inc., Company Documents and Federal Reserve data. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
DBRS Morningstar did have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.

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

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

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