Morningstar DBRS Confirms State Street Corporation at AA; Trend Stable

DBRS, Inc. (Morningstar DBRS) 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, Morningstar DBRS 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. Additionally, the credit ratings are also underpinned by the Company's relatively low risk balance sheet and very strong funding, liquidity, and capitalization.

State Street typically performs well in times of stress, benefiting from a flight to quality for deposits, which helps further augment an already very liquid balance sheet. Consistent with all trust banks, the credit ratings also consider the operational, technological, and reputational risks given the complexity of operating globally across numerous regulatory jurisdictions.

CREDIT RATING DRIVERS
Given State Street Corporation'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 result in a credit rating downgrade.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
State Street is the second largest custodian globally, serving more than 100 geographic markets, providing substantial geographic diversity. 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
The Company's earnings power is strong, supported by its globally diverse, fee-dominated business model that generates solid, recurring earnings. Specifically, fee revenues typically represent about 80% of total revenues, with servicing fees representing the largest component (39% of total revenues during 9M2024). In Q3 2024, State Street reported net income of $730 million (up 73% YoY), a 12.0% return on equity, and a pretax margin of 28.4%. Total revenue was up 21% YoY, driven by both higher fee revenue and net interest income. Total operating expenses were up 6% YoY, driven by business investments and revenue related costs that were partially offset by productivity savings. At September 30, 2024, State Street's AUC/A of $46.8 trillion reflected an increase of 17% YoY, benefitting from higher quarter-end market levels, net new businesses and client flows. Similarly, AUM of $4.7 trillion was up 29%, driven by higher market levels and record Q3 2024 net inflows.

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 12.4% of total assets and remains the smallest of the trust banks. As of 3Q24, State Street's leveraged loan and commercial real estate portfolios were at 1.1% and 0.8% of total assets, respectively.

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. Moreover, in times of crisis, State Street's balance sheet attracts significant client funds given its strong financial profile, indicative of a "flight to quality". The Company had $216 billion of cash and securities at the end of Q3 2024, representing nearly two-thirds of total assets, with approximately 97% 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 Q3 2024, State Street's CET1 ratio was at 11.6%, well above its internal target and regulatory minimum. Given its capital-light business model, the Company typically returns a high proportion of its earnings to shareholders and anticipates its FY2024 payout ratio to be within the 80-90% range.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/444244.

ENVIRONMENTAL, SOCIAL, AND 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) at https://dbrs.morningstar.com/research/437781.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024) https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

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

The primary sources of information used for this credit rating include Morningstar, Inc. and company documents. Morningstar DBRS 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.

Morningstar DBRS had 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. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.
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