Fitch: Low Interest Rates Continue to Pressure State Street's Core Earnings
NEW YORK -- October 16, 2012
State Street (STT) reported net income of $674 million in the third quarter of
2012 (3Q'12), up from $490 million in the sequential quarter, and up from $555
million in the year-ago quarter. Fitch would note, however, that STT's 3Q'12
results benefited from a $362 million claims settlement related to the Lehman
Brothers bankruptcy. Excluding this, STT's core earnings were modestly down to
$473 million from the sequential quarter as Fitch notes that topline growth
remains challenging partially offset by continued expense management.
STT's 3Q'12 overall revenue was down 3% from both the sequential and year-ago
quarters as the low interest rate environment continues to constrain net
interest revenue, as well as some continued weakness in securities finance and
foreign exchange trading revenue. These declines were very modestly offset by
higher servicing and asset management fees, which were up 1% and 2% from the
sequential quarter. Fitch notes that this improvement was due to a mix of
higher markets as well as some new business wins on the quarter.
Fitch notes that the company's net interest margin (NIM) declined to 1.44% at
3Q'12, down from 1.54% at 2Q'12. Fitch had expected this decline given the
currently challenging interest rate environment, and now with the next steps
of quantitative easing, Fitch would expect the NIM to continue to contract
over a near-to-intermediate term time horizon.
Fitch would note that STT also realized some continued compensation and
benefits savings, which declined 3% from the sequential quarter and 5% from
the year ago quarter. Fitch notes that this buffered the decline in core
Given STT's strong position as a global asset servicer, total assets under
custody and administration (AUCA) continued to grow, in part through higher
markets, and now amount to $23.4 trillion. Similarly, total assets under
management (AUM) increased to $2.06 trillion, up from $1.9 trillion, which
includes $78 billion of net new assets. Given STT's positioning, Fitch expects
both AUCA and AUM to increase over time, but at uneven rates given the still
challenging market and economic environment.
STT's capital position remains solid. The company's Tier 1 common ratio was
17.8% at 3Q'12, essentially unchanged from the sequential quarter, and up from
16.8% at year-end 2011. The Tier 1 common ratio was unchanged, as current
earnings were essentially returned to shareholders via current dividends and
$480 million of buybacks during the quarter.
Under Basel 3 proposals including the U.S. NPR, and specifically the
application of the Simplified Supervisory Formula Approach (SSFA), STT's Tier
1 common ratio improved to 11.3% in 3Q'12 from 9.8% in 2Q'12. However, STT
estimates that with certain securities run-off, the Tier 1 common ratio under
Basel 3 would be 11.9%, down from 12.7% in 2Q'12.
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One State Street Plaza
New York, NY 10004
Justin Fuller, CFA
Brian Bertsch, +1-212-908-0549 (New York)
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