Fitch: State Street Sees Fee Improvements but Mixed Market Based Revenues in
NEW YORK -- January 18, 2013
State Street (STT) reported net income of $470 million in 4Q'12, which equates
to a 9.3% return on equity (ROE), according to Fitch Ratings. Fitch continues
to view STT's operating performance as satisfactory and consistent with peer
institutions but below STT's historical averages.
Fitch notes that STT's revenue grew 4% from the sequential quarter, but the
revenue picture was somewhat mixed. STT saw decent sequential growth in
servicing and fee revenue thanks to improved equity markets and some solid new
business wins. This was partially offset by continued challenging market based
revenues in areas such as securities finance, as well as flat net interest
revenue (NIR). Fitch would expect more of the same revenue picture in the
first part of 2013.
As noted, STT's NIR was essentially unchanged on a sequential basis, but the
company's net interest margin (NIM) declined to 1.36% in 4Q'12 from 1.44% in
3Q12. This was due to an inflow of deposits towards the end of 2012 as well as
the continued run-off of higher yielding securities subsequently being
invested at lower rates. Given the challenging interest rate environment Fitch
would expect continued margin compression over the next year.
Given the difficult environment noted above, STT also announced additional
expense management measures with earnings, which was a workforce reduction of
approximately 630 positions. These reductions will be phased in over the
course of 2013. As a result 4Q'12 results included a pre-tax charge of $139
million, and STT estimates a $90 million a year savings from this action
beginning primarily in 2014. Fitch believes that this, in addition to STT's
business transformation program, should continue to buffer bottom line results
while market based revenue remains challenging.
STT's total assets under custody and administration (AUCA) continued to grow,
in part through higher markets and in part through new business wins, and now
amount to $24.37 trillion. Similarly, total assets under management (AUM)
increased to $2.09 trillion at the end of 4Q'12, primarily due to growth in
Given STT's good new business wins for AUCA, including the nicely growing
mandates for alternative asset servicing, Fitch expects STT's fee revenue to
continue to modestly grow over the course of the year absent any large market
STT's capital position remains solid with a Tier 1 common ratio of 17.1% at
the end of 4Q'12. Fitch does note that due to some balance sheet growth and
continued dividends and share buybacks, the Tier 1 common ratio did modestly
decline from 17.8% in the sequential quarter.
Under current Basel III proposals, STT's pro forma Tier 1 common ratio was
10.8% which Fitch notes compares reasonably well with other institutions.
However, STT estimates that with certain securities run-off that would better
optimize its risk-weighted assets, the Tier 1 common ratio under Basel III
would be 11.9% at 4Q'12 which is unchanged from the sequential quarter.
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Joseph Scott, +1-212-908-0624
One State Street Plaza
New York, NY 10003
Justin Fuller, CFA, +1-312-368-2057
Brian Bertsch, New York, +1-212-908-0549
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