Fitch: Satisfactory Results For State Street, But Below Long-Term Averages

  Fitch: Satisfactory Results For State Street, But Below Long-Term Averages  Business Wire  CHICAGO -- April 25, 2014  State Street Corporation's (STT) first quarter 2014 (1Q'14) earnings were reflective of the continued protracted low short-term interest rate environment, which continues to pressure the company's return on equity (ROE), according to Fitch Ratings. STT's ROE for 1Q'14 was 7.2% on a stated basis, or 8.8% on an operating basis (this measure excludes some one-time charges), which is a decline from the sequential quarter on either measure and relatively flat result from the year-ago quarter. While Fitch views this return as satisfactory from a credit perspective, it remains below the company's long-term averages and Fitch's estimate of STT's long-term cost of equity.  Overall revenue was essentially flat from the sequential quarter, and up very modestly from the year-ago quarter as growth in fee revenue continued to be offset by declines in net interest revenue (NIR). Both asset servicing and asset management fees were flat relative to the sequential quarter, but showed strong growth relative to the year-ago quarter thanks in part to higher stock markets over the course of 2013. Fitch would expect some new business wins to help support STT's fee revenue over the course of the year, but without the tailwinds of rapidly rising markets (as was the case in 2013) Fitch expects overall fee revenue growth to be much more modest in 2014.  STT's market based revenue, which includes securities finance and foreign exchange (fx) trading was up nearly 5% from the sequential quarter, but down relative to the year-ago quarter. This continues to be a challenging area for STT--and other trust banks--and Fitch would expect it to remain so without a significant increase in FX volatility.  STT's NIR continues to decline amid low short-term interest rates and the company's somewhat short duration of its securities portfolio. The company's net interest margin (NIM) declined to 1.24% in 1Q'14, down from 1.30% in the sequential quarter, and 1.31% in the year-ago quarter. As long as short-term interest rates remain at generation lows, Fitch would expect some continue margin compression as asset yields modestly reprice down and funding costs are at or near absolute lows.  That said, Fitch continues to note that STT--as well as many other financial institutions--is very sensitive to higher short-term interest rates. Should short-term rates increase at some point, Fitch would expect meaningful earnings expansion for STT. Until then, however, significant improvement in STT's ROE is likely to be challenging.  Given the revenue challenges noted above, STT has been carefully managing its expense base and has been engaging in cost savings programs. Nevertheless, expenses still grew faster than revenue relative to both the sequential and year-ago quarters due in large part to higher compensation expenses. Fitch would expect STT to continue to manage its expense base as best as possible over the balance of the year.  Fitch believes that STT's capital and liquidity positions remains good. STT's Tier 1 common (CET1) ratio under Basel III transitionally phased-in was 11.1% under the standardized approach and 13.2% under the advanced approach. This included the phase in of the deduction of other intangible assets, which will be deducted by 20% per year until fully phased in at Jan. 1, 2018.  STT's supplementary leverage ratio (SLR) of 6.4% at the holding company and 6% at the bank level, were in compliance with minimum requirements. However, since they were also impacted by the other intangible asset item noted above, Fitch would expect continued enhancements of these ratios until they are fully phased in.  Additional information is available at www.fitchratings.com  ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.  Contact:  Fitch Ratings, Inc. Primary Analyst Justin Fuller, CFA, +1-312-368-2057 Senior Director 70 W Madison Street Chicago, IL 60602 or Secondary Analyst Doriana Gamboa, +1-212-908-0865 Director or Media Relations, New York Brian Bertsch, +1-212-908-0549 brian.bertsch@fitchratings.com  
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