Fitch: Satisfactory Results For State Street, But Below Long-Term Averages
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
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
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Fitch Ratings, Inc.
Justin Fuller, CFA, +1-312-368-2057
70 W Madison Street
Chicago, IL 60602
Doriana Gamboa, +1-212-908-0865
Media Relations, New York
Brian Bertsch, +1-212-908-0549
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