TEXT - Fitch affirms State Street Corp ratings
Dec 6 - Fitch Ratings has affirmed the long-term Issuer Default ratings of State Street Corporation (STT) and its primary subsidiary State Street Bank and Trust Company at 'A+/F1+'. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release. Today's rating action is reflective of STT's strong franchise in global asset servicing and investment management, low risk balance sheet, ample liquidity, and strong capital position. Offsetting these positives are continued earnings pressure, some regulatory uncertainty, and operational risk inherent to STT's business. RATING ACTION RATIONALE STT's Viability Rating (VR) of 'a+' is supported by a low-risk balance sheet and strong capital position. STT's investment portfolio quality is good with issues rated 'AAA' or 'AA' comprising approximately 88% of total holdings as of Sept. 30, 2012. Similarly, STT's loan credit quality is sound. Fitch further notes that the balance sheet also sports ample liquidity as STT's core businesses provide stable sources of funding. Fitch continues to note that STT's capital levels continue to be above the company's historical range with the company's Tier 1 common ratio under Basel 1 rules at a solid 17.8% as of Sept. 30, 2012. STT estimates that under current Basel 3 proposals, STT's Tier 1 common ratio would have been 11.3%, which is well above STT's regulatory minimums and any likely buffer that will be applied to institutions such as STT that are deemed to be systemically important financial institutions. While the factors noted above support STT's strong credit profile, the company's earnings growth continues to be challenging which Fitch notes serves as a constraint to ratings. Volatile markets and the low interest rate environment continue to be strong headwinds for meaningful revenue growth. STT's fee revenue has modestly declined during the year as strength in asset servicing and management has been offset by weakness in foreign exchange trading and securities lending. Additionally, the low interest rate environment continues to pressure the company's net interest margin (NIM), which as of Sept. 30, 2012 declined to 1.44%. Fitch expects continued NIM compression over a near-to-intermediate term time horizon. To help support the company's earnings amid the challenging environment noted above, management has engaged in a business transformation program which includes some explicit cost savings, process improvements, and significant information technology (IT) enhancements and initiatives. Fitch notes that this has helped buffer STT's bottom line results and that the IT investments have improved the company's risk management functions from the perspective of data collection and security as well as analyzing and assessing enterprise-wide risks. RATING DRIVERS & SENSITIVITIES - VR, IDRs, & SENIOR DEBT The Rating Outlook is Stable, but Fitch believes there is over time the potential for upside to STT's ratings or Rating Outlook. This would likely be predicated on sustainably improved earnings and further establishing a track record of favorable risk management. Fitch does believe that STT's risk management processes, procedures, and infrastructure have been significantly enhanced in the wake of its past risk management issues during the financial crisis. However, given their relatively new implementation, some are still untested in various market environments. Fitch views the biggest downside risks to STT's business and ratings could result from a technological or operational loss particular to STT, resulting in reputational damage that causes clients to flee the firm. While these types of risks are inherently difficult to predict and quantify, and large occurrence would likely prompt Fitch to review ratings to determine if a negative was appropriate. Other risks to STT's business and ratings include litigation risks, the potential for significant losses in foreign exchange trading, or potential contagion impacts from European market and economic issues. In terms of the latter, management has taken steps to measure aggregate exposure levels, and Fitch believes the overall level is manageable. Most of the exposure is in the stronger Eurozone countries, with risk to peripheral countries relatively low. RATING DRIVERS & SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR STT's current 'A+' long-term IDR is equalized with its 'a+' VR, which remains above its support rating floor. STT's '1' Support Rating and 'A' Support Rating Floor factor in government support in the event of need for STT and other U.S. G-SIFIs. While Fitch believes the broad policy goal is to no longer provide full support to systemically important banks, this is progressing at an uneven pace globally. Fitch could reassess its support ratings for U.S. G-SIFIs if global market conditions normalize and resolution regimes become more harmonized across international jurisdictions. At STT's current VR, the firm's long-term IDR would not be affected by a change in support rating floor. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by STT and by various issuing vehicles are all notched down from STT's or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective nonperformance and relative loss severity risk profiles. Their ratings are primarily sensitive to any change in the VRs of STT or its bank subsidiaries. HOLDING COMPANY RATING DRIVERS AND SENSITIVITIES STT's IDR and VR are equalized with those of its operating companies and banks, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. SUBSIDIARY AND AFFILIATED COMPANY RATING DRIVERS AND SENSITIVITIES The IDRs and VRs of STT's bank subsidiary benefit from the cross-guarantee mechanism in the U.S. under FIRREA and therefore IDRs and VRs are equalized across the group. State Street, based in Boston, MA, is the world's largest institutional investment manager and the third largest global custodian. Fitch has affirmed the following ratings: State Street Corporation --Long-term Issuer Default Rating (IDR) at 'A+'; --Short-term IDR at 'F1+'; --Viability rating at 'a+'; --Support at '1'; --Support Rating Floor at 'A'; --Commercial paper at 'F1+'; --Junior subordinated debt at 'BBB'; --Preferred stock at 'BBB-' --Long-term senior debt at 'A+'. State Street Bank and Trust Company --Long-term IDR at 'A+'; --Short-term IDR at 'F1+'; --Viability rating at 'a+'; --Support at '1'; --Support Rating Floor at 'A'; --Long-term deposits at 'AA-'; --Short-term deposits at 'F1+'; --Long-term subordinated at 'A'. State Street Capital I State Street Capital IV --Trust preferred securities at 'BBB'. The Rating Outlook is Stable.