Fitch: Equity Market Tailwinds Help Support State Street's 4Q Earnings

Fri Jan 24, 2014 2:25pm EST

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(The following statement was released by the rating agency) CHICAGO, January 24 (Fitch) State Street Corporation’s (STT) fourth quarter 2013 (4Q’13) stated net income of $545 million modestly increased from $531 million in the sequential quarter, but up from $468 million in the year-ago quarter, according to Fitch Ratings. Both favorable comparisons are largely reflective of improved equity markets over the course of the year, which boosted both asset servicing and asset management fees, partially offset by higher costs relative to the sequential quarter. These earnings equated to a 10.9% return on equity (ROE) in 4Q’13, up from a 10.8% ROE in the sequential quarter, and a 9.3% ROE in the year-ago quarter. Fitch continues to view these results as satisfactory from a credit perspective, but below the company’s long-term historical averages. Given the challenging low interest rate environment, the contribution to overall revenue from net interest income (NII) continues to remain on the lower side relative to historical averages. STT has, however, benefited from slower prepayments on its mortgage backed securities (MBS) portfolio, which slowed premium amortization which has helped to modestly support its net interest margin (NIM). As of 4Q’13, the NIM increased 3 basis points from the sequential quarter to 1.30% on an operating basis. Additionally, low foreign exchange (FOREX) volatility, as well as some disintermediation from new electronic FOREX firms has pressured the company’s trading revenue, which is lower relative to both the sequential and year-ago quarters. Offsetting the weakness in market based revenue has been an improvement in fee revenue given higher equity markets and some good new business growth, particularly in STT’s alternative asset servicing area. Fitch would expect continued growth in alternative asset servicing revenue given STT’s good new business wins during the quarter. Fitch believes that STT’s focus on expense control as well as its operations and information technology (ops and IT) transformation program has been good, and created the potential for very significant operating leverage at some point in the future when short-term interest rates rise. Now, however, many of these savings have been offset by higher compliance and regulatory costs over the course of the last year. Fitch continues to expect these elevated environmental costs to persist over the near term. Fitch continues to believe that STT’s capital and liquidity positions remain good. STT’s Tier 1 common (CET1) ratio under Basel I of 15.5% is good, and unchanged from the sequential quarter despite $560 million of share buybacks during the quarter. The pro forma CET1 ratio under Basel III standardized approach was 10.1% at 4Q’13, and under the advanced approach was 11.8% at 4Q’13, both of which Fitch views as solid. Additionally, STT’s Basel III supplementary leverage ratio (SLR) was 5.2% at the holding company which is above the 5.0% proposed minimum and 5.0% at its main bank subsidiary, State Street Bank & Trust Company, which is below the current 6.0% proposed minimum. Contact: Primary Analyst Justin Fuller, CFA Director +1-312-368-2057 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60425 Secondary Analyst Doriana Gamboa Director +1-212-908-0865 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. 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: here. 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.

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