Fitch: More of the Same in State Street's 2Q'14 Earnings

Tue Jul 22, 2014 10:36am EDT

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(The following statement was released by the rating agency) CHICAGO, July 22 (Fitch) State Street Corporation's (STT) second quarter 2014 (2Q'14) earnings were more of the same, according to the review by Fitch Ratings, as growth in core asset servicing and asset management revenue was offset by continued expense growth and weakness in market-based revenue amid the protracted low interest rates and low volatility. Overall, STT's return on equity (ROE) in 2Q'14 was 11.9%, which was up from the 7.3% ROE in the sequential quarter and 11.3% in the year-ago quarter. While Fitch views STT's earnings as satisfactory from a credit perspective and also views the moderate improvement positively, it also notes that STT's results remain below the company's long-term averages. Fitch believes this level of earnings performance is likely to persist until either short-term interest rates increase (whenever that may be) or foreign exchange volatility increases. STT's core asset servicing and management franchise performed well during the quarter as asset servicing fees increased 4.0% from the sequential quarter and 7.2% from the year-ago quarter. Similarly, asset management also performed well with management fees up 2.7% from the sequential quarter and a solid 8.3% from the year-ago quarter. These improvements reflected $250 billion of new assets to be serviced and $18 billion of new assets to be managed as well as higher markets particularly relative to the year-ago comparisons. As previously noted, growth in market-based revenue for STT - as well as the rest of the industry - continued to be constrained. During the quarter, securities finance revenue seasonally expanded while foreign exchange (FX) revenue continued to decline. FX revenue declined amid continued low global FX volatility despite improved volumes. Net Interest Revenue (NIR) modestly expanded relative to the sequential quarter largely due to growth in the balance sheet amid strong deposit inflows, but declined relative to the year-ago quarter. The company's net interest margin (NIM) also declined to 1.12% in 2Q'14 reflective of continued pressure on investment yields. That said, Fitch continues to expect STT to be very sensitive to higher short-term interest rates whenever they eventually rise. Expense management remains a key focus for STT, as management continues to optimize its cost base amid the challenging interest rate environment and higher regulatory costs. Expenses benefited relative to the sequential quarter on lower deferred compensation costs, but rose faster than revenue relative to the year-ago quarter. Despite management's continued good execution on its Business Operations and Technology Transformation program, higher regulatory and compliance costs continue to offset some of the savings the program has achieved. As a result, STT now expects it will be more challenging to achieve its goal of positive annual operating leverage in 2014, without a pick-up in the company's market-based revenue. Fitch continues to consider STT's liquidity position to be sound. The company's capital ratios are good as well, particularly considering the risk profile of its balance sheet. STT's estimated Common Equity Tier 1 (CET1) ratio under the Basel III transitionally phased-in standardized approach was good at 11.3%. Additionally, STT's supplementary leverage ratio (SLR) was 6.1% at the holding company and 5.8% at the main bank subsidiary, State Street Bank & Trust Company, both of which are currently in compliance with regulatory proposals. Contact: Primary Analyst Justin Fuller, CFA Senior Director +1-312-368-2057 Fitch Ratings, Inc 79 W Madison St. Chicago, 60602 Secondary Analyst Chris Wolfe Managing Director +1-212-908-0771 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: Additional information is available at '' 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.