Jan 18 - Standard & Poor's Ratings Services today said its ratings on State
Street Corp. (STT; A+/Negative/A-1) are not affected by the company's
relatively good fourth-quarter results. Earnings reflected higher fee revenue,
partly offset by lower net interest income compared with the third quarter.
Positively, STT continues to exhibit good new business growth in its core asset
servicing business, which continues to underpin our assessment of its very
strong business profile.
STT reported net income available to shareholders of $468 million, including a
sizable pretax charge of $139 million, mainly related to a planned workforce
reduction. Excluding extraordinary items, net operating income was $521
million, up from $473 million in the third quarter. We estimate that the
adjusted pretax operating margin in the quarter was solid at approximately
30%, up from about 29% in the third quarter.
Higher servicing and investment management fees aided a 3% increase in total
operating revenue relative to the third quarter. This about matched the rise
in operating expenses, underscoring STT's focus on expense controls. The 4.5%
increase in servicing fees was partly because of additional revenue from
Goldman Sach's hedge fund administration business (GSAS), which STT acquired
in mid-October. However, even excluding the acquisition, servicing fees rose
in the quarter, reflecting net new business and higher global equity market
valuations. In contrast to the trend of declining foreign exchange revenues
that STT's peers reported, the company's foreign exchange business posted an
increase in revenue in the quarter, which its broad product offerings partly
aided. Net interest revenue decreased slightly as lower asset yields offset
further growth in the company's securities portfolio. The net interest margin
(NIM) declined 8 basis points during the quarter to 1.36%, and we expect the
NIM to narrow further in the coming quarters.
As we expected, STT's capital ratios declined during the quarter as a result
of common stock repurchases and the all-cash GSAS acquisition. STT estimated
that its pro forma Basel III Tier 1 common ratio was 10.8% at the end of the
fourth quarter, down from 11.3% at the end of the third quarter. STT bought
back $480 million of its common stock in the fourth quarter, and we expect it
will complete its authorization by repurchasing about $360 million of stock in
the first quarter of 2013. We view this buyback program as large, and we
consider the company's priority of returning capital to shareholders as a
negative factor from a credit perspective. However, our rating reflects our
assumption that the company will repurchase shares at a measured quarterly
pace and that its total payout will not exceed 80% of net income in 2013,
which will help the company to increase its capital ratios over time.
The negative outlook on STT reflects our negative outlook on the U.S.
sovereign rating because we incorporate one notch of uplift into our ratings
on STT based on our expectation for potential extraordinary U.S. government
support. Otherwise, we view STT's fundamental trends as stable. We expect that
STT's overall financial performance will remain satisfactory, measured by a
pretax operating margin of about mid-20%, although earnings performance should
remain subdued because of persistent low interest rates.