January 18, 2013 / 8:12 PM / 5 years ago

TEXT - Fitch comments on State Street

Jan 18 - State Street (STT) reported net income of $470 million in 4Q'12,
which equates to a 9.3% return on equity (ROE), according to Fitch Ratings.
Fitch continues to view STT's operating performance as satisfactory and
consistent with peer institutions but below STT's historical averages.

Fitch notes that STT's revenue grew 4% from the sequential quarter, but the 
revenue picture was somewhat mixed. STT saw decent sequential growth in 
servicing and fee revenue thanks to improved equity markets and some solid new 
business wins. This was partially offset by continued challenging market based 
revenues in areas such as securities finance, as well as flat net interest 
revenue (NIR). Fitch would expect more of the same revenue picture in the first 
part of 2013.

As noted, STT's NIR was essentially unchanged on a sequential basis, but the 
company's net interest margin (NIM) declined to 1.36% in 4Q'12 from 1.44% in 
3Q12. This was due to an inflow of deposits towards the end of 2012 as well as 
the continued run-off of higher yielding securities subsequently being invested 
at lower rates. Given the challenging interest rate environment Fitch would 
expect continued margin compression over the next year.

Given the difficult environment noted above, STT also announced additional 
expense management measures with earnings, which was a workforce reduction of 
approximately 630 positions. These reductions will be phased in over the course 
of 2013. As a result 4Q'12 results included a pre-tax charge of $139 million, 
and STT estimates a $90 million a year savings from this action beginning 
primarily in 2014. Fitch believes that this, in addition to STT's business 
transformation program, should continue to buffer bottom line results while 
market based revenue remains challenging.

STT's total assets under custody and administration (AUCA) continued to grow, in
part through higher markets and in part through new business wins, and now 
amount to $24.37 trillion. Similarly, total assets under management (AUM) 
increased to $2.09 trillion at the end of 4Q'12, primarily due to growth in 
passive equities. 

Given STT's good new business wins for AUCA, including the nicely growing 
mandates for alternative asset servicing, Fitch expects STT's fee revenue to 
continue to modestly grow over the course of the year absent any large market 

STT's capital position remains solid with a Tier 1 common ratio of 17.1% at the 
end of 4Q'12. Fitch does note that due to some balance sheet growth and 
continued dividends and share buybacks, the Tier 1 common ratio did modestly 
decline from 17.8% in the sequential quarter.

Under current Basel III proposals, STT's pro forma Tier 1 common ratio was 10.8%
which Fitch notes compares reasonably well with other institutions. However, STT
estimates that with certain securities run-off that would better optimize its 
risk-weighted assets, the Tier 1 common ratio under Basel III would be 11.9% at 
4Q'12 which is unchanged from the sequential quarter.
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