State Street Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods unless stated otherwise. State Street provides investment servicing and investment management services to institutional investors. At quarter-end, it reported $40.02 trillion in assets under custody and/or administration (AUC/A) and $3.69 trillion in assets under management (AUM).
Financial results and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total fee revenue | $2.361bn | $2.299bn | $7.115bn | $7.242bn |
| Net interest income (NII) | $624m | $660m | $2.081bn | $1.753bn |
| Total revenue | $2.691bn | $2.959bn | $8.902bn | $8.993bn |
| Provision for credit losses | $0 | $0 | $26m | $10m |
| Total expenses | $2.180bn | $2.110bn | $6.761bn | $6.545bn |
| Net income | $422m | $690m | $1.734bn | $2.041bn |
| Diluted EPS | $1.25 | $1.80 | $4.97 | $5.28 |
| Pre-tax margin | 19.0% | 28.7% | 23.8% | 27.1% |
- Key Q3 driver: Revenue included a $294m pre-tax loss on the sale of available-for-sale securities as part of an investment portfolio repositioning. Management said the repositioning is expected to benefit future NII; the loss reduced Q3 EPS by approximately $0.68.
- Cash flow: For the first nine months, operating activities used $3.492bn, investing activities provided $26.566bn and financing activities used $23.035bn. Cash and due from banks ended at $4.009bn. Changes in collateral deposits and other balance-sheet movements materially affected operating cash flow.
- Balance sheet at September 30: Assets were $284.415bn, deposits $213.001bn, long-term debt $18.564bn and shareholders’ equity $23.621bn. At December 31, 2022, these were $301.450bn, $235.464bn, $14.996bn and $25.191bn, respectively.
- Capital and liquidity: Standardized CET1 was 11.0%, down from 13.6% at year-end 2022; the Tier 1 leverage ratio was 5.8%, versus 6.0%. The SLR was 6.3%. Average Q3 LCR was 109% at the Parent Company and approximately 120% at State Street Bank; both entities’ NSFRs exceeded the 100% minimum.
- Shareholder returns and funding: Q3 common dividends were $0.69 per share and repurchases totaled approximately $1.0bn; total Q3 capital returned was approximately $1.2bn. The company issued $1.2bn of fixed-rate and $300m of floating-rate senior notes due 2026 in August.
Changes versus prior periods
- Q3 total revenue fell 9%, net income fell 39% and diluted EPS fell 31%, primarily reflecting the securities-sale loss and lower NII. Fee revenue increased 3%, partly offsetting those impacts.
- Q3 NII declined 5% as lower average deposit balances and a shift toward interest-bearing deposits outweighed higher rates. Nine-month NII rose 19%, principally because of higher rates.
- Q3 expenses increased 3%, with higher salaries and continued business investment partly offset by productivity savings and no repeat of 2022 acquisition and restructuring costs.
- AUC/A increased 12% and AUM increased 12.9% year over year, mainly reflecting higher market levels; AUC/A also benefited from net new business. Q3 AUC/A onboardings were approximately $247bn.
Outlook, risks and unusual items
- Management expected its CET1 ratio to remain within a 10–11% target range and the Tier 1 leverage ratio to move into its 5.25–5.75% target range in Q4 2023. These are expectations, not guarantees.
- The company’s September 30 baseline rate forecast assumed rates had reached peak levels and cuts would begin around mid-2024. Its modeled parallel +100-basis-point rate shock implied a $169m NII benefit over 12 months overall, with USD exposure of negative $113m partly offset by a $282m benefit in other currencies; actual results depend on deposits, rate paths and other assumptions.
- Approximately $2.26tn of servicing assets remained to be installed. Management expected about 15% to be installed in the rest of 2023, 75% in 2024 and 10% in 2025; timing and resulting revenue are subject to change. A large client’s ETF-provider transition is expected to affect fee revenue and income trends most notably from Q3 2023 through 2025.
- The FDIC’s proposed special assessment related to the SVB and Signature Bank failures was estimated to cost State Street Bank approximately $360m pre-tax. The amount and timing remained subject to the final rule and possible adjustments.
- Portfolio interest-rate exposure remains material: HTM securities had a $7.835bn net unrealized loss at September 30, and management attributed investment-securities unrealized losses primarily to interest-rate changes rather than material deterioration in credit characteristics. Deposits, deposit pricing, rate sensitivity and credit quality—including commercial real estate—remain important risks.
- Other disclosed exposures include indemnified securities lending, unfunded credit commitments, potential credit-rating-triggered collateral calls and legal or regulatory matters. Legal loss-contingency accruals were approximately $17m; estimated reasonably possible losses beyond accruals were up to approximately $70m for matters with estimable ranges, while some matters could not be estimated. The company also cited cyber, operational, geopolitical, regulatory and market risks.
Important facts for investors to verify
- Whether the portfolio repositioning produces the expected improvement in NII, and how NII responds to deposit levels, deposit costs and interest-rate changes.
- Actual timing and revenue contribution from the $2.26tn servicing installation pipeline, alongside the large client ETF transition and associated expense changes.
- Capital and liquidity levels, including the impact of ongoing repurchases, risk-weighted assets and regulatory changes.
- The final FDIC assessment versus the estimated $360m, and developments in legal, tax and regulatory matters.
- Credit quality trends, especially commercial real estate and leveraged-loan reserves, and the assumptions used in allowance estimates.