State Street Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; results are compared with Q1 2019 unless otherwise noted. State Street provides custody, servicing and investment management services. At quarter-end, it reported $31.86 trillion in assets under custody and/or administration (AUC/A) and $2.69 trillion in assets under management (AUM).
Financial results and key metrics
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $3.065 billion | $2.932 billion; up 5% |
| Fee revenue | $2.399 billion | $2.260 billion; up 6% |
| Net interest income (NII) | $664 million | $673 million; down 1% |
| Provision for credit losses | $36 million | $4 million |
| Total expenses | $2.255 billion | $2.293 billion; down 2% |
| Net income | $634 million | $508 million; up 25% |
| Diluted earnings per share | $1.62 | $1.18; up 37% |
| Pre-tax margin | 25.3% | 21.7% |
| Return on average common equity | 10.9% | 8.7% |
- Revenue mix: Foreign-exchange trading services rose 64% to $459 million amid heightened volatility and trading volumes. Servicing fees increased 3% to $1.287 billion and management fees rose 7% to $449 million. Securities finance revenue fell 22% to $92 million; software and processing fees fell 41% to $112 million.
- Margins and expenses: Higher revenue and lower expenses lifted pre-tax margin. Expense reductions reflected resource discipline and process improvements, partly offset by technology investment and higher transaction-processing costs.
- Cash flows: Operating cash flow was $4.039 billion, investing cash flow was negative $112.773 billion and financing cash flow was positive $110.364 billion. The large investing and financing movements principally reflect client deposit flows and MMLF-related activity. Cash and due from banks ended at $4.932 billion, up from $3.302 billion at year-end.
- Balance sheet and funding: Total assets were $362.527 billion, versus $245.610 billion at December 31, 2019; deposits were $257.104 billion, versus $181.872 billion. The increase was substantially associated with market disruption, client deposits and the Federal Reserve’s Money Market Mutual Fund Liquidity Facility (MMLF). Long-term debt was $15.538 billion, up from $12.509 billion. Total shareholders’ equity was $23.861 billion, down from $24.431 billion.
- Credit and loans: Loans were $32.379 billion, up from $26.309 billion at year-end, including $8.685 billion of overdrafts versus $3.256 billion. The $36 million credit-loss provision reflected CECL estimates incorporating the COVID-19-related economic outlook. The allowance for credit losses was $124 million at quarter-end.
- Liquidity and capital: Parent-company daily average liquidity coverage ratio (LCR) was 109% for Q1. The standardized-approach CET1 ratio was 10.7%, down from 11.7% at year-end; the Tier 1 leverage ratio was 6.1%, down from 6.9%, and the supplementary leverage ratio was 5.4%. Management said standardized-approach capital ratios were binding; it also estimated regulatory relief effective after quarter-end would raise the pro forma SLR.
Material changes and notable items
- State Street purchased approximately $27 billion of securities through the MMLF during Q1, with purchases matched by Federal Reserve borrowings and the assets pledged as collateral. The facility was non-recourse to State Street for the purchased assets’ credit risk. The filing reports $26.8 billion of related HTM securities and $25.7 billion of related short-term borrowings at March 31.
- Accumulated AUM fell to $2.689 trillion from $3.116 trillion at December 31, 2019, primarily due to $436 billion of market depreciation and $30 billion of foreign-exchange impact, partly offset by $39 billion of net inflows. AUC/A was $31.864 trillion, down 2% year over year; AUM was down 4% year over year.
- State Street adopted CECL on January 1, 2020; adoption reduced opening retained earnings by $3 million. Q1’s credit-loss provision is not directly comparable with the prior-year incurred-loss measure.
- The company redeemed its $500 million Series C preferred stock in March, recording a $9 million charge, approximately $0.03 per share. It issued $2.5 billion of senior notes in January and March.
- State Street repurchased $500 million of common stock in Q1, then temporarily suspended repurchases on March 16 amid the pandemic. It declared common dividends of $0.52 per share, compared with $0.47 a year earlier.
Outlook, commentary and risks
- Management said client deposits had risen sharply late in March. It expected deposits to remain above Q4 2019 and January–February 2020 averages, but did not expect late-March levels to persist absent renewed market disruption; normalization could affect NII.
- Management warned that sustained lower equity markets could reduce servicing and management fee revenue. Lower interest rates pressured NII, while future credit provisions could rise if the economic outlook worsened relative to the assumptions used at quarter-end.
- Approximately 90% of global employees were working from home at quarter-end; management reported business continuity and operational effectiveness. The pandemic and historically high transaction volumes increased operational, technology and cyber risk.
- In April, the company said it was deferring most planned headcount reductions through year-end 2020. It expected approximately $200 million of CRD acquisition and integration costs through 2021; $121 million had been incurred through March 31, 2020.
- Legal and regulatory exposure includes the ongoing review of historical billing practices. Legal loss-contingency accruals totaled approximately $146 million; estimated reasonably possible losses in excess of accruals were up to approximately $50 million for matters where an estimate could be made. The filing says certain matters cannot currently be reasonably estimated. Potential DOJ and DOL outcomes remain uncertain.
- No specific earnings or revenue guidance is provided. Interim financial statements received an independent accountant’s review, not an audit opinion.
Important facts for investors to verify
- Whether client deposits and activity, and the MMLF-related balance-sheet expansion, persist or normalize—and the resulting effect on NII and liquidity.
- How market declines, client flows and asset installation timing affect AUC/A, AUM and fee revenue in subsequent quarters.
- Whether COVID-19 economic assumptions lead to higher CECL allowances, credit provisions or problem loans.
- Capital ratios and distribution plans following the buyback suspension, regulatory leverage relief and Series C redemption.
- Developments in billing-practice investigations and litigation, including potential DOJ or DOL penalties beyond recorded accruals.