State Street Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing was signed February 20, 2020. State Street is a global institutional custody, investment servicing and investment management firm. Year-end AUC/A was $34.36 trillion and AUM was $3.12 trillion.
Financial performance and condition
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $11.756 billion | $12.131 billion | -3% |
| Fee revenue | $9.147 billion | $9.454 billion | -3% |
| Net interest income | $2.566 billion | $2.671 billion | -4% |
| Net income | $2.242 billion | $2.593 billion | -14% |
| Net income available to common shareholders | $2.009 billion | $2.404 billion | -16% |
| Diluted EPS | $5.38 | $6.39 | -16% |
| Pre-tax margin | 23.1% | 25.6% | Down 2.5 percentage points |
| Net interest margin, FTE | 1.42% | 1.47% | Down 5 basis points |
| Operating cash flow | $5.690 billion | $10.175 billion | Down $4.485 billion |
Total expenses were $9.034 billion, up slightly from $9.015 billion. Provision for loan losses was $10 million. Return on average common equity was 9.4%, compared with 12.1%.
At December 31, 2019, total assets were $245.61 billion, deposits $181.87 billion, long-term debt $12.51 billion and shareholders’ equity $24.43 billion. Regulatory capital included a 11.7% CET1 ratio and 6.1% supplementary leverage ratio; the company reported that it exceeded applicable capital requirements. Average daily parent-company LCR for Q4 was 110%.
Cash flows were $5.690 billion provided by operations, $2.626 billion used in investing activities and $2.974 billion used in financing activities. These flows include significant movements in deposits, securities and collateral; operating cash flow alone should not be treated as a conventional measure of bank free cash flow.
Material changes versus the prior period
- Servicing fees fell 6%, management fees 4%, foreign-exchange trading services 7% and securities-finance revenue 13%. Management cited pricing pressure, lower client activity or flows, reduced market volatility, and lower securities-lending balances or spreads.
- Software and processing fees rose 64%, primarily reflecting a full year of Charles River Development (CRD) revenue in 2019 versus one quarter in 2018. CRD contributed $385 million in revenue and $201 million in expenses in 2019.
- Net interest income declined amid lower long-end U.S. rates and lower average non-interest-bearing client deposits; higher interest expense also weighed on the result.
- AUC/A rose 9% and AUM rose 24%, mainly reflecting higher year-end market levels and flows. A previously announced client transition remained a partial offset to AUC/A.
- The 2019 reported results include a $140 million increase to the legal accrual for the historical invoicing matter, recorded after the company initially announced its year-end results. This filing’s reported figures reflect the charge.
- Reported 2018 comparisons include only one quarter of CRD. State Street also changed its accounting method for low-income housing tax-credit investments and revised prior periods; consider this when assessing comparability.
Management commentary, outlook and risks
State Street reported approximately $415 million of gross expense savings in 2019, exceeding its revised $400 million goal. It recorded $110 million of 2019 repositioning charges for further automation, technology optimization and organizational changes. Management did not provide a clear numerical earnings or revenue forecast in the supplied filing text. It expected CRD-related acquisition and integration costs of approximately $200 million through 2021, of which $110 million had been incurred by year-end 2019.
Capital returns totaled approximately $2.33 billion in 2019, including $1.6 billion of common-share repurchases and $728 million of common dividends. The Federal Reserve did not object to the 2019 capital plan; $1.0 billion remained under the authorized $2.0 billion repurchase program at year-end. The company redeemed $750 million of Series E preferred stock in December 2019 and announced a Series C redemption for March 2020.
Contingencies: The company estimated cumulative customer reimbursements for historical invoicing errors at no less than $380 million, paid or accrued. The SEC and Massachusetts Attorney General settlements included penalties of $40 million and $5.5 million, respectively. DOJ discussions were ongoing and a DOL review remained open; the potential aggregate penalties were not known, and the company cautioned that ultimate liability could materially exceed its accrual. Legal and regulatory accruals totaled approximately $146 million at December 31, 2019; estimated reasonably possible losses above accruals ranged up to approximately $50 million for matters where an estimate was possible, excluding matters that could not then be estimated.
Key risks include sensitivity of fee income and investment balances to market levels and client flows; interest-rate, deposit, funding and liquidity exposure; competition and fee pressure; counterparty, securities-lending and investment-portfolio risks; cyber, operational and technology risk; CRD integration and State Street Alpha execution; and extensive regulatory requirements. State Street also cited ongoing compliance oversight, including a deferred prosecution agreement and compliance monitoring, and uncertainty around the invoicing investigations and litigation.
Important facts for investors to verify
- Reconcile the $140 million year-end legal accrual with the Q4 results and track any DOJ, DOL or civil-litigation resolution, additional costs or remediation.
- Assess whether fee pressure and declines in servicing, management, FX and securities-finance revenues persist, and how much AUC/A and AUM growth translates into recurring fees.
- Review CRD integration progress, State Street Alpha adoption, remaining integration costs and the sustainability of reported expense savings.
- Monitor capital and liquidity ratios, regulatory requirements and the effect of planned share repurchases and preferred-stock redemptions.
- Evaluate exposures behind $367.9 billion of indemnified securities-financing commitments and $29.7 billion of unfunded credit facilities, including collateral and drawdown assumptions.