Business context and reporting period
State Street Corporation’s Form 10-K covers the fiscal year ended December 31, 2013; the filing also reports fourth-quarter results. The company provides institutional investment servicing and investment management worldwide. At year-end, assets under custody and administration were $27.43 trillion and assets under management were $2.35 trillion.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $9.884 billion | $9.649 billion |
| Net income | $2.136 billion | $2.061 billion |
| Net income available to common shareholders | $2.102 billion | $2.019 billion |
| Diluted EPS | $4.62 | $4.20 |
| Net interest revenue | $2.303 billion | $2.538 billion |
| Net interest margin, fully taxable-equivalent | 1.37% | 1.59% |
| Total expenses | $7.192 billion | $6.886 billion |
| Return on average common equity | 10.5% | 10.3% |
| Total assets / deposits / shareholders’ equity | $243.291 billion / $182.268 billion / $20.378 billion | $222.582 billion / $164.181 billion / $20.869 billion |
| Long-term debt | $9.699 billion | $7.429 billion |
- Fee revenue rose 7% to $7.590 billion, led by servicing fees (+9%) and management fees (+11%). Foreign-exchange trading revenue rose 15%; securities-finance revenue fell 11%.
- Operating cash flow was negative $1.974 billion, versus positive $1.927 billion in 2012. Investing cash outflow was $14.085 billion and financing cash inflow was $16.689 billion. The filing attributes much of the operating cash-flow movement to changes in collateral deposits.
- Year-end asset liquidity was $86.578 billion, up from $78.192 billion. Parent-company net liquid assets were $4.42 billion. Commercial paper outstanding was $1.819 billion; no time certificates of deposit were outstanding at year-end.
- Under then-applicable Basel I rules, State Street’s tier 1 risk-based, total risk-based and tier 1 leverage ratios were 17.3%, 19.7% and 6.9%, respectively, versus 19.1%, 20.6% and 7.1% in 2012. Preliminary Basel III tier 1 common-ratio estimates were 10.1% under the standardized approach and 11.8% under the advanced approach.
- For Q4 2013, net income was $553 million and diluted EPS was $1.22, compared with $470 million and $1.00 in Q4 2012. Revenue was $2.464 billion versus $2.449 billion; expenses were $1.846 billion versus $1.864 billion.
Material changes versus the prior comparable period
- Revenue increased 2% year over year, as stronger servicing and management fees and foreign-exchange trading partly offset lower net interest revenue and securities-finance revenue.
- Net interest revenue fell 9%, and net interest margin declined 22 basis points, reflecting low rates, reinvestment of security paydowns at lower yields and deposits placed in low-yielding central-bank balances.
- Reported expenses increased 4%. Excluding Lehman-related credits in both years, expenses were approximately flat at $7.28 billion in each year.
- Assets under custody and administration increased 13%, and assets under management increased 12%, supported primarily by stronger markets. SSgA recorded approximately $5 billion of net lost business, mainly from alternative investments.
- Shareholders’ equity declined from $20.869 billion to $20.378 billion, reflecting capital returns and other changes; the company repurchased approximately $2.04 billion of stock and declared $1.04 per share in common dividends.
Outlook, commentary, risks and unusual items
- Management expected approximately $130 million of incremental pre-tax savings from its operations and IT transformation program in 2014, with annualized savings of approximately $575 million to $625 million by year-end 2014 versus 2010, all else equal; full impact was expected in 2015. Management cautioned that total expenses could move differently due to other factors.
- The Federal Reserve’s review of the 2014 capital plan would determine the scope of dividends and repurchases after March 2014. The filing gives no specific earnings or revenue guidance.
- 2013 income tax expense included a $71 million out-of-period benefit from a deferred-tax-accounting adjustment. Excluding it, the effective tax rate was 23.2%, rather than the reported 20.5%.
- The transition-management matter resulted in a January 2014 U.K. regulator fine of approximately $37.8 million, accrued in 2013; related client reimbursements and other costs brought reported 2013 pre-tax costs to approximately $69 million, with an additional $12 million resolution cost in February 2014.
- Indirect foreign-exchange services remain a significant legal, regulatory and reputational risk. 2013 estimated revenue from those services was $285 million; State Street had not accrued for the related pending claims. California authorities asserted approximately $100 million of actual damages for 2001–2009 and sought additional penalties, including treble damages.
- Aggregate legal and regulatory accruals were approximately $119 million at year-end. Management said pending matters were not likely to materially affect consolidated financial condition, but some outcomes could materially affect results or reputation.
- Investment securities were approximately 48% of total assets; 89% were rated AAA or AA. Interest-rate changes reduced the portfolio’s net unrealized position, and the filing identifies credit, valuation, liquidity and Basel III capital treatment as material sensitivities. Basel III implementation and proposed leverage and liquidity rules could affect capital, portfolio composition and profitability.
- Other key risks include counterparty and sovereign exposures, European market disruption, securities-lending indemnities, regulatory change, cyber and operational risk, and execution of the transformation program. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Track net interest revenue and margin, including deposit levels, reinvestment yields and declining accretion from former conduit securities.
- Review subsequent Basel III capital disclosures, the G-SIB surcharge and leverage and liquidity requirements, and their effect on capital distributions and investment strategy.
- Follow developments in the indirect foreign-exchange litigation and investigations, including any new accruals, settlements or changes to client activity.
- Assess whether transformation savings are realized as projected and weigh them against technology, restructuring and other expense increases.
- Monitor securities-finance indemnification exposure, investment-portfolio marks and credit quality, and the conversion of accounting cash flows into liquidity and capital.