STT

Business Context and Reporting Period

Company: State Street Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2004
Business Overview: State Street is a financial holding company providing investment servicing and investment management services to sophisticated investors worldwide. As of year-end 2004, the company held $9.50 trillion in assets under custody and $1.35 trillion in assets under management. The company operates two primary lines of business: Investment Servicing (84% of revenue) and Investment Management (16% of revenue).

Key Financial Metrics

Material Changes Versus Prior Period

• Revenue Growth: Total revenue increased 4.6% to $4.95 billion. On an operating basis (excluding non-recurring items), revenue grew 14% to $5.00 billion. Growth was driven by a 16% increase in servicing fees and a 31% increase in management fees on an operating basis.
• Profitability: Net income rose 10.5% to $798 million. Operating net income increased 9% to $839 million. Diluted EPS increased 9.3% to $2.35.
• Expense Management: Total operating expenses increased 3.8% to $3.76 billion. This included $62 million in merger and integration costs related to the 2003 acquisition of Deutsche Bank's Global Securities Services (GSS). On an operating basis, expenses rose 16%, primarily due to higher incentive compensation and transaction processing costs.
• Assets Under Management/Custody: Assets under custody grew to $9.50 trillion (up $127 billion), and assets under management grew to $1.35 trillion (up $248 billion), reflecting both market appreciation and net new business.

Guidance, Outlook, and Risks

Financial Goals (2005 and beyond):

• Annual growth in operating earnings per share: 10% to 15%.
• Annual operating revenue growth: 8% to 12%.
• Annual operating return on stockholders' equity: 14% to 17%.

Management Commentary: Management highlighted the successful integration of the GSS business, which contributed $606 million in revenue in 2004. The company expects 2005 operating results to be in the lower end of the established ranges for revenue and EPS growth. The company is implementing rigorous expense management and streamlining business units to align costs with revenue.

Risks and Contingencies:

• Regulatory Scrutiny: The company is responding to inquiries from the SEC and other agencies regarding market timing, late trading, and securities lending practices in the mutual fund industry.
• Divestiture: State Street announced an intent to divest its ownership interest in Bel Air Investment Advisors LLC, which is expected to result in a pre-tax charge of $150 million to $170 million in 2005.
• Market Sensitivity: Revenue is sensitive to worldwide equity and fixed income valuations. A 10% change in worldwide equity values could result in approximately a 2% change in total revenue.
• Basel II: The company is preparing for the implementation of Basel II capital adequacy rules, expected to become effective in 2007, though the final impact on risk-based capital cannot yet be predicted.

Investor Verification Checklist

• Verify the progress and financial impact of the GSS business integration, specifically the completion of client conversions in Germany scheduled for 2005.
• Monitor the status of regulatory inquiries regarding market timing and late trading to assess potential fines or reputational damage.
• Track the execution of the Bel Air Investment Advisors divestiture and the associated $150-$170 million pre-tax charge.
• Review the company's ability to meet its 2005 operating EPS growth target of 10-15% amidst rising interest rates and competitive pricing pressures.
• Assess the impact of the new 2005 stock repurchase program (15 million shares authorized) on shareholder returns.