State Street Corporation — Q1 2024 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2024; compared with Q1 2023 for income and cash-flow measures, and December 31, 2023 for most balance-sheet measures. State Street provides financial services to institutional investors through Investment Servicing and Investment Management. At quarter-end, it reported $43.91 trillion in assets under custody and/or administration (AUC/A), $4.34 trillion in assets under management (AUM), and approximately 46,000 employees.
Financial performance and condition
| Metric | Q1 2024 / March 31, 2024 | Comparable period / change |
|---|---|---|
| Total fee revenue | $2.422 billion | Up 4% year over year |
| Net interest income (NII) | $716 million | Down 7% |
| Total revenue | $3.138 billion | Up 1% |
| Provision for credit losses | $27 million | $44 million in Q1 2023 |
| Total expenses | $2.513 billion | Up 6% |
| Net income / diluted EPS | $463 million / $1.37 | $549 million / $1.52; down 16% / 10% |
| Profitability | Pre-tax margin 19.1%; return on average common equity 7.7% | 22.2% and 9.3%, respectively |
| Net interest margin | 1.13% on a fully taxable-equivalent basis | 1.31% in Q1 2023 |
| Total assets / deposits / shareholders’ equity | $338.00 billion / $251.88 billion / $24.43 billion | At December 31, 2023: $297.26 billion / $220.97 billion / $23.80 billion |
| Loans, net of allowance | $38.50 billion | $36.50 billion at December 31, 2023 |
| Debt and short-term funding | Long-term debt $19.75 billion; other short-term borrowings $11.54 billion | $18.84 billion and $3.66 billion, respectively, at December 31, 2023 |
| Regulatory capital | Standardized CET1 11.1%; Tier 1 leverage 5.4%; supplementary leverage ratio 6.5% | CET1 11.6% and Tier 1 leverage 5.5% at December 31, 2023 |
| Cash flows | Operating $(844) million; investing $(41.35) billion; financing $41.56 billion | Q1 2023: operating $(2.86) billion; investing $14.31 billion; financing $(11.72) billion |
Operating cash flow was negative, while substantial investing outflows—mainly the increase in interest-bearing bank deposits—were largely offset by financing inflows, including growth in deposits and short-term borrowing. These cash-flow movements reflect the balance-sheet nature of the banking business and should not be read as conventional corporate free cash flow.
Material changes versus comparable periods
- Fee growth was led by management fees (+12%) and software and processing fees (+25%); servicing fees rose 1%. Foreign-exchange trading revenue fell 3%, and securities finance revenue fell 12%.
- NII declined as deposits shifted toward interest-bearing accounts and average non-interest-bearing balances fell, partly offset by higher rates, lending growth, and investment portfolio effects. Average interest expense rose to $2.17 billion from $1.26 billion.
- Expenses rose primarily because of an additional $130 million FDIC special-assessment charge; management said this accounted for approximately five percentage points of expense growth. The remaining increase reflected business investment, largely offset by productivity savings.
- AUC/A increased 17% and AUM increased 20% year over year, reflecting higher market levels and, for AUM, net inflows. The company announced approximately $474 billion of new servicing mandates and onboarded approximately $203 billion of AUC/A during the quarter.
- Investment Servicing revenue was essentially flat year over year, while Investment Management revenue increased 9% and pre-tax income increased 10%.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expects CET1 to remain within or above its 10–11% target range and Tier 1 leverage within or above its 5.25–5.75% target range.
- Approximately $2.58 trillion of AUC/A remained to be installed at quarter-end. State Street expects about 40–50% to be installed during the rest of 2024, with the balance during 2025–2026; timing depends on client implementation schedules and other factors. A previously disclosed large ETF client transition is expected to continue through 2025.
- The FDIC special assessment increased by $130 million in Q1 2024, following a $387 million expense recorded in Q4 2023. The final amount remains subject to FDIC revisions to estimated losses related to Silicon Valley Bank and Signature Bank.
- Commercial real estate conditions remain a credit risk. The Q1 provision primarily reflected higher reserves for certain CRE loans; $31 million of charge-offs were largely related to a single CRE property. The CRE portfolio was $3.06 billion, with 34% in office properties and no construction exposure.
- The investment portfolio was predominantly high quality: approximately 97% of carrying value was rated AA or higher. However, the filing reports $6.58 billion of gross pre-tax unrealized losses across investment securities, which management primarily attributed to interest rates rather than material deterioration in credit quality. HTM securities had a $46.82 billion fair value against $52.91 billion amortized cost.
- Liquidity metrics included average daily Parent Company LCR of 107% and State Street Bank LCR of approximately 130%; both entities’ NSFRs exceeded the 100% minimum. State Street reported $8 billion outstanding under the Bank Term Funding Program and $3.5 billion of FHLB funding at quarter-end.
- Other risks include deposit outflows and funding costs, interest-rate and market volatility, cyber and operational disruptions, regulatory capital changes, and legal and tax matters. Legal and regulatory loss-contingency accruals were approximately $20 million; estimated reasonably possible losses above accruals were up to approximately $40 million, while some matters could not be reasonably estimated.
- Shareholder returns totaled approximately $308 million: $208 million in common dividends and $100 million in share repurchases. The quarterly dividend was $0.69 per share. The company issued $1.5 billion of Series I preferred stock and redeemed $1.0 billion of Series D and F preferred stock; it also issued $1.0 billion of 4.993% senior notes due 2027.
Important facts for investors to verify
- Whether fee growth, particularly management and software revenue, can offset continued NII pressure and the ongoing ETF client transition.
- How much of the $2.58 trillion servicing pipeline is installed on schedule and converts into revenue, given implementation and pricing uncertainty.
- Further FDIC assessment revisions and their impact on expenses, EPS, and operating leverage.
- CRE loan performance, charge-offs, reserve adequacy, and any deterioration in office-property values or borrower credit quality.
- Deposit mix, funding costs, liquidity ratios, and the higher use of short-term wholesale funding.
- Capital-ratio movements, including RWA normalization and potential effects of proposed Basel III capital rules, alongside planned dividends and repurchases.
- The scale and resolution of unrealized securities losses, legal or tax contingencies, and the timing and financial effects of the announced business and operational changes.