State Street Corporation — 2014 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2014; includes fourth-quarter results. State Street is a global financial-services company focused on institutional investors, operating through Investment Servicing and Investment Management (State Street Global Advisors). At year-end, it reported $28.19 trillion in assets under custody and administration and $2.45 trillion in assets under management.
Financial performance, condition and liquidity
- Full-year revenue: $10.30 billion, up 4% from 2013. Fee revenue rose 6% to $8.03 billion; net interest revenue fell 2% to $2.26 billion.
- Profit: Net income was $2.04 billion, down from $2.14 billion. Net income available to common shareholders was $1.97 billion; diluted EPS was $4.57 versus $4.62. Return on average common equity was 9.8%, down from 10.5%.
- Expenses and margins: Expenses increased 9% to $7.83 billion, faster than revenue. Net interest margin declined to 1.16% from 1.37%; pre-tax margin fell to 24% from 27%.
- Fourth quarter: Revenue was $2.63 billion versus $2.46 billion in Q4 2013; net income was $492 million versus $553 million, and diluted EPS was $1.12 versus $1.22. Q4 expenses increased to $2.06 billion from $1.85 billion.
- Cash flow: Operating activities used $561 million, compared with $2.02 billion used in 2013. Investing activities used $28.49 billion and financing provided $27.69 billion; cash and due from banks declined by $1.37 billion to $1.86 billion. These cash-flow movements include substantial client-deposit and investment-portfolio activity.
- Balance sheet and liquidity: Total assets were $274.12 billion, deposits $209.04 billion, long-term debt $10.04 billion and shareholders’ equity $21.47 billion. Reported asset liquidity was $120.19 billion; estimated high-quality liquid assets under the LCR definition were $115.56 billion. Management considered liquidity sufficient for current commitments and business needs.
- Capital: Under the Basel III advanced-approaches calculation, common equity tier 1 was 12.5%, tier 1 capital 14.6%, total capital 16.6% and tier 1 leverage 6.4%. The filing cautions that 2014 ratios are not directly comparable with prior-year Basel I ratios.
Material changes versus comparable periods
- Servicing fees rose 6% and management fees 9%, supported by stronger equity markets and net new business. Securities-finance revenue increased 22%, while processing fees and other revenue fell 18%.
- Fee growth was offset by lower net interest revenue and higher expenses, including compensation, transaction-processing, professional-services and legal costs.
- Deposits rose to $209.04 billion from $182.27 billion, while investment securities declined to $112.64 billion from $116.91 billion. Assets under custody and administration increased 3% and assets under management 4% year over year.
- State Street repurchased about 23.8 million shares for $1.65 billion in 2014 and declared common dividends of $1.16 per share, up from $1.04.
Outlook, commentary, risks and unusual items
- Management reported completion of its Business Operations and Information Technology Transformation program, with more than $625 million of annual pre-tax savings achieved over the program and projected to take full effect in 2015. The filing provides no specific earnings or revenue guidance.
- State Street secured an estimated $1.14 trillion of servicing assets in 2014; approximately $406 billion remained uninstalled at year-end. About $15 billion of awarded investment-management business also remained uninstalled. Future fees depend on successful installation and retention.
- A $185 million accrual for indirect foreign-exchange matters was included in 2014 results, including an additional $65 million accrued in February 2015 and reflected in the filing. The company was negotiating with some, but not all, claimants and authorities; outcomes and ultimate costs remain uncertain. Indirect FX revenue was $246 million in 2014, down 14%.
- Other significant exposures include low or negative global interest rates, a strong U.S. dollar, European economic and sovereign risks, investment-portfolio valuation and credit risk, client deposit fluctuations, counterparty concentrations, cybersecurity and operational risk, and regulatory implementation costs.
- Regulatory changes may constrain capital returns. A proposed U.S. G-SIB surcharge was preliminarily estimated at 1.5% for State Street, subject to final rules; enhanced leverage requirements and liquidity standards also phase in over time. The company stated it exceeded applicable capital requirements at year-end.
- Off-balance-sheet indemnified securities financing totaled $349.77 billion, supported by collateral that exceeded the value of securities on loan. This is a large contingent exposure, not a reported balance-sheet debt amount.
Important facts for investors to verify
- Track whether the $185 million FX legal accrual proves adequate and whether additional claims, settlements or client-volume declines arise.
- Assess whether expense growth moderates and the stated transformation savings materialize in 2015.
- Monitor net interest margin, deposit mix, foreign-exchange effects and the return impact of holding additional regulatory liquidity.
- Review installation, retention and fee contribution from the servicing and management business backlog.
- Compare capital ratios on a consistent Basel basis and confirm the impact of final G-SIB, leverage and liquidity requirements on dividends and buybacks.
- Consider the scale and collateral terms of securities-lending indemnities, counterparty exposures and investment-portfolio concentrations.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2014.