State Street Corporation — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with FY 2021. State Street is a global custody, investment servicing and investment management provider. At year-end, it reported $36.74 trillion of assets under custody and/or administration (AUC/A), $3.48 trillion of assets under management (AUM), $301.45 billion of assets and approximately 42,000 employees.
Financial performance and position
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Total revenue | $12.148 billion | $12.027 billion |
| Fee revenue | $9.606 billion | $10.012 billion |
| Net interest income (NII) | $2.544 billion | $1.905 billion |
| Provision for credit losses | $20 million | $(33) million release |
| Total expenses | $8.801 billion | $8.889 billion |
| Net income | $2.774 billion | $2.693 billion |
| Diluted earnings per share | $7.19 | $7.19 |
| Pre-tax margin | 27.4% | 26.4% |
| Fully taxable-equivalent net interest margin | 1.03% | 0.74% |
- Revenue increased 1%; higher NII, reflecting central-bank rate increases, more than offset lower fee revenue and currency translation effects. Fee revenue declined 4%, including servicing fees down 8% and management fees down 6%; foreign exchange trading services revenue rose 14%.
- Expenses declined 1%, with productivity savings and currency translation benefits offset in part by business investment, higher headcount, merit increases and other costs. Positive operating leverage was 2.0 percentage points; fee operating leverage was negative 3.1 points.
- Return on average common equity was 11.1%, versus 10.7%. Common dividends declared were $2.40 per share, versus $2.18.
- Operating cash flow was $11.954 billion, compared with $(6.710) billion in 2021; investing cash flow was $6.816 billion and financing cash flow was $(18.431) billion. Operating cash flow included substantial collateral-related movements, so it should not be read as a simple measure of recurring earnings cash conversion.
- At year-end, deposits were $235.46 billion, long-term debt $15.00 billion, short-term borrowings $2.10 billion and shareholders’ equity $25.19 billion. Total assets were $301.45 billion. Total deposits decreased from $255.04 billion in 2021.
Material changes and notable items
- AUC/A fell 16% to $36.74 trillion and AUM fell 16% to $3.48 trillion, mainly reflecting lower market valuations and currency translation; AUC/A was also affected by a client transition and AUM by institutional outflows.
- One large servicing client’s previously announced provider-diversification transition began in 2022 and is expected to occur principally in 2023–2024, affecting fee and income growth through 2025. Fees associated with assets still to transition represented about 1.7% of FY 2022 total fee revenue.
- State Street recorded $78 million of repositioning charges and $65 million of acquisition costs associated with the BBH Investor Services transaction, which it decided not to pursue. A $23 million recovery related to settlement proceeds from a 2018 FX benchmark litigation resolution was included in FX revenue.
- The company transferred $23.56 billion of securities from available-for-sale (AFS) to held-to-maturity (HTM). Year-end AOCI was negative $3.71 billion, and the investment portfolio had $8.10 billion of gross unrealized losses. Management considered the declines temporary and not reflective of material credit deterioration; market-rate changes nevertheless weighed on reported capital.
Capital, liquidity and outlook
- Standardized CET1 capital ratio was 13.6%, down from 14.3%; Tier 1 leverage was 6.0%, down from 6.1%. State Street reported that it exceeded applicable capital requirements. Its 2022 stress capital buffer was at the 2.5% minimum.
- Supplementary leverage ratio was 7.0%. Average daily liquidity coverage ratio (LCR) for the parent company was 106% in Q4 2022; State Street Bank’s Q4 LCR was approximately 122%. The regulatory minimum LCR and net stable funding ratio are 100%.
- Management said it currently expects CET1 and Tier 1 leverage ratios to move into target ranges of 10–11% and 5.25–5.75%, respectively. It anticipated risk-weighted assets could rise as market volatility normalizes. These are capital expectations, not earnings guidance.
- The filing provides no clear formal numerical revenue or EPS guidance. Its year-end rate baseline reflected market expectations for rates to peak in the first half of 2023 and cuts potentially beginning as early as Q4 2023. Management’s modeled aggregate NII sensitivity to an instantaneous +100-basis-point shock was a $207 million benefit over 12 months, while the U.S.-dollar balance sheet was liability-sensitive under that scenario.
- In January 2023, the Board authorized up to $4.5 billion of share repurchases through year-end 2023; execution remains subject to capital, market and regulatory considerations. The company repurchased $1.5 billion in Q4 2022.
Risks, contingencies and controls
- Key exposures include market and interest-rate risk, fee pressure and market-sensitive AUC/A and AUM, deposit and liquidity variability, counterparty and operational risk, cyber threats, technology execution, and extensive regulatory requirements.
- As of December 31, 2022, legal and regulatory loss-contingency accruals were approximately $17 million; estimated reasonably possible losses above accruals were up to approximately $45 million for matters where State Street could estimate a range. Some matters could not be reasonably estimated, and actual outcomes could differ materially.
- The invoicing matter remains subject to potential further remediation and claims. The company said cumulative customer payments for identified invoicing errors were expected to be at least $350 million, all paid or accrued; additional remediation costs may be identified. It also remained subject to a deferred prosecution agreement and independent compliance monitoring.
- Cash and due from banks held in or through Russia-related accounts totaled approximately $1.3 billion, including $767 million with a subcustodian and Western European clearing agencies, and was subject to access restrictions.
- Management concluded disclosure controls and internal control over financial reporting were effective at year-end; the independent auditor issued unqualified opinions on the financial statements and internal controls. The auditor identified servicing fee revenue as a critical audit matter because of contract complexity, transaction volume and multiple recognition systems.
Investor verification priorities
- Track the large client’s 2023–2024 asset transition, related fee exposure, retained business and possible expense offsets.
- Review AFS/HTM securities, unrealized losses, AOCI and the effect of rates and securities classification on capital and NII.
- Assess deposit trends, deposit pricing, LCR and funding needs alongside the company’s interest-rate sensitivity disclosures.
- Monitor servicing-fee pricing, client activity, market levels, new mandate installations and the conversion of $3.61 trillion of announced servicing assets still awaiting installation.
- Follow litigation, invoicing remediation, compliance-monitor requirements and restricted Russia-related cash; also assess whether repurchases and stated capital targets remain consistent with regulatory requirements.