Business Context and Reporting Period
Company: State Street Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: State Street is a financial holding company and a leading specialist in providing investment servicing and investment management services to institutional investors worldwide. As of year-end 2008, the company held $12.04 trillion in assets under custody and $1.44 trillion in assets under management. The company operates in 27 countries and reported 28,475 employees.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenue | $10.69 billion | $8.34 billion |
| Net Income | $1.81 billion | $1.26 billion |
| Diluted EPS | $4.30 | $3.45 |
| Total Assets | $173.63 billion | $142.54 billion |
| Total Deposits | $112.23 billion | $95.79 billion |
| Shareholders' Equity | $12.77 billion | $11.30 billion |
| Return on Common Equity | 14.8% | 13.4% |
| Net Interest Margin (FTE) | 2.08% | 1.71% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 28% to $10.69 billion. This was driven by a 53% increase in net interest revenue (due to Federal Reserve rate cuts and increased customer deposits) and a 17% increase in fee revenue. A one-time $350 million gain from the sale of the CitiStreet joint venture interest contributed significantly to the top line.
- Expense Increases: Total expenses rose 22% to $7.85 billion. This included $1.07 billion in specific charges: $450 million for an investment account infusion, $306 million in restructuring charges, $200 million for Lehman Brothers indemnification exposure, and $115 million in merger costs.
- Asset Base: Total assets grew 22% to $173.63 billion, largely due to a surge in customer deposits as clients sought liquidity during the financial crisis. Assets under custody declined 21% to $12.04 trillion, primarily due to market valuation declines.
- Capital Position: The company participated in the U.S. Treasury's TARP Capital Purchase Program, receiving $2 billion in exchange for preferred stock and warrants. Tier 1 risk-based capital ratio increased to 20.3% from 11.2% in 2007.
Guidance, Outlook, and Risks
Management Commentary & Outlook: In February 2009, management announced a plan to strengthen tangible common equity (TCE) in response to continued market disruption. Actions included temporarily reducing the quarterly dividend to $0.01 per share and reinvesting maturing securities into interest-bearing deposits with central banks. Management expects these actions to reduce the net interest margin for 2009 by approximately 13% to 18% compared to 2008.
Key Risks and Contingencies:
- Lehman Brothers Exposure: The company recorded a $200 million reserve for indemnification obligations related to collateralized repurchase agreements with Lehman Brothers. While $1 billion was paid to customers, the company took possession of collateral valued at $800 million. Further losses are possible if collateral values deteriorate.
- Investment Securities Impairment: As of December 31, 2008, there were $5.45 billion in after-tax net unrealized losses on investment securities. Management considers these temporary, but a determination of "other-than-temporary" impairment could result in material charges.
- Conduit Consolidation Risk: The company administers unconsolidated asset-backed commercial paper conduits with $3.56 billion in after-tax net unrealized losses. Changes in accounting standards or market conditions could require consolidation, adversely impacting capital ratios.
- Legal Exposure: A reserve of approximately $208 million remained at year-end regarding litigation related to SSgA's active fixed-income strategies (sub-prime exposure), down from a $625 million reserve established in 2007.
Investor Verification Checklist
- Dividend Policy: Verify the impact of the temporary dividend reduction to $0.01 per share on shareholder returns and the timeline for restoration.
- Unrealized Losses: Monitor the status of the $5.45 billion in unrealized losses on investment securities and the criteria used to determine if they become "other-than-temporary."
- Conduit Exposure: Track the potential for consolidation of unconsolidated asset-backed commercial paper conduits and the associated $3.56 billion unrealized loss impact on capital ratios.
- Lehman Collateral: Review future updates on the valuation of commercial real estate collateral acquired from Lehman Brothers to assess potential for additional charges beyond the $200 million reserve.
- Net Interest Margin: Confirm the projected 13-18% reduction in net interest margin for 2009 due to the shift of assets into low-yielding central bank deposits.