State Street Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet figures are as of March 31, 2022. State Street provides custody, administration and investment management services to institutional investors. It reported $41.72 trillion in assets under custody and/or administration (AUC/A), $4.02 trillion in assets under management (AUM), and 39,335 employees.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total fee revenue | $2.573 billion | $2.483 billion | +4% |
| Net interest income | $509 million | $467 million | +9% |
| Total revenue | $3.081 billion | $2.950 billion | +4% |
| Provision for credit losses | $0 | $(9) million | Prior-period release |
| Total expenses | $2.327 billion | $2.332 billion | Approximately flat |
| Income before tax | $754 million | $627 million | +20% |
| Net income | $604 million | $519 million | +16% |
| Diluted EPS | $1.57 | $1.37 | +15% |
Return on average common equity was 9.5%, up from 8.4%; pre-tax margin was 24.5%, up from 21.3%. Management reported positive operating leverage of 4.6 percentage points. The effective tax rate rose to 19.9% from 17.2%.
- Servicing fees were flat at $1.368 billion: higher activity, equity markets and new business were offset by pricing pressure and currency translation, which reduced servicing fees by 2%.
- Management fees grew 5% to $520 million, principally from higher average equity markets and ETF inflows. Software and processing fees rose 26% to $201 million; other fee revenue rose 81% to $29 million, including positive equity-investment fair-value adjustments.
- Foreign-exchange trading revenue increased 4% to $359 million, reflecting higher volatility partly offset by lower client volumes. Securities finance revenue declined 3% to $96 million.
- Net interest income growth reflected portfolio and loan growth and higher rates. Fully taxable-equivalent net interest margin was 0.80%, versus 0.75% a year earlier.
Financial position, cash flow and capital
- Total assets were $322.35 billion, deposits $251.04 billion, total liabilities $296.13 billion, and shareholders’ equity $26.22 billion. Period-end deposits declined from $255.04 billion at December 31, 2021; average deposits increased year over year to $233.27 billion.
- Loans, net of allowance, were $35.06 billion, up from $32.45 billion at year-end. The allowance for credit losses was $107 million; no loans were on non-accrual status.
- Cash and due from banks declined to $2.98 billion from $3.63 billion. Quarterly cash flows were $4.59 billion provided by operating activities, $4.34 billion used in investing activities, and $905 million used in financing activities; cash declined $655 million overall. These totals include substantial changes in collateral, derivatives and other balance-sheet accounts.
- Long-term debt was $13.92 billion. State Street issued $1.50 billion of senior notes in February and redeemed $750 million of notes in March. It announced a further $750 million redemption for May 15, 2022.
- Standardized CET1 ratio was 11.9%, down from 14.3% at year-end; Tier 1 leverage ratio was 5.9%, down from 6.1%. The CET1 decline primarily reflected AFS securities unrealized losses in AOCI, implementation of SA-CCR and temporary RWA deployment. The filing states the company and State Street Bank exceeded applicable capital requirements.
- Daily average LCR was 106% for the Parent Company and approximately 127% for State Street Bank. The Parent Company’s average HQLA was $151.57 billion. The filing reports $101.68 billion average fair value of total unencumbered securities.
- Common dividends declared were $0.57 per share, or $209 million. No common shares were repurchased in Q1.
Material changes, outlook and risks
- Comprehensive income was a loss of $961 million, compared with a loss of $86 million in Q1 2021, mainly reflecting a $1.445 billion after-tax unrealized loss on AFS securities and foreign-currency translation losses. Total AOCI declined to $(2.698) billion from $(1.133) billion at year-end. Management attributed investment-securities unrealized losses primarily to higher interest rates, not material credit deterioration.
- Management no longer expected to resume share repurchases in Q2 or Q3 2022, citing AFS unrealized losses. During the quarter, approximately $2.3 billion of securities were transferred from AFS to HTM, and management described hedging and portfolio runoff actions intended to limit further AOCI risk.
- The proposed $3.5 billion cash acquisition of BBH Investor Services remained subject to regulatory approvals and other conditions. Regulatory review was slower than expected; State Street was evaluating potential transaction modifications and working toward concluding reviews in Q3. Management expected CET1 and Tier 1 leverage ratios to be near the lower end of target ranges during the closing quarter. Estimated acquisition and integration costs could reach approximately $590 million through the third year after closing.
- Management’s rate-sensitivity model estimated a $531 million increase in next-12-month NII under an instantaneous +100-basis-point rate shock and a $311 million decrease under a −100-basis-point shock, relative to its baseline. The model assumes no management action and reflects the company’s rate and deposit assumptions; it is not earnings guidance.
- A large servicing client plans to transition a significant portion of its ETF assets to other providers, principally in 2023–2024. Associated 2021 fee revenue was approximately 1.9% of total fee revenue; the actual impact depends on client growth and related expense reductions. New mandates announced in Q1 were approximately $302 billion; $2.91 trillion of servicing assets remained to be installed.
- State Street described direct Russia exposure as low: under $25 million in rouble deposits, Russian securities below 0.1% of AUC/A and 0.01% of AUM, and no direct credit exposure to Russian-domiciled entities other than a Russian subcustodian affiliate.
- Other stated risks include market and interest-rate volatility, fee pricing pressure, credit and counterparty exposure, cyber and operational risks, regulatory and capital requirements, and acquisition execution. Unfunded credit commitments were $33.76 billion; standby letters of credit were $2.62 billion. Indemnified securities on loan were $395.51 billion, supported by collateral held as agent.
- Legal and regulatory loss-contingency accruals were approximately $15 million; estimated reasonably possible losses in excess of accruals were up to approximately $45 million for matters that could be estimated. Some matters could not be reasonably estimated. Management noted the potential for adverse outcomes to affect results, financial condition or reputation.
Important facts for investors to verify
- Progress and final terms, approval timing, closing date and total costs for the BBH Investor Services acquisition—and the resulting capital and integration effects.
- Further AOCI and regulatory-capital effects if interest rates continue rising, including the effectiveness of securities transfers, hedging and portfolio runoff.
- The scale and timing of the ETF client transition, and whether new mandates convert to installed assets and recurring revenue as anticipated.
- Whether NII benefits from higher rates are realized amid deposit outflows, rising deposit betas and changing client balances.
- Credit quality and reserve adequacy, particularly in leveraged lending and under changing economic forecasts; also assess the company’s large contingent commitments and securities-lending indemnities.
- Developments in legal, regulatory and tax matters. Ernst & Young conducted an interim review, not an audit, and reported no material modifications needed for GAAP conformity.