State Street Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This annual filing includes full-year results, not a standalone fourth-quarter earnings report. State Street is a global custody, investment servicing and investment management firm, with $43.68 trillion in assets under custody and/or administration (AUC/A) and $4.14 trillion in assets under management (AUM) at year-end.
Financial performance and position
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Total revenue | $12.027 billion | $11.703 billion | +3% |
| Total fee revenue | $10.012 billion | $9.499 billion | +5% |
| Net interest income (NII) | $1.905 billion | $2.200 billion | -13% |
| Net income | $2.693 billion | $2.420 billion | +11% |
| Diluted EPS | $7.19 | $6.32 | +14% |
| Pre-tax margin | 26.4% | 24.8% | +1.6 percentage points |
| FTE net interest margin | 0.74% | 0.97% | -0.23 percentage points |
Fee revenue was approximately 83% of total revenue. Servicing fees rose 7% and management fees rose 9%; foreign-exchange trading services revenue fell 11%, while securities finance revenue rose 17%. The $33 million credit-reserve release in 2021 compared with an $88 million provision in 2020. Expenses rose 2% to $8.889 billion. Return on average common equity was 10.7%, versus 10.0%.
Cash flow: Operating activities used $6.710 billion, versus $3.532 billion provided in 2020. Investing activities used $2.172 billion; financing activities provided $9.046 billion. The cash-flow statement reflects substantial movements in collateral deposits and foreign-exchange derivatives; operating cash flow should be considered alongside these balance-sheet-related movements.
Year-end balance sheet: Total assets were $314.624 billion, deposits $255.035 billion, total shareholders’ equity $27.363 billion and long-term debt $13.475 billion. Loans, net of allowance, were $32.445 billion. AUC/A increased 13% and AUM increased 19% year over year, reflecting higher markets and client flows, among other factors.
Capital and liquidity: Standardized CET1 ratio was 14.3%, Tier 1 capital ratio 16.1%, total capital ratio 17.6%, Tier 1 leverage ratio 6.1% and supplementary leverage ratio (SLR) 7.4%. Parent-company average LCR was 105% in the fourth quarter; State Street Bank’s LCR was approximately 129%. The filing states the NSFR requirement is at least 100%, but the supplied text does not provide a clear actual year-end NSFR value.
Material changes and notable items
- Revenue growth was led by higher servicing and management fees, supported by equity-market levels, client activity, flows and new business. Normal pricing pressure partly offset servicing-fee gains.
- NII declined as investment-portfolio yields fell, partly offset by growth in the portfolio, deposits and loan balances. The FTE NIM also decreased.
- Net income included a $53 million pre-tax gain on the sale of a majority interest in Wealth Management Services and a $58 million pre-tax gain from selling securities reclassified from held-to-maturity under reference-rate reform.
- Compensation expense included approximately $147 million of accelerated deferred-cash compensation expense following an award amendment. Management said this expense would not recur for those amended awards, while future compensation costs will depend on awards and business conditions.
- Other 2021 items included approximately $65 million of acquisition costs, a net $3 million repositioning release and a $5 million charge associated with partial redemption of Series F preferred stock.
- Other comprehensive income was a loss of $1.320 billion, largely reflecting changes in available-for-sale securities and foreign-currency translation; total comprehensive income was $1.373 billion.
Outlook, risks and contingencies
- BBH acquisition: State Street agreed to acquire Brown Brothers Harriman’s Investor Services business for $3.5 billion in cash, subject to regulatory approvals and other closing conditions. The review was taking longer than initially anticipated. The company expected to fund the transaction principally with approximately $1.9 billion of common-stock offering proceeds, cash and suspended repurchases. It estimated up to approximately $590 million of acquisition and integration costs through the third year after closing.
- Capital outlook: Assuming the BBH transaction closed in the first half of 2022 and including SA-CCR implementation, management expected CET1 and Tier 1 leverage ratios to be at or near the lower end of target ranges of 10–11% and 5.25–5.75%, respectively. The filing also estimated that SA-CCR could raise standardized RWA by approximately 10% on a pro forma basis before planned mitigating actions.
- Client transition: A large asset-servicing client expected to move 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 ultimate earnings effect depends partly on expense reductions and growth in continuing business.
- Interest rates and markets: Management’s year-end baseline incorporated three expected Federal Reserve rate increases over the following 12 months. Its modeled 12-month NII benefit from a parallel 100-basis-point increase was $753 million, assuming no management action and stable deposit levels; actual results would depend on rates, deposit balances and deposit betas. The filing identifies market volatility, low yields, client deposit behavior and asset valuations as material sensitivities.
- Legal and regulatory matters: State Street paid a $115 million penalty in 2021 to resolve potential criminal claims related to the invoicing matter. It reported at least $355 million in cumulative customer payments for invoicing errors, all paid or accrued, and continued to review historical billing practices. At year-end, aggregate legal and regulatory loss accruals were approximately $15 million; estimated reasonably possible losses above accrued amounts were up to approximately $45 million for matters where an estimate could be made. Some matters could not be reasonably estimated.
- Principal risks: The filing highlights intense competition and fee pressure; dependence on market-sensitive fee revenue; execution and client-retention risks in acquisitions and technology initiatives; interest-rate, credit, liquidity and capital risks; cybersecurity, operational and third-party risks; regulatory oversight; workforce retention; and continuing COVID-19-related uncertainty.
- Shareholder returns: Common dividends declared were $2.18 per share. State Street repurchased $900 million of stock in 2021, but paused repurchases in the third and fourth quarters in connection with the planned BBH acquisition and did not intend to resume until the second quarter of 2022.
Investor verification priorities
- Track BBH regulatory approvals, closing timing, financing, integration costs and client-retention outcomes.
- Assess the impact of SA-CCR on RWA, capital ratios and the pace of planned capital returns.
- Monitor NII and NIM against interest-rate movements, deposit levels and client deposit pricing.
- Quantify the revenue and expense effects of the ETF asset transition and continued servicing-fee pricing pressure.
- Review billing remediation, monitors and legal proceedings, including matters for which potential losses are not estimable.
- Reconcile operating cash-flow volatility to collateral and derivative movements, and follow actual NSFR disclosures.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Servicing fee revenue was identified as a critical audit matter because of contract complexity, transaction volume and the systems and processes used to recognize revenue.