State Street Corporation — Q3 2020 Form 10-Q
Business and period. State Street provides investment servicing and investment management services to institutional clients worldwide. This unaudited report covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods unless noted. At quarter-end, assets under custody and/or administration (AUC/A) were $36.64 trillion, assets under management (AUM) were $3.15 trillion, and the company had 38,979 employees.
Financial results and key metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total fee revenue | $2.306 billion (+2%) | $2.259 billion | $7.083 billion (+4%) | $6.779 billion |
| Net interest income (NII) | $478 million (−26%) | $644 million | $1.701 billion (−12%) | $1.930 billion |
| Total revenue | $2.784 billion (−4%) | $2.903 billion | $8.786 billion (+1%) | $8.708 billion |
| Provision for credit losses | $0 | $2 million | $88 million | $7 million |
| Total expenses | $2.103 billion (−4%) | $2.180 billion | $6.440 billion (−3%) | $6.627 billion |
| Net income | $555 million (−5%) | $583 million | $1.883 billion (+12%) | $1.678 billion |
| Diluted EPS | $1.45 (+2%) | $1.42 | $4.93 (+22%) | $4.03 |
| Pre-tax margin | 24.5% (vs. 24.8%) | 24.8% | 25.7% (vs. 23.8%) | 23.8% |
| FTE net interest margin | 0.85% (vs. 1.42%) | 1.42% | 1.01% (vs. 1.44%) | 1.44% |
- Revenue mix: Q3 servicing fees rose 2%, management fees rose 2%, FX trading services rose 4%, and software and processing fees rose 21%; securities finance fell 28%. The nine-month FX increase was 31%, while securities finance fell 26%.
- Profitability: Q3 return on average common equity was 8.9%, down from 9.7%. Nine-month return was 10.6%, up from 9.5%. Q3 operating leverage was unfavorable at (0.6%).
- Cash flow: For the first nine months, operating cash flow was $156 million, investing cash flow was $(26.122) billion, financing cash flow was $27.512 billion, and cash and due from banks increased $1.546 billion. These flows reflect the company’s banking balance sheet and substantial client-deposit movements.
- Balance sheet and funding: At September 30, total assets were $272.08 billion, deposits $197.51 billion, shareholders’ equity $25.56 billion, loans net of allowance $26.90 billion, and long-term debt $13.85 billion. At December 31, 2019, the respective figures were $245.61 billion, $181.87 billion, $24.43 billion, $26.24 billion, and $12.51 billion.
- Capital and liquidity: Standardized CET1 ratio was 12.4%, versus 11.7% at year-end 2019; the company reported significant headroom over applicable requirements. Tier 1 leverage ratio was 6.6%, compared with 6.9%. Q3 average parent-company LCR was 109%. Average central-bank cash balances were $68.46 billion.
- Business volumes: AUC/A increased 11% and AUM increased 7% year over year at quarter-end. Q3 new servicing mandates were approximately $249 billion; approximately $486 billion of servicing assets remained to be installed.
Material changes versus comparable periods
- Q3 total revenue and net income declined despite higher fee revenue, chiefly because sharply lower interest rates reduced NII. Management also cited higher mortgage-backed securities premium amortization and the absence of prior-year episodic market benefits.
- For the first nine months, revenue edged higher and net income rose 12%; lower expenses and a 31% rise in FX trading services revenue more than offset lower NII and securities finance revenue. The nine-month credit-loss provision increased to $88 million under the newly adopted CECL methodology.
- Client deposits remained above pre-pandemic levels, increasing average deposits and balance-sheet assets. The company reported no common-stock repurchases in Q2 or Q3 2020, compared with $500 million of Q3 2019 repurchases.
- Common dividends remained $0.52 per share in Q3. Nine-month common dividends were $1.56 per share, versus $1.46 in 2019.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing gives no specific quantitative earnings or revenue guidance. Management said deposits were expected to remain elevated in the prevailing low-rate environment, while future levels would depend on client behavior and market conditions. Interest rates, deposit mix, reinvestment yields, and mortgage prepayments could materially affect future NII and margin.
- COVID-19 and capital distributions: Approximately 80% of employees were working remotely at quarter-end. The Federal Reserve maintained restrictions on capital distributions beyond current-level common dividends through Q4 2020; share repurchases were suspended. State Street’s 2.5% stress capital buffer applied from October 1, 2020, but updated stress-test results could affect later requirements.
- Credit and market risks: The Q3 CECL provision was zero, reflecting slightly improving forecasts and limited negative credit migration, but management emphasized continuing economic uncertainty. The allowance for credit losses was $153 million at quarter-end, including $106 million related to leveraged loans. The company reported $4.26 billion of leveraged loans, with most rated BB or B; Q3 leveraged-loan sale losses were $11 million.
- Liquidity and commitments: Gross unfunded credit facilities were $33.74 billion and standby letters of credit were $3.24 billion. Indemnified securities on loan totaled $379.05 billion, supported by $398.08 billion of collateral held as agent; these are off-balance-sheet exposures and collateral is not recorded as the company’s balance-sheet asset.
- Legal matters: Aggregate accrued legal and regulatory loss contingencies were approximately $141 million. For matters with estimable reasonably possible losses, estimated exposure above accrued amounts was up to approximately $50 million; some matters could not be reasonably estimated. Historical invoicing-error reimbursements were expected to total at least $370 million, all paid or accrued. DOJ discussions continued, and the DOL review remained unresolved.
- Other unusual items: The company recorded a $20 million Q3 true-up of prior-period securities premium amortization. It expected approximately $200 million of CRD acquisition and integration costs through 2021, of which $148 million had been incurred since acquisition as of September 30, 2020. The June 2020 Federal Reserve written agreement on BSA/AML and sanctions compliance was terminated.
- Accounting and review: CECL was adopted January 1, 2020, decreasing opening retained earnings by $3 million. Ernst & Young’s interim review reported no material modifications needed for conformity with U.S. GAAP; this was a review, not an audit.
Investor verification priorities
- Track whether fee growth—particularly servicing, management, and CRD-related revenue—can offset continued low-rate pressure on NII and margin.
- Review subsequent CECL allowance changes, leveraged-loan performance, and credit migration as economic forecasts evolve.
- Confirm updated Federal Reserve stress-test outcomes, the stress capital buffer, and when share repurchases may resume.
- Monitor installation and revenue realization of the $486 billion servicing pipeline, including mandate attrition, pricing, and implementation timing.
- Follow DOJ/DOL outcomes and any further billing remediation, penalties, or litigation developments beyond current accruals and estimated loss ranges.
- Assess deposit stability, liquidity metrics, and the scale and collateralization of unfunded commitments and indemnified securities-lending exposures.