State Street Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Financial statement amounts are in U.S. dollars; dollar amounts below are in millions unless otherwise stated.
Business context
State Street is a global custody bank and institutional asset servicer, with two business lines: Investment Servicing and Investment Management (State Street Global Advisors). At year-end, it reported $38.79 trillion in assets under custody and/or administration (AUC/A), $3.47 trillion in assets under management (AUM), and approximately 39,000 employees. The company acquired Charles River Development (CRD) in 2018 and is integrating its technology into State Street Alpha.
Financial performance and position
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $11,703 | $11,756 | Flat, down less than 1% |
| Fee revenue | $9,499 | $9,147 | Up 4% |
| Net interest income (NII) | $2,200 | $2,566 | Down 14% |
| Provision for credit losses | $88 | $10 | Up $78 |
| Total expenses | $8,716 | $9,034 | Down 4% |
| Net income | $2,420 | $2,242 | Up 8% |
| Net income available to common shareholders | $2,257 | $2,009 | Up 12% |
| Diluted EPS | $6.32 | $5.38 | Up 17% |
| Pre-tax margin | 24.8% | 23.1% | Up 1.7 percentage points |
| Fully taxable-equivalent net interest margin | 0.97% | 1.42% | Down 0.45 percentage points |
- Fee growth reflected higher servicing fees (+2%), management fees (+3%), FX trading services (+29%) and software and processing fees (+2%). Securities finance revenue fell 24% amid lower spreads and client deleveraging.
- Lower market rates reduced NII despite higher deposits, loans and investment securities. The effective tax rate was 16.5%, versus 17.3% in 2019.
- Fourth quarter: Revenue was $2,917, net income was $537 and diluted EPS was $1.39. In fourth-quarter 2019, revenue was $3,048, net income was $564 and diluted EPS was $1.35.
- Operating cash flow was $3,532, compared with $5,690 in 2019. Investing activities used $65,534, largely reflecting increased bank deposits and securities activity; financing provided $62,167, primarily from deposit growth.
- Year-end total assets were $314,706, deposits $239,798, shareholders’ equity $26,200 and long-term debt $13,805. Deposits rose from $181,872 in 2019; assets increased from $245,610.
- Capital ratios included CET1 of 12.3% (11.7% in 2019), Tier 1 capital of 14.4%, total capital of 15.3%, Tier 1 leverage of 6.4% and supplementary leverage (SLR) of 8.1%. The company said it exceeded applicable regulatory capital requirements.
- Daily average parent-company liquidity coverage ratio (LCR) was 108% in the fourth quarter, compared with 110% a year earlier. The company held substantial high-quality liquid assets; reported average HQLA was $143.61 billion for the quarter.
- AUC/A increased 13% year over year and AUM increased 11%, supported by higher year-end markets and business flows. AUM also reflected ETF and cash inflows, partly offset by institutional outflows.
Material changes, outlook and risks
- COVID-19 drove elevated client deposits, transaction volumes and FX activity, but also uncertainty, credit migration and a lower-rate environment. State Street recorded an $88 million credit-loss provision under the newly adopted CECL standard; adoption reduced opening retained earnings by $3 million.
- The company returned approximately $1.23 billion to shareholders in 2020, including $734 million in common dividends and $500 million in repurchases. Repurchases were suspended after the first quarter under pandemic-related restrictions. In January 2021, the Board authorized up to $475 million of repurchases through March 31, subject to regulatory limits.
- Management announced plans to eliminate approximately 1,200 positions during 2021, partly offset by insourcing and critical hires, and expects approximately $150 million of 2021 savings. The 2020 repositioning program included $133 million of charges and a planned real-estate footprint reduction of approximately 13%.
- No numerical full-year 2021 revenue or earnings guidance is provided in the supplied filing text. Management noted that deposits were expected to remain elevated in the then-current low-rate environment, while future NII and NIM would depend on rates, deposit levels, balance-sheet mix and regulatory requirements.
- A large servicing client expects to move a significant portion of its ETF assets to other providers, principally in 2023. Fees associated with the assets were approximately 1.5% of 2020 total fee revenue; the ultimate earnings impact depends partly on continuing business and related expense reductions.
- Legal and regulatory exposure remains notable. Historical invoicing remediation payments were expected to total at least $370 million, all paid or accrued, with DOJ and DOL matters unresolved and possible additional penalties. Legal and regulatory accruals totaled about $144 million; estimated reasonably possible losses above accruals were up to about $40 million for matters where the company could estimate a range. Some matters could not be reasonably estimated.
- Other key risks include competitive pricing pressure, interest-rate and market exposure, concentrated counterparty and credit risks, operational and cyber risks, regulatory capital and liquidity requirements, CRD integration and State Street Alpha execution. Management also cited LIBOR transition risk and potential effects of Brexit and changing regulation.
- The 2020 financial statements received an unqualified audit opinion. Management and the auditor concluded internal control over financial reporting was effective. The auditor identified servicing fee revenue as a critical audit matter because of contract volume, non-standard terms, renegotiations and multiple revenue processes.
Important facts for investors to verify
- Whether fee growth can offset persistently lower NII and NIM, and how the rate and deposit environment affects future earnings.
- The credit outlook behind the CECL allowance, particularly leveraged loans, fund finance and commercial real estate exposures.
- The size and timing of the ETF servicing transition, the client’s retained business and associated expense reductions.
- Progress on the announced workforce and real-estate actions, including whether expected savings are achieved net of implementation costs.
- Resolution and potential cost of the DOJ and DOL invoicing investigations, related litigation and any further billing remediation.
- Capital distribution capacity under Federal Reserve restrictions, including whether authorized repurchases proceed as planned.
- State Street Alpha and CRD integration progress, including client installations, revenue conversion and remaining acquisition costs.