Business context and reporting period
State Street Corporation’s Form 10-K covers the fiscal year ended December 31, 2012; the filing also provides fourth-quarter results. The company serves institutional investors globally through Investment Servicing and Investment Management (State Street Global Advisors). At year-end, assets under custody and administration were $24.37 trillion and assets under management were $2.09 trillion.
Financial results and condition
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $9.649 billion | $9.594 billion |
| Fee revenue | $7.088 billion | $7.194 billion |
| Net interest revenue | $2.538 billion | $2.333 billion |
| Net income | $2.061 billion | $1.920 billion |
| Net income available to common shareholders | $2.019 billion | $1.882 billion |
| Diluted EPS | $4.20 | $3.79 |
| Total expenses | $6.886 billion | $7.058 billion |
| Net interest margin, fully taxable-equivalent | 1.59% | 1.67% |
| Return on average common equity | 10.3% | 10.0% |
| Operating cash flow | $1.826 billion | $3.374 billion |
Revenue increased 1% and net income increased 7%. Fee revenue fell 1%: servicing fees rose 1%, management fees rose 8%, and trading services declined 17%, including a 25% decrease in foreign-exchange trading revenue. Net interest revenue increased 9%, mainly from higher interest-earning assets and lower funding costs; the higher average balance of low-yielding central-bank deposits weighed on margin.
Fourth-quarter 2012 revenue was $2.449 billion and net income was $470 million, versus $2.315 billion and $381 million, respectively, in fourth-quarter 2011. Diluted EPS was $1.00 versus $0.76.
Year-end total assets were $222.582 billion, deposits $164.181 billion, total shareholders’ equity $20.869 billion, and long-term debt $7.429 billion. The loan-loss allowance was $22 million; the company recorded a $3 million provision benefit for the year. Regulatory capital ratios were 19.1% Tier 1 and 20.6% total risk-based capital at State Street Corporation; the bank subsidiary’s respective ratios were 17.3% and 19.1%.
Reported cash flow was $1.826 billion from operations, $(4.591) billion from investing, and $3.162 billion from financing. The investing cash outflow included securities purchases and acquisition spending; year-over-year cash-flow movements also reflected substantial changes in deposit and central-bank balances. Management reported consolidated net liquid assets of $149.02 billion, including approximately $41.11 billion of excess central-bank balances.
Material changes versus prior period
- Assets under custody and administration rose 12% to $24.37 trillion; assets under management rose 13% to $2.09 trillion.
- Servicing and management fee growth benefited from stronger equity markets, new business and acquisitions; a weaker euro and client de-risking partly offset servicing-fee growth.
- Foreign-exchange trading revenue fell to $511 million from $683 million, reflecting lower volatility and spreads, as well as lower indirect-trading volumes. Securities finance revenue increased 7% to $405 million, supported by wider spreads despite lower lending volumes.
- Net interest margin declined 8 basis points. The investment portfolio grew, with year-end investment securities of $121.061 billion versus $109.153 billion.
- Year-end deposits increased to $164.181 billion from $157.287 billion; long-term debt declined to $7.429 billion from $8.131 billion. Common shares repurchased totaled approximately 33.4 million for $1.44 billion, and common dividends declared increased to $0.96 per share from $0.72.
Outlook, commentary, risks and unusual items
Management forecast approximately $220 million of incremental pre-tax savings in 2013 from its Business Operations and Information Technology Transformation program, and projected annualized savings of $575–$625 million by the end of 2014 versus the 2010 expense base, with full effect expected in 2015. These are program-specific savings, not a forecast that total expenses will decline. A separate 2012 restructuring charge of $133 million related to planned reductions of approximately 630 positions, expected to be substantially completed in 2013.
The company recorded a $362 million benefit from resolving U.S. and U.K. claims related to Lehman Brothers, plus an approximately $10 million gain from selling the resulting claims. Other notable items included $118 million of provisions for litigation exposure and other costs, $199 million of net restructuring charges, and a $46 million loss on the sale of Greek securities. Goldman Sachs Administration Services was acquired in October for approximately $550 million, adding about $200 billion of hedge-fund assets under administration.
Management said foreign-exchange services remained subject to client, regulatory and media scrutiny, and did not expect pressure on indirect FX services to ease in 2013. The filing describes pending FX-pricing, securities-lending, shareholder and other litigation; some matters have no recorded reserve and possible exposure is not clearly quantifiable. The California Attorney General asserted approximately $100 million in actual damages for 2001–2009 and sought additional penalties, including treble damages. State Street had a $10 million reserve for a separate securities-lending matter and $10 million for U.K. transition-management indemnification costs and a potential penalty.
Key risks include concentrated exposure to major financial institutions and sovereign counterparties; market, interest-rate and investment-portfolio risks; short-term and potentially volatile client funding; operational, cyber-security and execution risks; and litigation and reputational exposure. The company was designated a systemically important financial institution and a global systemically important bank. Proposed Basel III and U.S. capital rules could increase capital requirements and affect portfolio composition, profitability and shareholder distributions. The Federal Reserve’s review of 2013 capital plans was pending; future dividends and repurchases depended on that review. No specific company-wide earnings guidance was provided.
Most important facts for investors to verify
- How much of 2012 earnings growth is sustainable after adjusting for the $362 million Lehman-related benefit, restructuring, litigation provisions and other unusual items.
- Whether planned transformation savings are achieved on schedule and translate into lower total operating expenses.
- Trends in indirect FX revenue, related litigation and regulatory inquiries, and the adequacy of recorded reserves.
- Investment-portfolio credit quality, impairment assumptions, sensitivity to interest rates, and the effect of proposed capital rules.
- Deposit stability, net liquid assets and funding needs after expiration of the FDIC Transaction Account Guarantee.
- Federal Reserve decisions on the 2013 capital plan and their implications for dividends and share repurchases.