Business context and reporting period
State Street Corporation filed this unaudited Form 10-Q for the quarter ended June 30, 2011. It provides investment servicing and investment management services to institutional investors. At quarter-end, it reported $22.76 trillion in assets under custody and administration and $2.12 trillion in assets under management.
Financial results and key metrics
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Total revenue | $2.491 billion | $2.304 billion | $4.852 billion | $4.600 billion |
| Net income | $513 million | $432 million | $984 million | $927 million |
| Diluted EPS | $1.00 | $0.87 | $1.93 | $1.86 |
| Net interest revenue | $572 million | $658 million | $1.149 billion | $1.319 billion |
| Net interest margin, fully taxable-equivalent | 1.76% | 2.21% | — | — |
| Total expenses | $1.774 billion | $1.944 billion | $3.476 billion | $3.523 billion |
- Q2 fee revenue rose 12% to $1.892 billion; servicing fees increased 16% and management fees 24%. For the first half, fee revenue rose 14% to $3.683 billion.
- Q2 securities finance revenue increased 26%, while trading services revenue fell 5% and processing fees and other revenue fell 20%.
- Q2 provision for loan losses was $2 million; first-half provision was $1 million. The allowance for loan losses was $54 million at June 30, down from $100 million at December 31, 2010.
- Six-month operating cash flow was negative $4.374 billion, investing cash flow negative $19.402 billion, and financing cash flow positive $25.037 billion. Cash and due from banks increased $1.261 billion to $4.572 billion. These flows reflect substantial balance-sheet and client-funding movements.
- At June 30, total assets were $190.455 billion, deposits $125.409 billion, total shareholders’ equity $19.834 billion, and long-term debt $9.544 billion. Consolidated net liquid assets were $107.69 billion.
- State Street’s Tier 1 and total risk-based capital ratios were 18.9% and 20.8%; State Street Bank’s were 17.2% and 19.3%. Both exceeded regulatory minimum and “well-capitalized” thresholds.
Material changes versus the prior comparable period
- Q2 revenue grew 8% and net income grew 19%; first-half revenue rose 5% and net income rose 6%. Higher servicing and management fees, market appreciation, new business and acquisitions contributed to growth.
- Reported Q2 expenses fell 9%, but Q2 2010 included a $414 million securities-lending charge. Excluding that charge, expenses increased about 16%, reflecting higher compensation, transformation-program costs, acquisitions and operating volumes.
- Net interest revenue declined 13% in both the quarter and first half, primarily because conduit-related discount accretion fell. Q2 accretion was $51 million versus $172 million a year earlier; excluding accretion, fully taxable-equivalent net interest revenue rose 7% in Q2.
- Assets under custody and administration rose to $22.76 trillion from $19.03 trillion at June 30, 2010; assets under management rose to $2.12 trillion from $1.84 trillion. Growth reflected market appreciation and acquired or installed business, partly offset by net lost asset-management business.
- Net realized securities gains and impairment produced a $27 million Q2 gain, versus a $50 million net loss in Q2 2010. Credit-related impairment was $35 million in Q2 2011.
Outlook, management commentary, risks and unusual items
- Management expected most of the $150 billion of remaining Q2 asset-servicing awards, plus $180 billion of earlier awards still awaiting installation, to be installed in the second half of 2011. Of $141 billion in Q2 asset-management awards, $30 billion remained to be installed.
- The multi-year operations and IT transformation program is expected to incur $400–$450 million of pre-tax restructuring charges through 2014 and deliver annualized expense reductions of $575–$625 million by the end of 2014. Management expected another $110–$130 million of charges in the second half of 2011; workforce reductions were ongoing.
- Management said liquidity was sufficient for current commitments and business needs. It cited $107.69 billion of consolidated net liquid assets at quarter-end. Client deposits can be withdrawn rapidly, and access to funding could be affected by adverse market perceptions or credit-rating downgrades.
- Investment securities were concentrated in mortgage- and asset-backed securities; approximately 90% were rated AAA or AA. Management’s housing-price assumption was a 37% peak-to-trough decline. It estimated impairment could increase by $20–$60 million if the decline reached 40%, subject to assumptions and other factors.
- State Street reported $1.27 billion of aggregate exposure to Portugal, Ireland, Greece and Spain, with no individual country exposure above 0.75% of total assets; no impairment or loan-loss provision had been recorded for those positions. Cross-border outstandings to Italy were approximately $1.49 billion.
- Legal and regulatory matters include investigations and litigation involving SSgA funds, securities lending and foreign-exchange pricing. California asserted $56 million in actual damages, plus penalties, in its FX-pricing action; other client and regulatory matters remained unresolved. The filing says outcomes and potential exposure for many matters cannot be reliably predicted or estimated.
- Other notable items include a $500 million preferred-stock issuance following a debt remarketing, $225 million of common-stock repurchases under a $675 million 2011 authorization, and common dividends of $0.18 per share in each of the first two quarters.
Important facts for investors to verify
- Whether growth in fee revenue and awarded business converts into installed assets and sustained revenue, and how market valuations affect fee income.
- Whether net interest revenue and margin stabilize as conduit-related discount accretion declines and interest rates and funding mix change.
- The underlying expense trend after excluding the prior-year securities-lending charge, and progress, costs and realized savings from the transformation program.
- Credit performance, valuation assumptions and impairment sensitivity for mortgage- and asset-backed securities, including non-agency mortgage exposures.
- Developments in FX-pricing, securities-lending and other legal or regulatory proceedings, including any new reserves or settlements.
- Capital and liquidity levels as balance-sheet assets, client deposits, repurchases, dividends and evolving Basel and Dodd-Frank requirements change.