Business Context and Reporting Period
Company: State Street Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: A financial holding company providing investment servicing and investment management services to institutional investors. Key metrics include $12.33 trillion in assets under custody and $1.85 trillion in assets under management as of March 31, 2007.
Key Financial Metrics
| Metric | Q1 2007 | Q1 2006 |
|---|---|---|
| Total Revenue | $1,696 million | $1,523 million |
| Net Income | $314 million | $292 million |
| Diluted EPS | $0.93 | $0.87 |
| Total Assets | $110.00 billion | $107.35 billion (Dec 31, 2006) |
| Total Deposits | $66.60 billion | $65.65 billion (Dec 31, 2006) |
| Shareholders' Equity | $7.47 billion | $7.25 billion (Dec 31, 2006) |
| Net Interest Margin | 1.45% | 1.23% |
| Return on Equity (Continuing Ops) | 17.4% | 17.6% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 11% year-over-year, driven by a 9% rise in total fee revenue and a 22% increase in net interest revenue.
- Fee Revenue Drivers: Servicing fees grew 9% and management fees grew 19%, benefiting from net new business and favorable equity market performance. Securities finance revenue surged 21% due to higher lending volumes. Trading services revenue declined 4% due to reduced currency volatility.
- Net Interest Revenue: Increased 22% with a 22 basis point expansion in net interest margin, attributed to higher customer deposits and a favorable non-U.S. interest rate environment.
- Expenses: Total operating expenses rose 11%, primarily due to increased performance-based compensation and headcount growth. The company achieved positive operating leverage as revenue growth (11.4%) outpaced expense growth (10.7%).
- Assets Under Management (AUM): SSgA generated $76 billion in net new business, bringing total AUM to $1.85 trillion (up 20% year-over-year).
Guidance, Outlook, and Risks
Outlook and Guidance
Management revised its 2007 financial goals to account for the planned acquisition of Investors Financial Services Corp. (expected to close mid-2007). The new targets are:
- Operating-basis revenue growth: 16% to 18%.
- Operating-basis EPS growth: 8% to 10%.
- Operating-basis Return on Equity: 12% to 15%.
Capital and Liquidity
In April 2007, the company issued $700 million in senior debt and $800 million in floating-rate capital securities. Liquid assets totaled $38.80 billion as of March 31, 2007. The company maintains a strong capital position, with Tier 1 risk-based capital ratios of 11.5% (State Street) and 9.8% (State Street Bank), well above regulatory minimums.
Risks and Contingencies
- Acquisition Risk: The Investors Financial acquisition is subject to regulatory and shareholder approval.
- Tax Legislation: Potential negative impact from U.S. Senate legislation regarding tax losses on non-U.S. leveraged leases, though not yet enacted.
- IRS Disputes: Ongoing disputes with the IRS regarding LILO and SILO transactions; management believes current accruals are sufficient.
- Market Risk: Exposure to interest rate fluctuations and foreign exchange volatility, managed through hedging and asset-liability management.
Investor Verification Checklist
- Verify the closing status and regulatory approval of the Investors Financial Services Corp. acquisition.
- Monitor the outcome of IRS audits regarding LILO and SILO tax transactions and potential legislative changes affecting leveraged lease tax losses.
- Track the integration of Currenex, Inc. (acquired March 2007) and its impact on trading services revenue.
- Assess the sustainability of the 22 basis point net interest margin expansion in the context of the inverted domestic yield curve.
- Review the $266 million in pre-tax net unrealized losses on available-for-sale securities and management's intent to hold them to maturity.