STT

Business Context and Reporting Period

Company: State Street Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 1997
Business Overview: A financial services corporation providing banking, trust, investment management, global custody, administration, and securities processing services. Operations are divided into Financial Asset Services, Investment Management, and Commercial Lending.

Key Financial Metrics

Liquidity & Capital:

• Cash and Due from Banks: $1,510 million (Sept 30, 1997).
• Liquid Assets: Represented 73% of total assets.
• Tier 1 Risk-Based Capital Ratio: 13.3% (Significantly exceeds the 4% regulatory minimum).
• Total Risk-Based Capital Ratio: 13.4% (Significantly exceeds the 8% regulatory minimum).

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 30% in Q3 1997 compared to Q3 1996, driven by a 36% increase in fee revenue and an 18% increase in net interest revenue.
• Profitability: Net income rose 36% in Q3 and 30% for the nine-month period. Return on stockholders' equity was 21.4% for the quarter.
• Fee Revenue Drivers:
  • Fiduciary Compensation: Increased 25% to $324 million, driven by expanded customer relationships and a 38% increase in assets under custody to $3.8 trillion.
  • Foreign Exchange Trading: Surged 168% to $74 million due to active currency markets and increased cross-border investment activity.
• Expense Growth: Operating expenses increased 29% in Q3, primarily due to a 29% rise in salaries and employee benefits (11% more staff and higher incentive compensation).
• Balance Sheet: Total assets grew 12% year-over-year. Non-U.S. deposits increased by $2.7 billion, and securities sold under repurchase agreements increased by $1.3 billion.

Guidance, Outlook, and Risks

Management Commentary:

• Management described Q3 results as "unusually strong," with earnings growth significantly above the long-term rate.
• A record amount of new business was signed in the quarter, expected to be installed in subsequent quarters.
• Management remains optimistic about long-term prospects despite recent market volatility.

Financial Goals:

• Revenue: Target of 12.5% real (inflation-adjusted) growth annually for the 1990s decade.
• ROE: Target of 18% return on common stockholders' equity.

Risks and Contingencies:

• Market Risk: Exposure to fluctuations in interest rates and currency values affecting derivative valuations and net interest revenue.
• Credit Risk: Potential losses from failure of counterparties to perform on derivative contracts or loan defaults. Non-performing assets decreased to $8 million.
• Operational Risk: Costs associated with Year 2000 compliance estimated at 1-2% of total expenses over three years.
• Legal: Subject to pending legal actions, though management believes they will not have a material adverse effect.

Investor Verification Checklist

• Asset Growth Sustainability: Verify the split between market value appreciation and new net inflows driving the 38% increase in assets under custody.
• Expense Management: Monitor if the 29% increase in operating expenses (driven by headcount and incentives) can be sustained relative to revenue growth.
• FX Revenue Volatility: Assess the sustainability of the 168% jump in foreign exchange trading revenue, which is highly dependent on market volatility.
• Capital Ratios: Confirm continued adherence to "well capitalized" status (Tier 1 > 6%) as the balance sheet expands.
• Stock Split Impact: Note the two-for-one stock split in May 1997; ensure per-share data comparisons are adjusted accordingly.