State Street Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021; comparisons are primarily with Q3 2020 and, where noted, the first nine months of 2020. State Street provides investment servicing and investment management services. At quarter-end, it reported $43.34 trillion in assets under custody and/or administration (AUC/A) and $3.86 trillion in assets under management (AUM).
Financial results and condition
- Q3 revenue and earnings: Revenue was $2.990 billion, up 7%; fee revenue was $2.504 billion, up 9%; and net interest income (NII) was $487 million, up 2%. Net income was $714 million, up 29%, and diluted EPS was $1.96, up 35% from $1.45. Pre-tax margin rose to 29.3% from 24.5%; return on average common equity rose to 11.6% from 8.9%.
- Q3 fee drivers: Servicing fees increased 7%, management fees 10%, securities finance 26%, and software and processing fees 15%. Foreign exchange trading services rose 3%. Higher market levels, client activity and flows, and net new business supported fee growth; pricing pressure and money-market fee waivers were offsets.
- First nine months: Revenue was $8.974 billion, up 2%; fee revenue increased 6% to $7.501 billion, while NII declined 16% to $1.421 billion. Net income was $1.996 billion, up 6%, and diluted EPS was $5.40, up 10%. The credit-loss provision was a $26 million release, compared with an $88 million provision in the prior-year period.
- Expenses and margins: Q3 expenses increased 1% to $2.116 billion. For the first nine months, expenses increased 2% to $6.559 billion. The nine-month effective tax rate was 18.2%, versus 16.6% in 2020.
- Balance sheet and debt: September 30 total assets were $323.14 billion, deposits $259.37 billion, total shareholders’ equity $27.31 billion, loans net of allowance $32.70 billion, and long-term debt $12.98 billion. Compared with December 31, 2020, deposits increased from $239.80 billion and loans net of allowance from $27.80 billion; long-term debt decreased from $13.81 billion.
- Cash flow: For the first nine months, operating activities used $10.94 billion, compared with $156 million provided in 2020. Investing activities used $478 million and financing activities provided $12.55 billion; cash and due from banks increased by $1.14 billion. Operating cash flow reflected, among other items, changes in collateral deposits and foreign-exchange derivatives.
- Capital and liquidity: The standardized CET1 ratio was 13.5% at September 30, versus 12.3% at December 31, 2020; the Tier 1 leverage ratio was 6.3%, versus 6.4%. The supplementary leverage ratio was 7.5%. Average Q3 liquidity coverage ratios were 105% for the Parent Company and approximately 127% for State Street Bank. The company said it exceeded applicable regulatory capital requirements.
- Assets under management and custody: AUC/A increased 18% year over year and AUM increased 23%, primarily reflecting higher markets; AUM also benefited from ETF and cash inflows, partly offset by institutional outflows.
Material changes versus prior periods
- Q3 earnings growth reflected stronger fee revenue, modestly higher NII, a $2 million credit-reserve release, and expenses that rose more slowly than revenue. The filing reports operating leverage of 6.8 percentage points for the quarter.
- Across the first nine months, fee growth was partly offset by lower NII, primarily reflecting lower investment portfolio yields and the prior-year comparison. Foreign-exchange trading revenue fell 12% for the nine-month period, following unusually high volatility in early 2020.
- September 2021 common stock issuance produced approximately $1.9 billion of net proceeds. The offering of approximately 21.7 million shares increased common shares outstanding.
- Q3 AUC/A included strong market-related growth, but a large servicing client plans to transition a significant portion of its ETF assets to other providers, principally in 2023. Associated 2020 fee revenue was approximately 1.5% of State Street’s total fee revenue.
Outlook, commentary, risks and unusual items
- Proposed BBH acquisition: State Street agreed to acquire Brown Brothers Harriman’s Investor Services business for $3.5 billion in cash, targeting completion by year-end 2021, subject to regulatory approval and other closing conditions. The company planned to use the $1.9 billion share-offering proceeds, cash on hand and suspended share repurchases to help finance it. It estimated up to approximately $590 million of acquisition and integration costs through the third year after closing. Following closing, management expected CET1 and Tier 1 leverage ratios to be at the lower end of target ranges of 10–11% and 5.25–5.75%, respectively.
- Capital returns: The Q3 common dividend declared was $0.57 per share, up 10% year over year. No shares were repurchased in Q3; management did not intend repurchases in Q4 2021 or Q1 2022 and expected to resume in Q2 2022.
- Business pipeline: Newly announced Q3 servicing mandates totaled approximately $1.66 trillion. Approximately $2.73 trillion of servicing assets remained to be installed; management expected conversion over 12–24 months, with about half of associated annualized revenue expected through 2022 and the remainder primarily in 2023. Mandates are subject to installation timing and other conditions.
- Interest rates and deposits: Management expected deposits to remain elevated but modestly below Q3 levels. Its modeled 12-month NII sensitivity estimated an $830 million benefit from a parallel +100-basis-point shock and a $1.017 billion benefit from a -100-basis-point shock. These are scenario estimates, not guidance, and depend on assumptions including deposit levels, pricing and rate floors.
- Credit and portfolio risks: The reserve release reflected improved credit quality and a stable economic outlook, but estimates remain sensitive to economic forecasts and credit migration. Approximately 17% of loans were rated speculative, concentrated mainly in leveraged loans; the filing notes these loans carry higher credit-loss exposure than higher-rated loans. About 92% of the investment portfolio was rated AAA or AA.
- Contingencies and unusual matters: Accruals for legal, regulatory and related matters totaled approximately $19 million; estimated reasonably possible losses in excess of accruals were up to approximately $45 million, excluding matters for which a range could not be estimated. In the invoicing matter, cumulative client reimbursements were expected to be at least $360 million, all paid or accrued; State Street paid a $115 million penalty in May 2021 under a deferred prosecution agreement. Additional remediation or claims remain possible.
- Other risks: The filing highlights acquisition approval and integration risks, competition and pricing pressure, market and interest-rate exposure, dependence on fee revenue and client asset levels, cyber and operational risks, COVID-19 impacts, regulatory requirements, and the transition away from LIBOR. Approximately 77% of employees were working remotely at quarter-end. No material change in internal control over financial reporting was reported, and management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the BBH transaction received approvals, closed on the expected timetable, retained clients, and achieved expected benefits and integration costs.
- Whether the $2.73 trillion installation pipeline converts as expected, and how the large client ETF transition affects future fees, revenue and costs.
- How deposit levels, short-term rates, fee waivers and investment yields affect NII and margins; modeled rate sensitivities rely on stated assumptions.
- What drove the sharp change in operating cash flow, particularly collateral and foreign-exchange derivative movements, and whether those flows persist.
- Whether credit quality, leveraged-loan exposures, allowance estimates and legal or regulatory contingencies change materially.
- Whether capital ratios, liquidity measures and planned share repurchases remain consistent with management’s post-acquisition expectations.