State Street Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods unless stated otherwise. State Street provides institutional investment servicing and investment management. At quarter-end it reported $42.60 trillion in assets under custody and/or administration (AUC/A), $3.90 trillion in assets under management (AUM), and operations in more than 100 markets.
Financial results and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $3.034 billion | $2.937 billion | $5.984 billion | $6.002 billion |
| Net interest income (NII) | $467 million | $559 million | $934 million | $1.223 billion |
| Net income | $763 million | $694 million | $1.282 billion | $1.328 billion |
| Diluted EPS | $2.07 | $1.86 | $3.44 | $3.48 |
| Total expenses | $2.111 billion | $2.082 billion | $4.443 billion | $4.337 billion |
| Pre-tax margin | 30.9% | 27.3% | 26.2% | 26.3% |
- Q2 fee revenue rose 6% to $2.514 billion; servicing fees increased 10% and management fees 14%. Securities finance revenue rose 18%. Lower foreign-exchange trading services revenue (down 12%) and software and processing fees (down 12%) partly offset those gains.
- Q2 NII fell 16%; fully taxable-equivalent net interest margin was 0.71%, down from 0.93%. Management attributed the decline mainly to lower investment yields and short-term rates, partly offset by growth in deposits, investments and loans. For the first half, NII declined 24% and FTE NIM was 0.73%, versus 1.10%.
- Q2 provision for credit losses was a $15 million release, compared with a $52 million expense in Q2 2020, reflecting an improved economic outlook. First-half provision was a $24 million release versus an $88 million expense.
- Q2 effective tax rate was 18.6%, compared with 13.6%; the filing cites higher foreign tax credits in 2020 and lower tax-credit investment benefits in 2021. First-half rates were 18.1% and 15.8%, respectively.
- At June 30, total assets were $326.53 billion, deposits $263.97 billion, shareholders’ equity $25.17 billion and loans, net of allowance, $30.60 billion. Long-term debt was $13.03 billion, down from $13.81 billion at December 31, 2020.
- For the six months, operating cash flow was a net outflow of $11.33 billion, versus a $5.38 billion inflow in 2020; investing cash flow was a $3.09 billion outflow and financing cash flow a $15.57 billion inflow. The filing reports significant collateral, derivative and other balance-sheet movements within operating cash flows.
Changes, capital and liquidity
- First-half revenue was nearly flat and net income declined 3%, while Q2 revenue rose 3%, net income 10% and diluted EPS 11%. Fee growth was outweighed over the first half by sharply lower NII and lower foreign-exchange revenue.
- AUC/A increased 27% and AUM 28% year over year, reflecting higher market levels and flows. Investment Management benefited from higher equity markets and ETF inflows, partly offset by institutional outflows and an asset reallocation reported in Q1 2021.
- Standardized CET1 was 11.2% at June 30, down from 12.3% at December 31, 2020, primarily due to higher risk-weighted assets. The Tier 1 leverage ratio was 5.2%, versus 6.4%; the standardized capital ratios were binding. The company said it exceeded applicable capital requirements.
- Average Q2 liquidity coverage ratio (LCR) was 104% at the Parent Company and approximately 131% at State Street Bank. Elevated client deposits were an important balance-sheet and liquidity factor; management expected deposits to remain elevated but modestly below Q2 levels.
- State Street returned approximately $606 million to shareholders in Q2: $179 million in common dividends and $425 million in repurchases. It announced a $0.57 per-share Q3 dividend and authorized up to $3.0 billion of repurchases through 2022.
Outlook, notable items and risks
- No specific consolidated earnings or revenue guidance is provided. Management expected money-market fee waivers to reduce management fees by approximately $20–$25 million per quarter for the rest of 2021, assuming short-term rates and fund assets remain constant. It expected current uninstalled servicing mandates to convert over 12–24 months, with revenue benefits beginning in 2022 and largely realized in 2023.
- A large servicing client plans to move a significant portion of ETF assets to other providers, with transition expected to begin in 2022 and occur principally in 2023. Related 2020 fee revenue was approximately 1.5% of total fee revenue; the ultimate revenue and income effect depends on continuing business and expense reductions.
- Q2 included a $53 million gain on sale of a majority interest in the Wealth Management Services business and an approximately $11 million legal accrual release. Acquisition and restructuring costs were approximately $11 million, primarily related to Charles River Development (CRD). These items affect comparability.
- Interest-rate exposure remains material: management’s 12-month NII sensitivity estimated benefits of $930 million under a parallel +100 basis-point shock and $959 million under a -100 basis-point shock, assuming no mitigating management action. Economic value of equity remained exposed to rising rates, with a modeled $1.739 billion decline under a +200 basis-point shock.
- Key disclosed risks include low rates and deposit behavior, market-sensitive fee revenue, client pricing pressure and flows, competition, credit and counterparty exposure, operational and cyber risk, COVID-19 effects, regulatory capital and liquidity requirements, and the transition from LIBOR.
- Legal matters include the invoicing matter: State Street entered a deferred prosecution agreement and paid a $115 million penalty in May 2021. It reported approximately $21 million in aggregate legal and regulatory accruals and estimated reasonably possible losses of up to approximately $40 million above accrued amounts for matters it could estimate; some matters could not be reasonably estimated. The filing says the invoicing-related customer remediation total is expected to be at least $366 million, paid or accrued, and further remediation may be identified.
- Off-balance-sheet exposure includes $34.97 billion of unfunded credit commitments and $3.47 billion of standby letters of credit. State Street also indemnified $421.86 billion of securities on loan, supported by $442.44 billion of collateral held as agent.
Important facts for investors to verify
- Whether fee growth and asset inflows persist after separating market appreciation, currency translation, fee waivers and the $53 million WMS gain.
- How NII and margins respond to interest rates, deposit balances and pricing, and whether actual outcomes match the disclosed sensitivity assumptions.
- The realization and economics of uninstalled servicing mandates, the ETF asset transition, and related client flows and expense savings.
- Capital ratio trends, risk-weighted asset growth, regulatory distribution constraints and the execution of the expanded repurchase authorization.
- Developments in the invoicing matter and other legal proceedings, including potential additional remediation, fines or losses beyond recorded estimates.
- Credit quality and collateral protections for lending, indemnified securities finance, unfunded commitments and derivative exposures.