State Street Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are primarily with Q1 2022. State Street provides custody, administration, investment management and related services to institutional investors. At quarter-end it reported $37.64 trillion in assets under custody and/or administration (AUC/A), $3.62 trillion in assets under management (AUM), and $290.82 billion in total assets.
Financial performance
| Metric | Q1 2023 | Prior comparable period / change |
|---|---|---|
| Total revenue | $3.101 billion | $3.081 billion; up 1% |
| Fee revenue | $2.335 billion | $2.573 billion; down 9% |
| Net interest income (NII) | $766 million | $509 million; up 50% |
| Provision for credit losses | $44 million | None recorded in Q1 2022 |
| Total expenses | $2.369 billion | $2.327 billion; up 2% |
| Net income | $549 million | $604 million; down 9% |
| Net income available to common shareholders | $525 million | $583 million |
| Diluted EPS | $1.52 | $1.57; down 3% |
| Pre-tax margin / return on average common equity | 22.2% / 9.3% | 24.5% / 9.5% |
| Fully taxable-equivalent net interest margin | 1.31% | 0.80% |
NII growth reflected higher short- and long-term rates and balance-sheet positioning, partly offset by lower average client deposits. Fee revenue was pressured by lower average market levels, client activity and pricing, weaker FX volumes versus unusually high Q1 2022 volumes, and lower software and processing revenue. Securities finance revenue rose 14%, supported by higher specials activity.
Balance sheet, cash flow, capital and liquidity
- At March 31, deposits were $223.63 billion, down from $235.46 billion at December 31, 2022; total shareholders’ equity was $24.75 billion, versus $25.19 billion. Long-term debt was $16.31 billion, up from $15.00 billion.
- Cash flow from operating activities was negative $2.86 billion, compared with positive $4.59 billion in Q1 2022. Investing activities provided $14.31 billion and financing activities used $11.72 billion; cash and due from banks ended at $3.70 billion. Cash-flow movements included material changes in collateral, deposits and other balance-sheet items.
- Standardized CET1 was 12.1%, down from 13.6% at year-end, primarily reflecting share repurchases and expected normalization of risk-weighted assets. The Tier 1 leverage ratio was 6.0%; the supplementary leverage ratio was 6.8%.
- Management said it currently expects CET1 and Tier 1 leverage ratios to move into target ranges of 10–11% and 5.25–5.75%, respectively, in the second half of 2023, subject to the economic environment and capital deployment.
- Average daily parent-company liquidity coverage ratio (LCR) was 108% for Q1; State Street Bank’s LCR was approximately 124%. The filing reports these liquidity measures above applicable minimums.
- State Street returned approximately $1.5 billion to common shareholders through $212 million of declared dividends and $1.25 billion of repurchases. It repurchased 13.6 million shares at an average $91.57 per share under a $4.5 billion authorization. The quarterly dividend was $0.63 per share, up from $0.57.
- On January 26, the company issued $500 million of 4.857% fixed-to-floating senior notes due 2026 and $750 million of 4.821% notes due 2034.
Material changes, outlook and risks
- AUC/A fell 10% year over year to $37.6 trillion, primarily due to lower market levels and a previously disclosed client transition, partly offset by new business. AUM fell 10% to $3.6 trillion, reflecting lower markets and institutional net outflows. Newly announced servicing mandates were approximately $112 billion; about $3.65 trillion remained to be installed, with conversion expected over the coming 36 months.
- A previously disclosed large ETF client transition is expected to occur principally in 2023 and 2024 and affect fee revenue and income growth trends through 2025. The assets yet to transition represented about 1.7% of 2022 total fee revenue.
- Management cited continued business and technology investment and higher salaries as expense pressures, partly offset by productivity savings, lower seasonal expenses and foreign-currency translation benefits. Q1 2023 had no notable items; Q1 2022 included $9 million of costs related to the discontinued BBH Investor Services acquisition transaction.
- The $44 million credit-loss provision included a $29 million episodic provision associated with industry support for a U.S. financial institution, plus higher reserves related to credit-rating changes. The allowance for credit losses was $162 million at quarter-end.
- The FDIC indicated it planned a special assessment to recover deposit-insurance fund losses following the SVB and Signature Bank resolutions. The timing, amount and allocation to State Street are uncertain; the company cautioned the expense impact could be material.
- Other disclosed exposures include interest-rate and deposit sensitivity, market volatility, client deposit outflows, securities-lending and counterparty exposures, cyber and operational risks, the U.S. debt-ceiling situation, and regulatory and litigation matters. The filing reports $16 million in accrued legal and regulatory loss contingencies and an estimated range of reasonably possible losses up to approximately $55 million above accruals for matters where an estimate was available; some matters could not be reasonably estimated.
- State Street announced an agreement to acquire CF Global Trading, subject to customary conditions, with completion expected by year-end 2023. Management also said most LIBOR transition work was substantially complete and no additional material systems investment was expected.
Key investor verification points
- Assess whether NII growth can persist as deposit balances and client behavior respond to rates, and compare that outlook with fee-revenue trends and market levels.
- Track CET1 and leverage ratios against the stated second-half target ranges, including the effects of repurchases, risk-weighted assets and regulatory changes.
- Verify the timing, amount and treatment of any FDIC special assessment, and monitor credit-reserve changes and the financial-institution support provision.
- Follow the large ETF client transition through 2025 and the installation, conversion and fee contribution of announced servicing mandates.
- Review interest-rate-related unrealized securities losses: the filing reports $6.96 billion of gross pre-tax unrealized losses across 2,061 securities, which management primarily attributed to rate changes rather than material deterioration in credit. HTM securities had a $59.14 billion fair value versus $65.03 billion carrying value at quarter-end.
- Confirm the CF Global Trading transaction’s closing and integration, and monitor legal, regulatory, operational, liquidity and debt-ceiling developments.