State Street Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods unless stated otherwise. State Street provides investment servicing and investment management services globally. At quarter-end, it reported $35.69 trillion in assets under custody and/or administration (AUC/A) and $3.27 trillion in assets under management (AUM).
Financial results
| Metric | Q3 2022 | Change year over year | Nine months 2022 | Change year over year |
|---|---|---|---|---|
| Total revenue | $2.959 billion | -1% | $8.993 billion | Approximately flat |
| Fee revenue | $2.299 billion | -8% | $7.242 billion | -3% |
| Net interest income (NII) | $660 million | +36% | $1.753 billion | +23% |
| Net income | $690 million | -3% | $2.041 billion | +2% |
| Diluted earnings per share | $1.80 | -8% | $5.28 | -2% |
| Pre-tax margin | 28.7% | 29.3% in Q3 2021 | 27.1% | 27.2% in 2021 |
| Return on average common equity | 11.2% | 11.6% in Q3 2021 | 10.9% | 10.8% in 2021 |
Q3 NII growth reflected higher short-term rates, partly offset by lower client deposits. Fee revenue declined primarily because of lower servicing and management fees; FX trading, securities finance, and software and processing revenue increased. Q3 expenses were $2.110 billion, essentially flat year over year, as productivity savings offset wage, investment, marketing and travel costs. Q3 credit-loss provision was zero; the nine-month provision was $10 million, compared with a $26 million reserve release in 2021.
Balance sheet, cash flow and capital
- At September 30, 2022, total assets were $303.57 billion, deposits $238.24 billion, total liabilities $277.92 billion, and shareholders’ equity $25.65 billion. Deposits were down from $255.04 billion at December 31, 2021.
- For the first nine months, operating cash flow was $4.918 billion, investing cash flow was $7.911 billion, and financing cash flow was negative $13.712 billion. Cash and due from banks ended at $2.748 billion, down $883 million from year-end 2021. These cash-flow totals are affected by movements in client collateral, deposits and other balance-sheet items.
- Standardized CET1 capital ratio was 13.2%, down from 14.3% at year-end 2021, primarily reflecting unrealized AFS securities losses in accumulated other comprehensive income (AOCI) and implementation of SA-CCR. Tier 1 leverage ratio was 6.4%, versus 6.1%; supplementary leverage ratio was 7.1%, versus 7.4%. State Street said it exceeded applicable regulatory capital requirements.
- Daily average Q3 liquidity coverage ratio (LCR) was 106% for the Parent Company; State Street Bank’s Q3 LCR was approximately 116%. The Parent Company had about $1.01 billion of senior notes or subordinated debentures maturing within 12 months.
- Long-term debt was $14.00 billion at quarter-end. State Street issued $750 million of 4.164% fixed-to-floating senior notes due 2033 in August 2022. It declared a Q3 common dividend of $0.63 per share, up from $0.57.
Material changes and notable items
- AUC/A fell 18% year over year and AUM fell 15%, mainly reflecting lower markets and currency translation; AUM also reflected institutional net outflows. New business and cash and ETF inflows provided partial offsets.
- Q3 servicing fees declined 12% and management fees 10%. Reported fee revenue also included a $5 million negative “other fee revenue” amount in Q3, versus $22 million of positive revenue a year earlier, reflecting absent equity-investment fair-value gains and negative market-related adjustments.
- Q3 AUC/A mandates announced totaled approximately $233 billion; about $3.41 trillion of servicing assets remained to be installed. State Street expects installation over the coming 36 months; mandates are not revenue until assets are installed and services begin.
- Q3 comprehensive income was $109 million, compared with $454 million a year earlier; nine-month comprehensive loss was $1.094 billion, versus $1.127 billion of income in 2021. Nine-month other comprehensive loss was $3.135 billion, including AFS securities and currency translation losses. State Street transferred $21.23 billion of securities from AFS to held-to-maturity (HTM) in Q2 to mitigate further AOCI exposure. At September 30, gross pre-tax unrealized losses on investment securities were $8.32 billion; management attributed them primarily to interest rates, not material deterioration in credit characteristics.
- State Street did not repurchase common stock in the first nine months of 2022, citing the proposed BBH transaction. It stated an intention to repurchase approximately $1.0 billion in Q4 under the existing program, subject to conditions and Board discretion.
Outlook, risks and contingencies
- BBH acquisition: The proposed $3.5 billion acquisition of Brown Brothers Harriman’s Investor Services business remained subject to regulatory review and other closing conditions. State Street and BBH were discussing proposed modifications, including a lower purchase price and changes to the operating model and legal structure. Management described the likelihood of a successful outcome as increasingly uncertain; either party may terminate without contractual penalty. A modified deal could delay synergies and the path to accretion. State Street reported $13 million of Q3 and $34 million of nine-month acquisition costs in 2022 and estimated up to approximately $590 million of acquisition and integration costs through the third year after closing; additional costs could arise if modifications are agreed.
- Market and rate sensitivity: Management cited geopolitical and economic uncertainty, inflation and central-bank actions, volatile equity and fixed-income markets, currency movements, deposit behavior, and counterparty risk. Its modeled 12-month NII sensitivity at September 30 showed a $234 million benefit under a +100 basis-point parallel shock and a $225 million exposure under a -100 basis-point shock, assuming no management action. The U.S. dollar balance sheet had become liability-sensitive to rising rates as deposit betas and deposit rotation increased; results depend on model assumptions and actual deposit behavior.
- Client transition: A large asset-servicing client plans to move a significant portion of its ETF assets to other providers, principally in 2023–2024. The associated assets represented approximately 1.9% of 2021 fee revenue. State Street expects to remain a significant provider to the client; actual financial impact will depend on continuing business and expense reductions.
- Legal matters: Legal and regulatory proceedings are not fully predictable. Accrued legal loss contingencies were approximately $15 million. For matters where an estimate was possible, reasonably possible losses in excess of accruals were estimated up to approximately $50 million; some matters could not be reasonably estimated. The filing also describes ongoing invoicing-related remediation, with cumulative customer payments expected to be at least $350 million, paid or accrued, and possible additional remediation.
- Other disclosed risks include liquidity and capital requirements, operational and cyber risk, regulatory change, LIBOR transition, and potential further AOCI deterioration. The filing provides no specific earnings or revenue guidance for the upcoming quarter.
Important facts for investors to verify
- Whether BBH and State Street agree to a modified transaction, obtain required approvals, or terminate the deal—and the resulting cost, timing and capital implications.
- How quickly higher rates translate into NII after deposit declines, deposit repricing and quantitative tightening; compare actual outcomes with the stated sensitivity scenarios.
- The size and timing of the ETF client transition and whether new business installations offset lost servicing fees and AUC/A.
- Further AOCI changes, securities portfolio fair values and the impact on regulatory capital if interest rates or markets move again.
- Whether the intended Q4 share repurchase occurred and how capital, liquidity and regulatory constraints affect future distributions.