State Street Corporation — Q2 2020 Form 10-Q
Business context and reporting period. State Street provides custody, administration, investment management and related services to institutional investors worldwide. This filing covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods unless noted. At quarter-end, assets under custody and/or administration (AUC/A) were $33.52 trillion and assets under management (AUM) were $3.05 trillion.
Financial results and condition
| Metric | Q2 2020 | Change year over year | Six months 2020 | Change year over year |
|---|---|---|---|---|
| Total fee revenue | $2.378 billion | +5% | $4.777 billion | +6% |
| Net interest income (NII) | $559 million | -9% | $1.223 billion | -5% |
| Total revenue | $2.937 billion | +2% | $6.002 billion | +3% |
| Provision for credit losses | $52 million | Compared with $1 million | $88 million | Compared with $5 million |
| Total expenses | $2.082 billion | -3% | $4.337 billion | -2% |
| Net income | $694 million | +18% | $1.328 billion | +21% |
| Diluted EPS | $1.86 | +31% | $3.48 | +33% |
| Pre-tax margin | 27.3% | Up 230 bps | 26.3% | Up 300 bps |
Revenue and margins. Q2 servicing fees increased 2%, FX trading services rose 26% amid unusually high volume and volatility, and software and processing fees rose 46%, partly reflecting CRD client implementation and renewals. Management fees fell 4% amid institutional net outflows; securities finance revenue declined 27% following client deleveraging, an asset mix shift and lower spreads. NII was pressured mainly by lower market rates, partly offset by higher deposits. Fully taxable-equivalent net interest margin was 0.93% in Q2, versus 1.38% a year earlier.
Cash flow. For the first six months, operating activities provided $5.375 billion, compared with $327 million used in 2019. Investing activities used $38.295 billion, including substantial purchases of MMLF securities and increased interest-bearing bank deposits. Financing activities provided $33.303 billion; cash and due from banks increased by $383 million to $3.685 billion.
Balance sheet and liquidity. At June 30, total assets were $280.24 billion, deposits $200.46 billion and shareholders’ equity $24.87 billion; at December 31, 2019, these were $245.61 billion, $181.87 billion and $24.43 billion, respectively. Long-term debt was $15.59 billion, up from $12.51 billion. Average parent-company liquidity coverage ratio (LCR) was 109% for Q2; average high-quality liquid assets were $141.69 billion. State Street reported a 12.3% standardized CET1 ratio and a 6.1% tier 1 leverage ratio at quarter-end. The filing says regulatory capital requirements were exceeded.
Material changes and notable items
- COVID-19 and credit provisions: The company adopted CECL on January 1, 2020; adoption reduced opening retained earnings by $3 million. Q2’s $52 million credit provision reflected portfolio credit migration and a weaker economic outlook related to COVID-19. The allowance for credit losses was $163 million at June 30.
- Federal Reserve liquidity support: Average participation in the Money Market Mutual Fund Liquidity Facility (MMLF) was $19.0 billion in Q2, generating $12 million of NII. MMLF-related assets were matched by non-recourse Federal Reserve borrowings; the program was authorized through September 30, 2020 unless extended.
- Capital returns: Common dividends were $0.52 per share in Q2, up from $0.47. No common shares were repurchased in Q2; Federal Reserve restrictions also barred repurchases in Q3 absent approval, while permitting dividends at prior levels. The timing of Q4 capital distributions remained uncertain pending updated stress testing.
- Capital position: The preliminary stress capital buffer (SCB) was 2.5%, the minimum, with the final determination expected by August 31, 2020. State Street redeemed $500 million of Series C preferred stock in March.
- CRD costs: State Street expected approximately $200 million of CRD acquisition and integration costs through 2021; $133 million had been incurred by June 30, 2020.
Outlook, risks and contingencies
Management said deposits were expected to remain elevated in the low-rate environment, but future balances depend on client behavior, the servicing business and market conditions. No specific earnings or revenue guidance is provided in the filing. The company deferred most planned headcount reductions through year-end 2020, with planned actions expected afterward.
Key uncertainties include the duration and economic effects of COVID-19, market levels and volatility, interest rates and resulting fee and NII pressure, client flows and pricing, credit migration, liquidity and deposit behavior, cyber and operational resilience, regulation and capital distributions. State Street also disclosed ongoing litigation and investigations concerning historical billing practices. It had accrued $147 million for legal, regulatory and related loss contingencies; estimated reasonably possible losses in excess of accruals were up to approximately $65 million, while some matters could not be reasonably estimated. The DOJ and DOL reviews remained unresolved. A prior Federal Reserve/Massachusetts Division of Banks written agreement concerning compliance programs was terminated in June 2020.
Most important facts for investors to verify
- Whether fee growth, particularly FX and CRD-related revenue, persists as market activity and volatility normalize.
- How lower interest rates and deposit levels affect NII and net interest margin in subsequent quarters.
- Whether COVID-19-related credit deterioration leads to further provisions under CECL.
- The final SCB, updated stress-test results and implications for repurchases and other capital distributions.
- Resolution and potential financial or reputational effects of the DOJ/DOL billing-practices matters, including any losses beyond current accruals.
- Whether announced servicing mandates are completed and installed as expected; the filing reports approximately $1.04 trillion of servicing assets yet to be installed at June 30, 2020.