Business context and reporting period
State Street Corporation’s audited Form 10-K covers the fiscal year ended December 31, 2015, with comparisons to 2014 and 2013. The company provides institutional investment servicing and investment management through State Street Global Advisors (SSGA). At year-end, it reported $27.51 trillion in assets under custody and administration (AUCA), $2.25 trillion in assets under management (AUM), and 32,356 employees.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $10.36 billion | $10.27 billion | +1% |
| Fee revenue | $8.28 billion | $8.01 billion | +3% |
| Net interest revenue | $2.09 billion | $2.26 billion | -8% |
| Total expenses | $8.05 billion | $7.83 billion | +3% |
| Net income | $1.98 billion | $2.02 billion | -2% |
| Diluted EPS | $4.47 | $4.53 | -1% |
| Net interest margin, fully taxable-equivalent | 1.03% | 1.16% | -13 basis points |
| Return on average common equity | 9.8% | 9.8% | Flat |
Fee revenue was approximately 80% of total revenue. Investment Servicing generated $9.16 billion in revenue and $2.16 billion in pre-tax income; its pre-tax margin was 24%, versus 26% in 2014. Investment Management revenue was $1.20 billion and pre-tax income $236 million; its margin was 20%, versus 24%.
At December 31, 2015, total assets were $245.19 billion (down from $274.12 billion), deposits $191.63 billion (down from $209.04 billion), long-term debt $11.53 billion (up from $10.04 billion), and shareholders’ equity $21.10 billion (versus $21.33 billion). Loans and leases were $18.80 billion, with a $46 million allowance for loan losses. The investment securities portfolio was $100.02 billion; approximately 92% of its carrying value was rated AAA or AA.
Regulatory capital ratios for State Street under the Basel III advanced approaches were 12.5% CET1, 15.3% Tier 1, 17.4% total capital, and 6.9% Tier 1 leverage. The supplementary leverage ratio was 6.2%; the company reported its LCR above 100%. The parent company’s net liquid assets were $5.73 billion.
Cash flow statement: operating activities used $1.40 billion; investing activities provided $25.00 billion; financing activities used $24.24 billion. Cash and due from banks declined by $648 million to $1.21 billion. For a financial institution, these cash-flow totals reflect substantial balance-sheet and client-collateral movements and should be read with the liquidity disclosures.
Material changes versus the prior comparable period
- Fee growth was offset by weaker net interest revenue, which fell as low global rates, currency translation and balance-sheet positioning reduced yields and margins.
- Servicing fee revenue rose 1%, supported by new business and transaction volumes, but was reduced by $203 million from the stronger U.S. dollar. Management fees fell 3%, including a $43 million currency impact.
- Year-end AUCA declined 2% to $27.51 trillion and AUM declined 8% to $2.25 trillion. AUM experienced $151 billion of net outflows; market and foreign-exchange effects also affected balances.
- Expenses included $415 million of 2015 legal charges, primarily a $400 million increase to the indirect foreign-exchange legal accrual. Expense growth was partly offset by lower acquisition and restructuring costs and currency effects.
- Common dividends declared increased to $1.32 per share from $1.16. State Street repurchased 20.5 million shares for approximately $1.52 billion during 2015.
Outlook, commentary, risks and unusual items
- State Street Beacon: Management expects approximately $550 million of annualized pre-tax expense savings over five years, including about $75 million in 2016, and estimates $300–$400 million of pre-tax restructuring costs through 2020. These are management estimates, not guaranteed results.
- New business and flows: State Street won $797.5 billion of asset-servicing mandates in 2015, of which $444.9 billion had been installed by year-end. SSGA had $13 billion of awarded but uninstalled AUM. Management also expected approximately $35 billion of additional redemptions by an in-sourcing sub-advisory client through 2016, which it did not expect to have a significant revenue impact.
- Client billing review: The company identified approximately $240 million of incorrect client expense invoices over a period beginning in 1998 and expects to pay about $17 million in related interest. It recorded the reimbursement liability and revised prior-period financial information; it said the errors were immaterial to each prior period but cumulative correction in 2015 would have materially misstated that year. The review could identify additional amounts or lead to claims or regulatory proceedings.
- Indirect FX litigation: State Street had accrued $565 million for claims and investigations related to indirect foreign-exchange trading. The filing states that settlement costs could exceed the accrual, additional claims could arise, and client shifts away from indirect FX may pressure related revenue. Indirect FX revenue was $280 million in 2015.
- Regulatory and market risks: A written agreement with the Federal Reserve and Massachusetts banking regulator requires improvements to Bank Secrecy Act, anti-money-laundering and sanctions compliance, including an independent review of prior transaction activity. Other key exposures include concentrated financial-institution counterparties, interest-rate and currency movements, European market disruption, cyber and operational risks, and evolving capital and liquidity rules. State Street reported a December 2015 credit-rating downgrade by S&P.
- Capital and liquidity rules: The company’s estimated G-SIB surcharge was 1.5% when fully phased in; it anticipated a TLAC requirement of 21.5% of risk-weighted assets by January 2022. These requirements and regulatory stress-test reviews may affect capital distributions and business returns.
- Unusual revenue and tax items: 2015 results included a $165 million pre-tax gain from a commercial-real-estate sale and final loan paydown related to Lehman-era assets, and a $61 million tax benefit related to an Italian deferred tax liability. The effective tax rate was 13.8%, versus 17.1% in 2014.
- Reporting assurance: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management reported effective controls and no material weaknesses. The filing also notes prior-period revisions tied to billing errors and a previously disclosed tax adjustment.
Most important facts for investors to verify
- Whether the client billing review increases the $240 million reimbursement estimate or generates further claims, and how the $17 million interest amount is paid.
- Whether the $565 million indirect-FX accrual proves sufficient, including any settlement terms, regulatory outcomes, and continuing client attrition.
- Whether Beacon delivers its stated savings on schedule and within the estimated $300–$400 million restructuring-cost range.
- Whether AUM outflows and the pending client redemption continue, and whether new servicing and management mandates are installed and generate fees.
- Whether net interest revenue and margin stabilize amid deposit changes, low or negative rates, currency movements, and higher liquidity requirements.
- Capital and liquidity headroom under fully phased-in Basel III, G-SIB, SLR and TLAC requirements, and any resulting limits on dividends or repurchases.