Business Context and Reporting Period
Company: State Street Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: State Street is a financial holding company providing investment servicing and investment management services to institutional investors. Key metrics as of March 31, 2009, include $142.14 billion in total assets, $83.92 billion in deposits, and $13.86 billion in shareholders' equity. The company employed 27,500 people and managed $11.34 trillion in assets under custody and $1.40 trillion in assets under management.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenue | $2,002 | $2,577 |
| Net Income | $476 | $530 |
| Net Income Available to Common Shareholders | $445 | $530 |
| Diluted Earnings Per Share | $1.02 | $1.35 |
| Return on Common Shareholders' Equity | 15.7% | 18.7% |
| Provision for Loan Losses | $84 | $0 |
| Total Expenses | $1,304 | $1,774 |
| Effective Tax Rate | 22.5% | 34.0% |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 22% year-over-year. Fee revenue dropped 27% due to declining asset valuations and trading volumes. Net interest revenue fell 10% (8% on a fully taxable-equivalent basis) driven by lower deposit volumes and compressed spreads.
- Expense Reduction: Total expenses decreased 26%, primarily due to a 31% reduction in salaries and benefits resulting from lower incentive compensation and a reduction in force. This decline exceeded the revenue drop, generating positive operating leverage.
- Loan Loss Provision: The company recorded an $84 million provision for loan losses related to commercial real estate loans purchased in 2008, reflecting deteriorating economic conditions in that sector. No provision was recorded in Q1 2008.
- Assets Under Management/Custody: Assets under custody decreased 24% year-over-year to $11.34 trillion, and assets under management decreased 29% to $1.40 trillion, largely due to market declines.
Guidance, Outlook, and Risks
- Tax Outlook: Management expects the effective tax rate for the full year 2009 to be approximately 31.5%, higher than the Q1 rate of 22.5% due to the reinvestment of earnings in non-U.S. subsidiaries.
- Net Interest Margin: Management anticipates that actions taken to improve tangible common equity, including reinvesting maturing securities into interest-bearing deposits, will continue to reduce net interest revenue and margin for 2009.
- Special Purpose Entities (Conduits): State Street administers four unconsolidated asset-backed commercial paper conduits. While currently not consolidated, management notes that if credit quality deteriorates further or first-loss notes become insufficient to absorb expected losses, the company may be required to consolidate these entities. Consolidation would result in a significant loss (estimated at $3.60 billion after-tax) and reduce regulatory capital ratios.
- Securities Lending: The net asset value of cash collateral pools for securities lending has fallen below $1.00 per unit (weighted average $0.947). Withdrawal limitations remain in place to manage liquidity, which could impact the business if market illiquidity persists.
- Legal Contingencies: A reserve of approximately $207 million remains for legal exposure related to SSgA active fixed-income strategies. Management believes current accruals are sufficient for tax exposures related to SILO transactions.
Investor Verification Checklist
- Conduit Consolidation Risk: Verify the status of the four unconsolidated asset-backed commercial paper conduits and the sufficiency of third-party first-loss notes to absorb expected losses.
- Commercial Real Estate Exposure: Review the $695 million portfolio of commercial real estate loans and the adequacy of the $94 million allowance for loan losses.
- Securities Lending Liquidity: Monitor the net asset value of cash collateral pools and the duration of withdrawal limitations imposed on participants.
- Investment Portfolio Impairment: Assess the $5.84 billion in net pre-tax unrealized losses on available-for-sale securities and management's intent to hold them to maturity.
- Regulatory Capital Ratios: Confirm that Tier 1 and total risk-based capital ratios remain well above regulatory minimums despite potential stress scenarios.