State Street Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter ended June 30, 2022; comparisons are primarily with Q2 2021. State Street provides custody, asset servicing and investment management services globally. At quarter-end it reported $38.18 trillion in assets under custody and/or administration (AUC/A), $3.48 trillion in assets under management (AUM), 40,354 employees and $300.22 billion in total assets.
Financial results and key metrics
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Total fee revenue | $2.370 billion | $2.514 billion | -6% |
| Net interest income | $584 million | $467 million | +25% |
| Total revenue | $2.953 billion | $3.034 billion | -3% |
| Provision for credit losses | $10 million expense | $15 million release | — |
| Total expenses | $2.108 billion | $2.111 billion | Flat |
| Net income | $747 million | $763 million | -2% |
| Diluted EPS | $1.91 | $2.07 | -8% |
| Return on average common equity | 12.1% | 12.6% | -50 bps |
| Pre-tax margin | 28.3% | 30.9% | -260 bps |
For the six months ended June 30, revenue was $6.034 billion (+1% year over year), net income was $1.351 billion (+5%), and diluted EPS was $3.48 (+1%). Net interest income increased 17% to $1.093 billion. Fully taxable-equivalent net interest margin was 0.87%, compared with 0.73% in the first half of 2021.
Quarterly fee trends were mixed: servicing fees fell 7%, management fees 3%, software and processing fees 11%, and securities finance 2%; foreign-exchange trading services rose 16%. Other fee revenue was negative $43 million, primarily reflecting market-related adjustments. Higher interest rates and loan balances supported net interest income; lower equity and fixed-income markets, pricing pressure, client activity and currency translation weighed on fee revenue.
Balance sheet, cash flow and capital
- At June 30, total deposits were $241.91 billion, down from $255.04 billion at year-end 2021; total shareholders’ equity was $25.77 billion, down from $27.36 billion. Loans, net of allowance, were $33.47 billion, versus $32.45 billion at year-end.
- For the first half of 2022, operating cash flow was $451 million, compared with cash used of $11.33 billion in the first half of 2021. Investing activities provided $13.25 billion and financing activities used $13.81 billion. Cash and due from banks ended the period at $3.52 billion.
- Long-term debt was $13.53 billion at quarter-end. State Street issued $500 million of senior notes in May and redeemed $750 million of notes due 2023 that month; it had also issued $1.5 billion of senior notes and redeemed $750 million in March.
- Standardized CET1 capital ratio was 12.9%, down from 14.3% at December 31, 2021; Tier 1 leverage ratio was 6.0%, versus 6.1%. The supplementary leverage ratio was 6.6%, versus 7.4%. Management attributed the CET1 decline mainly to AOCI losses on available-for-sale securities and implementation of SA-CCR. The company and State Street Bank exceeded applicable regulatory capital requirements.
- Daily average liquidity coverage ratios for Q2 were 106% at the Parent Company and approximately 122% at State Street Bank. The company transferred $21.23 billion of securities from available-for-sale to held-to-maturity to mitigate further AOCI exposure.
- Six-month common dividends declared were $1.14 per share. No common shares were repurchased in the first half of 2022; management said it intended to resume repurchases in Q4, subject to interest rates and market conditions.
Material changes, outlook and risks
- AUC/A declined 10% year over year and AUM declined 11%, primarily reflecting lower markets. Q2 asset-servicing mandates announced totaled approximately $972 billion; $3.63 trillion of servicing assets remained to be installed. Installation and resulting revenue are expected over time, not immediately.
- One large servicing client plans to move a significant portion of its ETF assets to other providers, principally during 2023–2024. The related assets generated about 1.9% of State Street’s 2021 fee revenue; the ultimate revenue and income effect will depend on client growth and expense reductions.
- The proposed $3.5 billion cash acquisition of BBH Investor Services remained subject to regulatory review and closing conditions. State Street and BBH were considering transaction modifications, including operating and legal-entity structure and purchase-price terms. Either party could terminate without penalty after September 6, 2022 absent further agreement. The parties were targeting a Q4 2022 close if terms and approvals were finalized, but the filing emphasized timing uncertainty. State Street expected up to approximately $590 million of acquisition and integration costs through the third year after closing.
- Management cited targeted investment and wage growth as expense pressures, offset by productivity savings and expense discipline. Q2 included approximately $12 million in BBH-related acquisition and restructuring costs. The prior-year quarter included a $53 million gain on the sale of a majority interest in the Wealth Management Services business and an approximately $11 million legal-accrual release.
- The effective tax rate was 10.5% in Q2 and 15.0% for the first half, lower than the comparable 2021 rates, primarily due to greater benefits from reassessing a deferred-tax-asset valuation allowance.
- Rapid rate increases were a significant risk to securities values and AOCI. AFS securities had $1.16 billion of gross unrealized losses at June 30; HTM securities had $4.19 billion. Management said the portfolio’s gross unrealized losses were primarily rate-driven, while cautioning that further material AOCI deterioration remained possible. First-half comprehensive loss was $1.20 billion, including $2.55 billion of other comprehensive loss.
- Other disclosed risks included market declines and fee pressure, deposit behavior and interest-rate sensitivity, credit migration, geopolitical disruption including the war in Ukraine, cyber and operational risks, regulatory requirements, and LIBOR transition execution. Direct Russian credit exposure was described as very low, with no direct exposure to Russian-domiciled entities other than the Russian subcustodian relationship.
- Legal and regulatory matters had $15 million of accrued loss contingencies; estimated reasonably possible losses in excess of accruals were up to approximately $50 million for matters where an estimate could be made. Some matters could not be reasonably estimated. The filing also describes ongoing invoicing-related remediation and litigation.
Most important facts for investors to verify
- Whether the BBH transaction’s terms, regulatory approvals, closing timing and expected costs change.
- How further market movements, deposit repricing and deposit outflows affect AOCI, capital ratios and net interest income.
- Whether planned Q4 share repurchases proceed and how capital distributions are balanced against acquisition funding and capital targets.
- The pace of installation and monetization of announced servicing mandates, and the financial impact of the ETF client transition.
- Developments in legal contingencies, credit-loss estimates and operational or cyber risks.