State Street Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are against Q1 2020 unless otherwise noted. State Street provides institutional investment servicing and investment management globally. At quarter-end, it reported $40.26 trillion in assets under custody and/or administration (AUC/A), $3.59 trillion in assets under management (AUM), and 39,318 employees.
Financial results and condition
| Metric | Q1 2021 | Comparison / change |
|---|---|---|
| Total fee revenue | $2.483 billion | Up 4% |
| Net interest income (NII) | $467 million | Down 30%; net interest margin (FTE) was 0.75%, versus 1.30% |
| Total revenue | $2.950 billion | Down 4% |
| Provision for credit losses | $9 million reserve release | Versus $36 million expense |
| Total expenses | $2.332 billion | Up 3% |
| Net income | $519 million | Down 18% |
| Net income available to common shareholders | $489 million | Versus $580 million |
| Diluted EPS | $1.37 | Down 15% from $1.62 |
| Pre-tax margin / return on average common equity | 21.3% / 8.4% | Versus 25.3% / 10.9% |
| Common dividend declared | $0.52 per share | Unchanged |
Revenue and business trends: Servicing fees rose 7% to $1.371 billion, and management fees rose 6% to $493 million, supported mainly by higher average equity markets. FX trading services fell 22% to $346 million as volatility normalized from the pandemic-driven spike in Q1 2020. Securities finance increased 8% to $99 million; software and processing fees rose 55% to $174 million, partly reflecting market-related adjustments. NII declined amid lower global rates and the absence of prior-year episodic benefits. Management cited negative operating leverage of 7.2 percentage points.
Cash flow and balance sheet: Operating cash flow was negative $3.732 billion, compared with positive $4.039 billion in Q1 2020; investing activities provided $6.804 billion and financing activities used $1.987 billion. Cash and due from banks increased $1.085 billion during the quarter to $4.552 billion. Quarter-end assets were $316.885 billion, deposits $244.893 billion, long-term debt $13.836 billion, and shareholders’ equity $25.005 billion. Total loans were $31.585 billion, net of a $118 million loan-loss allowance.
Capital and liquidity: The standardized CET1 ratio was 10.8%, down from 12.3% at December 31, 2020; the Tier 1 leverage ratio was 5.4%, down from 6.4%. Management attributed the ratio declines mainly to higher risk-weighted assets, lower capital from AOCI and intangible assets, and deposit-driven growth in average assets. The bank remained above applicable regulatory capital requirements. Parent-company average daily LCR was 107% in Q1, versus 108% in Q4 2020. Average HQLA was $158.89 billion. The company repurchased $475 million of common stock and declared $182 million of common dividends; it also redeemed $500 million of Series F preferred stock.
Material changes, outlook, and notable matters
- AUC/A increased 26% year over year and AUM increased 34%, primarily reflecting higher market levels, with business growth and client flows also contributing. Newly announced servicing mandates were approximately $343 billion; $463 billion of assets remained to be installed.
- Management expected money-market fund fee waivers to be higher in subsequent 2021 quarters. At quarter-end rates and asset levels, estimated gross waivers were approximately $35 million per quarter; a 10-basis-point rise in short-term rates was expected to largely mitigate the impact in subsequent quarters.
- CRD-related acquisition costs were approximately $11 million in Q1. State Street expected approximately $225 million of cumulative CRD acquisition costs through 2021; $175 million had been incurred by March 31.
- A large servicing client plans to move a significant portion of its ETF assets to other providers, with transition expected to begin in 2022 and occur principally in 2023. Associated 2020 fee revenue was approximately 1.5% of total fee revenue; the ultimate revenue and income effect depends on client growth and expense reductions.
- In April, the Board authorized up to $425 million of common share repurchases through June 30, subject to Federal Reserve limits. The Federal Reserve had extended capital-distribution restrictions through Q2 2021.
- Legal and regulatory matters included historical client-invoicing practices. Accrued loss contingencies were approximately $146 million; estimated reasonably possible losses in excess of accruals were up to approximately $40 million for matters where an estimate was possible. The company noted that additional matters could not be reasonably estimated and outcomes could affect results or reputation.
- COVID-19 continued to affect operations: about 80% of employees worked remotely at March 31. Management cited continued elevated client deposits and related operational, technology, and cyber risks. Other disclosed risks include interest-rate and market movements, credit and counterparty exposures, regulatory capital and liquidity requirements, litigation, and execution of technology and strategic initiatives.
Important facts for investors to verify
- Whether fee growth and increased AUC/A and AUM can offset persistent NII pressure, money-market fee waivers, and servicing pricing headwinds.
- How capital ratios and regulatory distribution limits evolve, particularly after the Q1 CET1 and leverage-ratio declines.
- The timing, installation, and revenue realization of the $463 billion servicing pipeline, and the eventual effect of the ETF client transition.
- Actual CRD integration costs versus management’s expected cumulative cost, and the financial contribution of CRD and the newly acquired Luxembourg activities.
- Developments in invoicing-related investigations and litigation, including any additional accruals, penalties, or business consequences.
- The drivers and sustainability of negative operating cash flow, alongside deposit levels, liquidity measures, and balance-sheet growth.