State Street Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; the filing also reports fourth-quarter results. State Street is a global institutional financial services company operating in Investment Servicing and Investment Management (SSGA). At year-end, it reported $33.12 trillion in assets under custody and administration (AUCA), $2.78 trillion in assets under management (AUM), and 36,643 employees.
Financial performance and condition
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Total revenue | $11.170 billion | $10.207 billion | +9% |
| Fee revenue | $8.905 billion | $8.116 billion | +10% |
| Net interest income | $2.304 billion | $2.084 billion | +11% |
| Total expenses | $8.269 billion | $8.077 billion | +2% |
| Income before tax | $2.899 billion | $2.120 billion | +37% |
| Net income | $2.177 billion | $2.143 billion | +2% |
| Diluted EPS | $5.24 | $4.97 | +5% |
| Pre-tax margin | 26.0% | 20.8% | +5.2 percentage points |
| Net interest margin, fully taxable-equivalent | 1.29% | 1.13% | +0.16 percentage points |
Fee revenue growth reflected stronger servicing and management fees, processing revenue, and currency translation, partly offset by lower trading services revenue. Servicing fees rose 6%; management fees rose 25%, supported by the full-year contribution from GE Asset Management (acquired in 2016), equity-market appreciation, and ETF flows. Net interest income benefited from higher U.S. rates and loan growth, partly offset by a smaller balance sheet. The 2017 effective tax rate was 24.9%; the 2016 rate was unusually low at (1.0%).
Fourth quarter: Revenue was $2.846 billion, versus $2.530 billion in Q4 2016; net income was $370 million versus $593 million, and diluted EPS was $0.89 versus $1.43. Q4 2017 included $347 million of income tax expense, while Q4 2016 included a $248 million tax benefit.
Cash flow: Operating activities provided $6.933 billion in 2017, compared with $2.290 billion in 2016. Investing activities provided $48 million, versus $4.230 billion; financing activities used $6.188 billion, versus $6.413 billion. Cash and due from banks ended the year at $2.107 billion. These cash-flow figures should be read alongside the bank’s larger interest-bearing deposits and liquidity disclosures.
Balance sheet and liquidity: Year-end assets were $238.425 billion, deposits $184.896 billion, shareholders’ equity $22.317 billion, and long-term debt $11.620 billion. HQLA under the LCR definition was $65.35 billion, down from $87.20 billion; the company stated its LCR exceeded the 100% requirement. The Parent Company reported $0.53 billion of net liquid assets, while its resolution-funding subsidiary, SSIF, reported $2.88 billion.
Capital: State Street’s Basel III advanced-approaches CET1 ratio was 12.3%, tier 1 ratio 15.5%, total capital ratio 16.5%, and SLR 6.5% at year-end. The standardized CET1 ratio was 11.9%. The bank reported that it was well capitalized. Applicable capital and leverage requirements were scheduled to rise, including G-SIB and SLR requirements.
Material changes versus the prior year
- AUCA rose 15% to $33.12 trillion and AUM rose 13% to $2.78 trillion, reflecting market appreciation, flows, and business wins.
- Net interest income increased as rates and loan balances rose, while average interest-earning assets declined.
- Beacon restructuring charges increased to $245 million from $142 million. The company reported approximately $150 million of year-over-year Beacon savings and $325 million in cumulative savings through year-end.
- Capital ratios improved, including advanced-approaches CET1 of 12.3% versus 11.7% and SLR of 6.5% versus 5.9%.
- Operating cash flow increased substantially, while investing cash flow fell sharply; financing remained a significant cash use.
Outlook, commentary, risks and unusual items
- Beacon: Management expected to reach $550 million in annual pre-tax run-rate savings by mid-2019, ahead of its prior end-2020 target. The filing cautions that execution, costs, and realized benefits remain uncertain.
- Client transition: A large client planned to move approximately $1 trillion of assets to another provider, principally during 2018 and beyond; State Street expected to remain a significant provider to that client.
- Business pipeline: The company reported approximately $350 billion of servicing mandates awarded but not yet installed at year-end, including approximately $445 billion in mandates won during 2017. Installation timing and resulting revenue are not assured.
- Tax and other items: The 2017 results included a provisional, one-time estimated $270 million net impact from the Tax Cuts and Jobs Act: about $250 million in tax expense and $20 million in reduced revenue. Actual effects could differ. FY2016 included $249 million of accelerated compensation expense and $211 million of tax benefits.
- Billing and legal exposure: State Street expected cumulative client reimbursements for historical invoicing errors to be at least $360 million; its review continued and additional errors, claims, fines, or sanctions could arise. The filing says some potential losses, including related to the invoicing matter, could not be reasonably estimated. It also disclosed a DOJ deferred prosecution agreement and SEC settlement concerning U.K. transition management, with ongoing monitoring and compliance obligations.
- Key operating risks: Fee pressure and client concentration; sensitivity of fee revenue to markets, flows, and asset mix; interest-rate, deposit and liquidity risks; investment portfolio valuation and credit risks; operational, cyber and technology risks; extensive regulation; and litigation, compliance, and reputational exposure.
- Capital returns: Common dividends declared were $1.60 per share, up from $1.44. State Street repurchased 16.8 million shares for approximately $1.45 billion in 2017. Future dividends and buybacks remain subject to Board decisions and regulatory capital-plan requirements.
Most important facts for investors to verify
- Whether the $550 million Beacon savings target is achieved by mid-2019, and the total restructuring and implementation costs required.
- The timing and revenue impact of the approximately $1 trillion client asset transition, and whether the uninstalled mandate pipeline converts to fee-generating business.
- Final costs of the billing review, related litigation and investigations, and any additional compliance or monitor requirements.
- Whether LCR, capital, leverage and TLAC requirements remain comfortably met as regulatory standards phase in; the filing projected about $1.5 billion of additional long-term debt by year-end 2018 for TLAC compliance.
- How changes in interest rates, deposit levels, markets, currency, and client asset mix affect net interest income, margins, and fee revenue.
- The filing reports unqualified audit opinions on the financial statements and internal controls; investors should also review the full notes and regulatory disclosures for contingent exposures and measurement assumptions.