State Street Corporation — Q2 2023 Form 10-Q
Business context and period. State Street provides investment servicing and investment management services to institutional investors. This unaudited report covers the quarter and six months ended June 30, 2023, with comparisons to the corresponding 2022 periods. At quarter-end, assets under custody and/or administration (AUC/A) were $39.59 trillion and assets under management (AUM) were $3.80 trillion.
Financial results and condition
| Metric | Q2 2023 | Change from Q2 2022 | Six months 2023 | Change from six months 2022 |
|---|---|---|---|---|
| Total revenue | $3.11 billion | +5% | $6.21 billion | +3% |
| Fee revenue | $2.42 billion | +2% | $4.75 billion | -4% |
| Net interest income (NII) | $691 million | +18% | $1.46 billion | +33% |
| Expenses | $2.21 billion | +5% | $4.58 billion | +3% |
| Net income | $763 million | +2% | $1.31 billion | -3% |
| Diluted earnings per share | $2.17 | +14% | $3.68 | +6% |
| Pre-tax margin | 29.5% | +120 bps | 25.8% | -50 bps |
- Q2 NII benefited from higher short- and long-term interest rates and balance-sheet positioning; lower average client deposits and a shift toward interest-bearing balances partly offset the benefit. Q2 net interest margin was 1.19%, compared with 0.94% a year earlier.
- Q2 fee trends were mixed: servicing fees fell 3%, management fees fell 6%, and FX trading services revenue fell 8%; securities finance rose 9% and software and processing fees rose 18%. The six-month declines in servicing and management fees were 7% and 9%, respectively.
- Expenses reflected higher salaries, headcount, and business investment, partly offset by productivity savings. Quarter-end headcount increased 6% year over year to 42,688. The Q2 provision for credit losses was a $18 million release; the six-month provision was $26 million.
- For the six months, operating cash flow was negative $3.71 billion, investing cash flow was positive $16.40 billion, and financing cash flow was negative $12.72 billion. The filing attributes large operating cash-flow movements in part to collateral deposits and FX derivatives.
- At June 30, total assets were $294.56 billion, deposits $222.32 billion, total liabilities $270.36 billion, and shareholders’ equity $24.20 billion. Deposits declined from $235.46 billion at year-end 2022. Long-term debt was $17.18 billion, up from $15.00 billion.
- Standardized CET1 was 11.8%, down from 13.6% at December 31, 2022; Tier 1 leverage was 5.8%, down from 6.0%. Management attributed the declines primarily to share repurchases. The bank reported that it remained above applicable regulatory capital requirements.
- Average daily liquidity coverage ratio (LCR) for the quarter was 108% at the Parent Company and approximately 120% at State Street Bank. Quarter-end cash and due from banks was $3.93 billion; interest-bearing deposits with banks were $86.05 billion.
Material changes, outlook, and risks
- State Street repurchased $1.05 billion of common stock in Q2 and declared $0.63 per common share in dividends. It returned approximately $1.3 billion to common shareholders during the quarter. The 2023 repurchase authorization allows up to $4.5 billion through December 31, 2023.
- Management expected CET1 and Tier 1 leverage ratios to move into target ranges of 10–11% and 5.25–5.75%, respectively, in the second half of 2023, subject to market conditions and planned repurchases. Its June 30 rate baseline generally reflected market expectations for rates to peak toward year-end 2023, with cuts possibly beginning in 2024; this is an assumption, not a guarantee.
- New servicing mandates announced in Q2 totaled approximately $141 billion. About $2.36 trillion of servicing assets remained to be installed; management expected approximately 40% in the remainder of 2023 and 60% in 2024, subject to client and implementation changes.
- A large asset-servicing client is expected to move a significant portion of its ETF assets to other providers, principally during 2023–2024. The transition is expected to affect fee revenue and income growth most notably from Q3 2023 through 2025. The associated assets represented approximately 1.7% of 2022 fee revenue.
- The FDIC had proposed a special assessment related to protection of uninsured depositors at failed banks. State Street estimated its bank’s pre-tax assessment at approximately $360 million, but the final amount and timing remained subject to the final rule and possible FDIC adjustments.
- Other risk areas include deposit outflows and deposit pricing, interest-rate sensitivity, market levels and client flows affecting fee revenue, credit exposures, regulatory capital and liquidity requirements, cyber and operational risks, and legal or regulatory matters. The filing reports $16 million of accrued legal and regulatory loss contingencies and estimates reasonably possible losses above accruals of up to approximately $70 million for matters where it could estimate a range; some matters could not be estimated.
- There were no notable Q2 2023 items identified by management. Q2 2022 included $12 million of acquisition and restructuring costs relating to the abandoned BBH Investor Services transaction. A proposed FDIC assessment was not yet recognized as a final charge.
Important facts for investors to verify
- Whether deposit balances, deposit mix, and deposit costs continue to pressure NII as rates and client behavior change.
- Whether fee trends improve or worsen, especially servicing and management fees, and the timing and financial impact of the ETF client transition.
- Progress toward capital-ratio targets alongside share repurchases, regulatory requirements, and any changes in risk-weighted assets.
- The final FDIC assessment amount and recognition period, and any additional operating or regulatory costs.
- Developments in credit quality, loan-loss allowances, unrealized investment-security losses, and legal or regulatory contingencies.