Fitch: Satisfactory 4Q15 Results for State Street

CHICAGO--(BUSINESS WIRE)-- State Street Corporation's (STT) fourth quarter 2015 earnings were satisfactory in Fitch Ratings' opinion. On a stated basis, STT's return on average common equity (ROE) was 11.6% in 4Q15 up from 11.3% in the sequential quarter and 9.45 in the year-ago quarter. These results were impacted by an $81 million gain related to the final payoff from a commercial real estate loan acquired as a result of the Lehman Brothers bankruptcy.

As such, on an operating basis (which adjusts for the gain above as well as a couple other items) STT's 4Q15 ROE was 10.5% up from 10% in the sequential quarter but down from 11.6% in the year-ago quarter. Additionally, on a full year operating basis, STT's 2015 ROE was 10.7%. This is generally in line with Fitch's range of estimates for STT's cost of equity of between 10% to 12%.

STT's total revenue was down 2% from the sequential quarter and 4.8% from the year-ago quarter due largely to lower foreign exchange (FX) trading revenue as well as lower net interest income (NII). STT's largest component of revenue, servicing fees, were just down slightly relative to sequential and year-ago comparisons.

NII declined due to some balance sheet shrinkage, particularly compared to the sequential quarter. In order to better comply with proposed Enhanced Supplementary Leverage Ratio (SLR) requirements, STT successfully pushed a number of deposit balances away from the company. This resulted in an 8.3% sequential decline in total deposit balances.

This dropped overall NII for the company, but the net interest margin (NIM) did improve to 1.01% for 4Q15.

STT's overall expenses on an operating basis declined 3% from the sequential quarter and 3.2% from the year-ago quarter largely due to some decline in compensation and benefits expense (STT's largest expense category) as well as other expenses. It is noted that lower incentive accruals resulted in the lower compensation and benefits expense.

With respect to future expenses, STT is introducing a new efficiency initiative labeled the Beacon program, which is a multi-year transformation program targeting approximately $550 million in estimated annualized pre-tax savings over the next five years. In order to achieve this, the company expects to incur aggregate pre-tax restructuring charges of $300 million to $400 million over the next five-year period.

Given the still challenging interest rate environment as well as the competitive nature of the business, Fitch believes efficiency initiatives remain a key lever management can use to use to improve results to at least if not better than the cost of equity assumptions detailed earlier.

STT's assets under custody and administration (AUCA) amounted to $27.51 trillion at the end of 4Q15, up 0.9% from the sequential quarter but down 2.4% from the year-ago quarter amid challenging markets and currency translation impacts. Similarly STT's total assets under management (AUM) were up 1.9% from the sequential quarter but down 8.3% from the year-ago quarter.

Exchange traded fund (ETF) products continue to generate net inflows as they steal share from traditional mutual fund products. Fitch expects this to continue at least over a medium-term time horizon.

Given the balance sheet shrinkage noted above, STT's capital ratios improved in 4Q15. The company's fully phased in Basel III Common Equity Tier 1 (CET1) ratio under the standardized approach was 12% at 4Q15 and under the advanced approach was 11.6%. In this case the advanced approach ratio would be the binding constraint one for STT.

STT's SLR also improved as of 4Q15 to 5.8% at the parent company, above the proposed 5% requirement, and to 5.7% at the main bank subsidiary, below the proposed 6% requirement. Fitch expects management to continue to take actions to achieve necessary compliance with these ratios by the phase-in date of Jan. 1, 2018.

Additional information is available at www.fitchratings.com

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160128005797/en/

Fitch Ratings
Primary Analyst
Justin Fuller, CFA
Senior Director
+1-312-368-2057
Fitch Ratings, Inc
79 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Christopher D. Wolfe
Managing Director
+1-212-908-0771
or
Media Relations:
Hannah James, +1 646-582-4947
[email protected]

Source: Fitch Ratings

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